PARETEUM Corp - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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| For the transition period from ____________________ to ____________________ | |
| Commission file number 0-28931 |
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Elephant
Talk Communications, Inc.
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(Exact
name of registrant as specified in its
charter)
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California
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95-4557538
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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Schiphol
Boulevard 249
1118
BH Schiphol
The
Netherlands
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N/A
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number: 31 0 20 653 5916
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, no par value
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o
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1
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 x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. Yes x No
o
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):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o Nox
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of April 14, 2008 was approximately $3,355,142.85 based on
the
closing sale price of the company’s common stock on such date of U.S. $0.06 per
share, as reported by the OTC BB.
State
the
number of shares outstanding
of each
of the issuer's classes of common equity, as of the latest practicable date:
As
of March 27, 2008, there were 238,265,927 shares of common stock
outstanding.
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2
Form
10-K
For
the fiscal year ended December 31, 2007
TABLE
OF CONTENTS
| Note on Forward-Looking Statements |
4
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| PART I |
5
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Item
1.
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Description
of Business.
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5
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Item
2.
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Description
of Property.
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23
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Item
3.
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Legal
Proceedings.
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23
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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24
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| PART II |
25
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Item
5.
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Market
for Common Equity and Related Stockholder Matters.
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25
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Item
6.
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Selected
Financial Data.
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26
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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26
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Item
8.
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Financial
Statements.
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31
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Item
9.
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure.
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55
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Item
9A(T).
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Controls
and Procedures.
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56
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| PART III |
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57
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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57
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Item
11.
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Executive
Compensation.
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62
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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66
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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68
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Item
14.
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Principal
Accountant Fees and Services.
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69
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| PART IV |
70
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Item
15.
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Exhibits,
Financial Statement Schedules.
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70
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NOTE
ON FORWARD LOOKING STATEMENTS
This
Report, including the documents incorporated by reference in this Report,
includes forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events.
Our
actual results may differ materially from those discussed herein, or implied
by,
these forward-looking statements. Forward-looking statements are generally
identified by words such as “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “plan,” “project” and other similar expressions. In addition, any
statements that refer to expectations or other characterizations of future
events or circumstances are forward-looking statements. Forward-looking
statements included in this Report or our other filings with the SEC include,
but are not necessarily limited to, those relating to:
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risks
and uncertainties associated with the integration of the assets and
operations the Company has acquired and may acquire in the
future;
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the
Company’s possible inability to raise or generate additional funds that
will be necessary to continue and expand the Company’s
operations;
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the
Company’s potential lack of revenue
growth;
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the
Company’s potential inability to add new products and services that will
be necessary to generate increased
sales;
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the
Company’s potential lack of cash
flows;
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the
Company’s potential loss of key
personnel;
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availability
of qualified personnel;
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international,
national regional and local economic political
changes;
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applicable
foreign and domestic regulations;
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general
economic and market conditions;
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increases
in operating expenses associated with the growth of our
operations;
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the
possibility of telecommunications rate changes and technological
changes;
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the
potential for increased competition;
and
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other
unanticipated factors.
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The
foregoing does not represent an exhaustive list of risks. Please see “Risk
Factors” for additional risks which could adversely impact our business and
financial performance. Moreover, new risks emerge from time to time and it
is
not possible for our management to predict all risks, nor can we assess the
impact of all risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ from those contained
in
any forward-looking statements. All forward-looking statements included in
this
Report are based on information available to us on the date of this Report.
Except to the extent required by applicable laws or rules, we undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to
us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this Report.
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4
PART
I
Item
1. Description of Business.
Overview
Elephant
Talk Communications, Inc. (herein referred to as "Elephant Talk," "ETCI," "We,"
"Our," or the "Company"), is
an
international telecom operator and enabler/systems integrator to the multi-media
industry. ETCI, until recently, was engaged in the long distance telephone
business in China and the Special Administrative Region Hong Kong. In 2006
the
Company adopted the strategy to re-position itself by facilitating the
distribution of all forms of content and telecommunications services to various
international customers. The company provides traditional telecom services,
media streaming and distribution services primarily to the business-to-business
community within the telecommunications market where it has a presence. Elephant
Talk operates in over a dozen markets in Europe, Asia Pacific and the Middle
East. Through intelligent design and organizational structure the Company
pursues this strategy by building a worldwide network based on both clear and
IP
bandwidth that is managed centrally by its self-developed In House Customer
Relations Management (IN-CRM)-Billing platform.
In
January 2007, through the acquisition of various assets in Europe, the Company
established a foothold in the European Telecommunications Market, particularly
in the market of Service Numbers like Toll Free and Premium Rate Services and
to
a smaller extent Carrier (Pre) Select Services. Furthermore, through the human
and IT resources acquired, the Company obtained the expertise of telecom and
multi-media systems, telecom regulations and European markets.
The
Company currently operates a switch-based telecom network with national licenses
and direct fixed line interconnects with the Incumbents/National Telecom
Operators in eight (8) European countries, one (1) in the Middle East (Bahrain),
licenses in Hong Kong and the U.S.A. and partnerships with telecom operators
in
France, Germany, Scandinavia, Poland and Hong Kong. Codec and media streaming
servers are currently located in six centers geographically spread around the
world. Together with the centrally operated and managed Intelligent Network
Customer Relations Management (IN-CRM)-Billing platform, the Company thus offers
geographical, premium rate, toll free, personal, nomadic and Voice over Internet
Protocol (VoIP) numbers. Services are primarily provided to the business market
and include traditional telecom services, VoIP, media streaming and distribution
including the necessary billing and collection. Through its European and Chinese
development centers, ETCI develops in-house telecom and media related systems
and software.
Background
of Elephant Talk Communications, Inc.
Elephant
Talk Communications Inc. was formed in 2001 as a result of a merger between
the
Staruni Corporation and Elephant Talk Limited (Hong Kong). Elephant Talk Limited
(Hong Kong) originally started its operation in 1994 as an international long
distance services provider, specializing in international call termination
into
China. Its operating hubs in Hong Kong and the USA provided a gateway to both
the North American and Worldwide Carrier Networks. However, due to the extremely
competitive nature of this market, the Company chose to abandon this strategy
a
few years ago.
Elephant
Talk is now primarily engaged in long distance and premium rate telephone
services and is actively seeking to position itself as a broader
telecommunications services provider and a multimedia distribution company.
It
is the Company’s goal to further develop and exploit a highly flexible, fully
standardized and integrated global telecommunications network on the basis
of
national licenses & interconnects which are owned or accessed through
partnerships. Through an integrated platform around this network it is ETCI’s
intention to offer its clients a turnkey solution for basic, commoditized
(voice) telecommunication services, toll free, shared cost and premium rate
services, content & payment provisioning, and mobile services. Eventually
covering the full range of services from (IP based) telecommunications services
to content delivery and billing and operating its own global communications
network, ETCI hopes to be able to bring these communications services and
content to its customers, collect payments, and allocate those payments to
all
parties involved in the distribution chain.
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5
ETCI
is
creating a managed global network that, it believes, enables ETCI’s
customers to distribute all their information in a fully managed and secured
environment compared to the internet. Together with a fully integrated back
office system, ET opens up this network to every Business-to-Business (B2B)
customer and enables these customers to manage and control their business,
as
well as to collect payment, from their own premises and to run ETCI’s network as
if it is their own.
The
feature allows ETCI’s B2B customers to see mobile, fixed, internet, WIFI,
and local, regional or multi-country, as just one integrated network, with
the
advantages of one single network interface, centralized customer recognition
and
one set of financial controls.
As
such
ETCI is attempting to position itself as the preferred telecom outsourcing
partner to all of its B2B customers. These long term business partners include
larger marketing organizations and/or content providers who are in need of
telecommunications services as a key (or merely a supporting but important)
feature in their overall product/market and distribution offering. In addition
other telecom companies could partner with ETCI to expand their geographical
footprint or services offered. As such ETCI positions its partners as if they
are a fully networked telecommunications company themselves by providing them
all the tools and resources to manage their businesses, particularly the
telecommunications part, as an integrated element of their overall
offering.
ETCI
believes its B2B customers will be able to create their own business
environment, and be able, with the support of ETCI’s back office and CRM
(Customer Relationship Management) systems, to recognize and serve their own
clients, employees or partners wherever they are, whatever device they use
and
at any time. ETCI’s vision is that all access to its network will be steered by
its worldwide central data and information base. This data base will facilitate
ETCI’s customers to define worldwide access authorization so their clients will
get access to the services through their own familiar interface and/or workplace
and in the format and language of their preference.
The
key
to ETCI’s business plan is the fully automated capturing and recording of any
event on its global network through standard Call Data Records. These so called
CDR’s are globally recognized and accepted by all of ETCI’s suppliers and
customers because of their high quality, reliability and consistency. As a
result, on a real time/on-line basis, ETCI believes its billing engine provides
trustworthy inter-company payment overviews.
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6
The
following chart illustrates the Company’s structure as of December 31,
2007.
In
2007
the ETCI group grew as a result of the acquisition, effective January 1, 2007,
of Elephant Talk Communication Holding AG (formerly known as “Benoit Telecom
Holding AG”) by Elephant Talk Europe Holding B.V.(the “Benoit Acquisition”).
Please see Historical
background “Benoit Acquisition”, for
an
overview of this transaction. In addition to the Benoit Acquisition, on June
1,
2007 ETCI acquired a French entity: 3U Telecom SrL, from 3U Telecom AG, a German
company. The name of this entity was subsequently changed to Elephant Talk
Communications France S.A.S. (“ET France”). As a result of this transaction and
the Benoit Acquisition, the operations and corporate structure of ETCI
significantly expanded.
In
addition to the aforementioned acquisitions, in 2007 we incorporated three
new
companies in the ETCI group. On May 24, 2007 we established Elephant Talk Global
Holding B.V (“ET Global”), a 100% Dutch subsidiary of ETCI. We created ET Global
to act as the holding company for several of our worldwide subsidiaries. We
incorporated Elephant Talk Business Services W.L.L. (“ET Business Services”), a
Bahrain based company, on October 21, 2007, to act as an intra-group service
provider outside Europe. Elephant Talk Communication Carrier Services GmbH
performs this activity within Europe. We also formed Elephant Talk
Communications Luxembourg S.A. (ET Luxembourg) on December 27, 2007, to
initially focus on providing payment collection services for other group
companies.
Page
7
Historical
background “Benoit Acquisition”
On
January 17, 2005, the Company entered into a Memorandum of Understanding with
Beltrust AG, a corporation organized and existing under the laws of Switzerland
(“Beltrust”), to acquire all of the issued and outstanding shares of Benoit
Telecom Holding AG, a corporation organized and existing under the laws of
Switzerland (“Benoit Telecom”). Benoit Telecom is a European-based telecom
company. On November 17, 2006, the Company executed an Agreement of Purchase
and
Sale (the “Agreement”), with Beltrust and Elephant Talk Europe Holding B.V. (“ET
Europe”), a corporation organized and existing under the laws of The
Netherlands, and a wholly owned subsidiary of the Company, providing for the
purchase and sale of all of the issued and outstanding shares of Benoit Telecom
by ET Europe.
Pursuant
to the Agreement, ET Europe agreed to purchase from Beltrust all of the 100,000
issued and outstanding shares of Benoit Telecom, in exchange for a) cash payment
of $6,643,080 and b) 40,000,000 shares of the Company’s common stock. The
parties acknowledged that $6,043,080 (equivalent to approximately Euros
4,625,000) had been previously paid by the Company on behalf of ET Europe to
an
escrow agent as an earnest deposit. In addition, the parties agreed that the
remaining balance of the consideration consisting of $600,000 of cash payment
and 40,000,000 shares of common stock of the Company shall be transferred
to Beltrust within 30 days of the closing. The 100,000 shares of Benoit were
transferred to ET Europe as of the closing pursuant to the Agreement.
Technology
Infrastructure
ETCI
has
built a worldwide footprint through intelligent network and content management
systems, supported by its organizational structure. The company provides clear
communication and IP bandwidth centrally managed by its proprietary
sophisticated IN (Intelligent Network)-CRM (Customer Relationship
Management)-Billing platform. ETCI is able to eliminate the usual limitations
caused by national borders, networks, devices or media and therefore enables
its
Business-to-Business customers to operate as independent telecom and multimedia
distribution organizations. Moreover, the Company is a system integrator and
developer for telecom and digital media distribution activities as well as
a
circuit and package based telecom operator. ETCI believes it has positioned
itself as the premier outsourcing partner for national and global multimedia
companies.
To
maintain flexibility and to allow growth, ETCI has chosen to develop its own
proprietary software and systems including: 1) a fully integrated rating,
mediation, provisioning, CRM and billing system for multi-country and
multi-media use and applications; 2) an advanced Infitel IN platform; and 3)
a
streaming technology. ETCI’s development activities are located in Gerona,
Spain, while the actual development and testing is carried out by ETCI’s own
software engineering staff in Guangzhou (China). Also ETCI’s global 24/7 Network
Operating Center is located in Guangzhou.
ETCI’s
in-house CRM/billing system is the backbone for all of the Company’s operations.
It ensures proper support for all of ETCI’s services and its reliable data are
the basis for customer satisfaction. We believe the Company’s network and system
platforms are able to handle the extremely high demands of national incumbents
and other telecom operators on ETCI’s globally interconnected network.
By
combining fixed line, mobile and wireless access services through contractual
arrangements with an unrestricted number of first/last mile telecom providers,
ETCI offers a wide range of content, media streaming and more traditional
telecom services. All traffic is supported by ETCI’s own CRM and CDR (Call Data
Records) systems for complete customer identification, billing and collection
purposes. Consequently, ETCI enables its B2B customers to operate as global
telecom & multi media distribution organizations themselves. Supporting
business processes such as fulfillment, logistics, and live customer care agents
can be provided through third party suppliers with which ETCI
cooperates.
ETCI’s
network is based on fixed-line telecommunications licenses, mobile access
agreements and network interconnections. ETCI’s geographical cross-border
footprint, established through existing relationships with national telecom
incumbents, is, in the Company’s opinion, especially well-positioned for
international traffic. ET has established its own facilities-based
infrastructure on four continents. Currently, as a fully licensed carrier,
ETCI
is interconnected with incumbents in the Netherlands (KPN), Spain (Telefonica),
Austria (Telekom Austria), Belgium (Belgacom), Switzerland (Swisscom), Italy
(Telecom Italia), the United Kingdom (BT) and Bahrain (Batelco). Through
partners, Elephant Talk has access to interconnections in France, Germany,
Poland, Finland, Sweden, Norway and Ireland. To complement its international
capabilities, ETCI has facilities in Hong Kong and Los Angeles.
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8
ETCI’s
distribution of third party content such as movies, ring tones and sports is
centrally managed and integrated through a network of content management
platforms strategically located in data centers around the world in places
like
Hong Kong, Amsterdam, Hannover, Barcelona, Bahrain and Curaçao.
As
mobile
and wireless access increasingly play a vital role in communication success,
ETCI continues to expand its mobile access on top of its fixed line access.
In
June 2007 a MVNE (Mobile Virtual Network Enabler) agreement was signed between
T-Mobile/Orange in the Netherlands and ETCI.
Products
& Markets
Carrier
(Pre) Select (CS/CPS)
ETCI’s
traditional fixed line network-based services include CS and CPS services to
end-users. In addition the Company offers the service to retailers/resellers
as
a “white label” (third party branded) product with the use of ETCI’s fully
integrated management tools. ETCI’s CS and CPS services route calls over its
network at competitive rates. By dialing a specific ETCI assigned access code
each time a long distance call is made (Carrier Select) or by having such code
pre-installed at the subscription providing carrier (Carrier PreSelect), clients
can route calls via the ETCI network. Clients can join ETCI easily as ETCI
takes
care of administrative work including number porting, the process of
transporting their number to ETCI’s carrier service. ETCI does not charge fixed
costs for using its CS or CPS services, clients are billed on a per usage base
only. Our detailed invoices, sent by email or accessible on-line, provide
complete call records and statistics. CS and CPS services are presently being
offered in The Netherlands, Italy, France and Austria. To
support its customers ETCI has a multilingual helpdesk available.
Service
Numbers / Premium Rate (PRS) &
Toll Free Services
ETCI’s
Premium Rate Service offers an easy payment solution for paid content such
as
data services and interactive & value added services over fixed and mobile
networks as well as over the internet. The calling party pays a premium on
top
of the normal call charges. Both charges are normally collected by the
subscription providing carrier, usually the local incumbent, through the regular
phone bill. PRS numbers implemented with ETCI are directly delivered to ETCI’s
switches, while the premium (after deduction of mostly regulated collecting
charges) is being paid to ETCI. ETCI offers such PRS services on either a
domestic or cross border basis in over 10 European countries with the added
benefit of a centrally located management and billing system. If required,
ETCI
can provide PRS numbers in other countries as well. In order to meet the new
demands as a result of the increasing integration of telecommunication and
media
broadcasting, ETCI is adding Video Calling solutions to its PRS platform
capabilities.
Toll
Free
numbers are usually marketed by companies that want to increase the number
of
customers calling their sales, service and customer support centers. Based
on
ETCI’s interconnected global network, ETCI is positioned to cater to this
market, especially focusing on high quality, low cost cross border toll free
traffic.
Two
Stage Dialing
ETCI’s
Two-Stage Dialing facility offers a low rate international call service and
is a
white label third party branded product. Two-stage
dialing means
the
end user has to dial twice - once to reach a second dial tone, and again to
reach the final destination. In other words, a call traversing from a
public switched telephone network (PSTN) to VoIP or VoIP to PSTN must go through
two dialing stages to reach the intended recipient.
Access
to the service can be gained by dialing a premium-rate or shared-cost number
from as little as $0.05/min. up to a maximum of around $0.63/min. subject to
the
international destination. Once connected to the service a dial tone prompts
callers to dial the number at their desired international destination subsequent
to which ETCI routs the call through its international carrier network. The
main
benefits of this concept are: a) total price transparency for the end-user,
b)
no separate billing, callers are charged on their regular phone bill, c) no
registration or contracts for callers, d) service can be used from any phone,
including mobiles, at any time. The continuously decreasing termination costs
have worked in favor of the profit margin between the revenues ETCI receives
from the premium-rate and shared-cost numbers, and the international call
routing costs. The service is currently used in Germany, Spain, The Netherlands,
Austria, Switzerland, Poland and the UK. Interconnects in these countries allow
the service to be centrally managed and ETCI’s CRM billing system enables the
company’s customers to monitor constantly updated call statistics online. The
Two-Stage Dialing services have predominantly been marketed through profit
sharing Media Partners among which some of the largest media groups in Europe
including IP Media (RTL, Switzerland), ORF Television (Austria), Metro, STER
(Dutch national television), and various leading local TV channels and
newspapers. Call statistics have revealed that the service is particularly
popular among the expanding European immigrant population. Poland, for instance,
is one of the top five most frequented destinations of all countries where
Two-Stage dialing has been marketed. Over the years the Two-Stage dialing
service has clearly encountered more competition from VoIP call services such
as
Skype but also from lower international call charges by incumbents and other
telecommunication companies in general. However, immigrant user groups tend
to
have only limited access to these alternative international call facilities
and
often depend on a mobile device only. Consequently, Two-Stage Dialing continues
to be essential for its niche market group users and the call volume of this
service has been only marginally affected by competing services.
Page
9
Streaming,
Media & Content Services
Streaming
ETCI
provides high quality streaming of video and audio for the internet and mobile
phones. ETCI has developed a new technology for the digitalization of ‘running
video’ based on a military pattern recognition technology. This compression
technology is applied specifically for encoding and transmitting video via
any standard mobile telephone communication protocol, such as GSM, GPRS, EDGE,
UMTS, HSDPA, CDMA, WCDMA with a capacity of 22 Kbps and higher: 16 Kbps for
video, 6 Kbps for audio. In addition, ETCI also has live streaming facilities
for analogue modems, ISDN, double ISDN, cable, xDSL, Wifi, Wimax and LAN. This
streaming technology thus allows ETCI’s customers to not only offer services to
broadband users, but to reach the vast market of low bandwidth end-users as
well.
Media
Phone
ETCI’s
platform facilitates the distribution of content driven services to end-users
via PC, laptop, fixed telephone or mobile handset using a proprietary software
interface called Media Phone. This interface provides end-users access to
content (music, videos and games), to use VoIP communication services, and
for
example also Fax and SMS services via ETCI’s network. By making use of the
ETCI’s CRM/billing system, ETCI’s B2B customers are also able to offer revenue
sharing business models to their own clients. Contrary to regular soft phone
interfaces, all Media Phone traffic is channeled through ETCI’s switches (not
peer-to-peer), thus making sure communication is of the highest quality. Users
are automatically directed to the nearest VoIP/Media Gateway, located around
the
globe, to further ensure the highest quality of service. As the VoIP facility
of
the Media Phone can set up all regular national and international calls via
ETCI’s own network, users can be assured of very competitive call charges. The
platform has recently become operational, though to date it has not generated
any traffic.
Digital
Content
ETCI
has
recently acquired distribution rights from third parties for the widest range
of
content including movies, videos, music, mobile content, and games. ETCI’s
facilities will offer access to this content base, and also enable ETCI’s B2B
customers to distribute their content efficiently. To avoid unauthorized usage,
security solutions have been developed using the latest techniques, including
Microsoft DRM licenses 9, 10 and 11, that offer a highly secure environment
in
combination with ETCI’s CRM/billing modules.
Page
10
Mobile
Services
ETCI
is a
full MVNE (Mobile Virtual Network Enabler) with its own integrated platforms,
switches and network for back-office and customer interaction solutions. The
back-office services will range from provisioning and administration to OSS
(Operation Service Support) and BSS (Business Service Support) running on ETCI’s
IN/CRM/Billing platform. ETCI’s CRM system is designed to facilitate both MNO’s
(Mobile Network Operators) to profitably target specific, often niche market
segments and/or specific market requirements as well as MVNO’s (Mobile Virtual
Network Operators) to run their operations effortlessly without the technical
and financial burden of an own mobile network. We anticipate these services
to
be fully operational in the second quarter of 2008.
For
companies that wish to enter the mobile telephone market, the MVNO business
model is most attractive because it eliminates the expense of establishing
and
managing a mobile network of their own. The initial capital expenditure is
therefore very low and so are the corresponding operational costs. Traditionally
MNO-MVNO propositions required high capital and operational expenditure and
attention to multiple technical components for both the MNO as well as the
MVNO.
ETCI’s business model offers a solution for MVNO’s allowing them to concentrate
on sales and marketing, and for MNO’s to be able to cater to often smaller,
niche market MVNO’s without burdening legacy systems and other resources,
usually not designed to efficiently service such wholesale
customers.
Next
to
more traditional voice and SMS services, ETCI’s MVNE platform is focusing on
wireless data services, content, applications and e-commerce. Traditional voice
service of MVNO’s will probably be marginalized over time, following similar
price erosion patterns as in fixed telecom services, and therefore cannot
compete on the long run without value-added services. Moreover, the emerging
market of 3G/3.5G mobile services, including WIMAX and WIFI, create great
opportunities to attract new subscribers.
Mobile
devices are an effective medium to communicate commercial messages to
subscribers, especially if supported by proper customer profiling tools in
combination with ETCI’s CRM/billing platform. Mobile messages can be
personalized per subscriber, segmented within the client base or just be used
as
a mass communication means. As a mobile device is one of the most personal
communication tools to connect with, and stimulate customers, MVNO’s might offer
excellent opportunities to a variety of companies with a non-telecommunication
core business, like fast moving consumer goods companies looking to expand
and
broaden their markets, while at the same time creating focused marketing
communication channels with their existing customer bases.
Business
Strategy for 2008 and Beyond
Growth
Strategy, in general
In
their
efforts to continue to reposition the Company, management has been actively
seeking additional business opportunities to steer the Company away from the
extremely competitive and low margin market of international call termination
to
the more profitable Carrier (Pre)Select, Premium Rate, Toll Free, Content
Distribution and Mobile Services global market.
In
this
respect the Company concluded its acquisition of Benoit Telecom Holding (BT)
on
January 1, 2007, giving Europe access to the European market. In addition,
on
June 1, 2007, the Company concluded its acquisition of 3U’s French operation,
mainly active in Carrier (Pre)Select.
After
obtaining all required licenses, the Company obtained its own interconnections
in the UK with BT and in Bahrain with Batelco operational in the third quarter
of 2007, thereby adding an additional footprint. Management hopes to
substantially increase ECTI’s presence over the next couple of years in Europe,
Middle East & Africa, The Far East and in the Americas, thereby increasing
its fixed line origination and termination capabilities.
An
important part of ETCI’s strategy will be to grow and operate its presence both
at a lower original investment cost as well as a structurally lower operational
cost by managing its global infrastructure as if it is one simple national
network, i.e. with one overhead instead of many different operational overheads.
Page
11
All
ETCI’s network elements, wherever located, are managed, monitored, diagnosed and
updated remotely. As all systems are designed redundantly and build up from
similar, uniform components, no continuous on-site support is required. On
a
rotating basis, proactive maintenance takes place to promote 100% uptime. As
a
consequence, ETCI can run all of its systems with one dedicated, relatively
small team of high level hardware, software and telecom engineers from locations
in Spain, China and the Netherlands. Using this single, relatively low overhead
to run all of its global applications, gives what ETCI believes is a low cost
structure and which is, in management’s belief, absolutely required for ETCI to
gain a preferred market positioning.
Another
part of ETCI’s strategy will be to build access to mobile networks on top of its
global fixed line infrastructure. This is achieved through negotiating full
Mobile Virtual Network Operator/Enabler (MVNO/MVNE) contracts with mobile
network operators in countries where ETCI already is in the possession of a
full
fixed telecom license.
By
building mobile access capabilities on top of its fixed network infrastructure,
and using primarily the same overheads to run this, ETCI can add these MVNE
capabilities at a lower investment cost than usual for these activities at
a
corresponding lower operational cost, thus creating a competitive advantage.
In
this respect ETCI concluded in 2007 its first MVNE contract in the Netherlands,
which operation is expected to start in the second quarter of 2008. During
the
next couple of years management expects to be able to add 2 to 3 national MVNE
operations each year.
The
Company intends to continue on this path of expansion by further acquisition
of
a controlling stake in profitable companies in the year 2008 and beyond.
The
Company also hopes to grow its presence in China. We believe that a business
position in China eventually will be beneficial to the Company as the
telecommunications industry in China experiences continuous growth along with
the development and modernizations of its economy. The accession to World Trade
Organization makes the demand for international calling services even bigger
and
will eventually open China’s telecommunications market to companies like ETCI.
Therefore we expect an increasingly transparent regulatory environment in China
through its regulatory system, and its gradual opening up of the domestic market
to foreign participation which should create opportunities that facilitate
progress toward an improved operating environment.
Development
Strategy
The
Management of the Company believes that reliable and flexible billing,
information management, monitoring and control are critical to the Company’s
success. Accordingly, ETCI will continue to invest substantial resources to
further develop and implement a sophisticated real-time management information
system. Key features of this system will include:
|
·
|
Reliability
|
|
·
|
Remote
Management
|
|
·
|
Compatibility
to all current and future payment
methods
|
|
·
|
A
global reach
|
|
·
|
Fully
compliant with the legal framework in each
market
|
|
·
|
Standardized
technology
|
|
·
|
Rapid
deployment of services
|
We
hope
to execute this strategy at a lower cost and lower investment than is normally
required through the application of a small organizational structure, the remote
control of switches in each country in which ETCI is operational, the use of
company-owned innovative technology, and the continuous search for optimal
balance between quality of services and operational costs.
Page
12
Product
Strategy
ETCI
is
planning to ultimately offer a complete range of retail and wholesale products
and services for telecommunications and multimedia content distribution,
including:
|
·
|
Smart
POTS (Plain Old Telephony Services), creating cheaper access through
the
application of smart access
technology:
|
|
o
|
Carrier
Select
|
|
o
|
Carrier
PreSelect
|
|
o
|
2-stage
dialing through third party Shared Cost/Premium Rate billing; pre
paid
calling cards
|
|
o
|
2-stage
dialing through direct pre/post paid billing; pre/post paid value/calling
cards
|
|
o
|
Dial
around access plans
|
|
o
|
VoIP
through desktop/laptop client
|
|
o
|
VoIP
using normal phone set through ADSL/Cable/Wifi connected VoIP
box
|
|
·
|
Originating
& Terminating Services
|
|
o
|
Toll
Free Originating Services
|
|
o
|
Shared
Cost Originating Services
|
|
o
|
Premium
Rate Originating Services
|
|
o
|
Revenue
Shared Terminating Services
|
|
o
|
LCR
Global Terminating Services
|
|
·
|
Mobile
Access Services
|
|
o
|
Mobile
Virtual Network Enabling Services, based on 3rd party mobile
networks
|
|
o
|
Wireless
ET Network Services, based on ET WIFI and/or WIMAX
networks
|
|
o
|
Roaming
services
|
|
·
|
Supporting
Services
|
|
o
|
Content
|
|
o
|
Streaming
|
|
o
|
Codec
|
|
o
|
MediaPhone
|
|
o
|
Billing-CRM-Payment
Transaction Services
|
|
o
|
Inteligent
Network Platform Services
|
It
is the
Company’s intention to offer these products either separately or as a bundled
package starting in 2008.
The
Company believes that adding market presence combined with a more in-depth
products and services offering, will position ETCI to find more marketing and
distribution partners, thereby enabling ETCI to rapidly grow the company with
a
lower than proportional growth in overhead cost.
Partners
As
a
result of the converging of IT and telecom solutions the amount of engagement
between ETCI and its various partners has increased. On the supply side ET
works
closely together with dozens of other carriers to either originate or terminate
ET’s traffic around the globe and with a broad range of content providers. On
the client side, resellers have evolved from indirect channels to true partners
bringing specialist market knowledge, customer focus and a geographical reach
to
its activities.
As
a key
element of our low-cost and fast deployment strategy, ETCI makes use of partners
in all layers of our Multimedia distribution platform. ETCI’s partners with
entities in the following particular areas:
Fixed
Network Interconnect Partners.
As a
fully licensed telecommunications carrier, ETCI is entitled to be interconnected
with a variety of incumbent operators and cable companies as well as more
recently established telecom providers in over a dozen countries that provide
both network origination and termination, mostly at regulated
costs.
Page
13
Network
Exchange Partners.
ETCI’s
Network Exchange Partners secure mutual network access and interconnection
on a
country by country and mutually voluntary basis. Through this cooperation,
ETCI
is able to leverage its own network of regulated interconnections by exchanging
these interconnections with network access in countries were ETCI is not
present. Thereby ETCI is capable to rapidly enlarge its network without the
associated capital expenditures.
Content
Partners.
These
partners can be a supplier as well as a marketing client at the same time.
On
one hand they provide a broad array of content available for distribution
through ETCI’s network, to be marketed by a variety of ETCI’s marketing
partners. On the other hand ETCI provides these partners with all the tools
they
may require to exploit and market their content and generate revenue from
them.
LCR
Wholesale Origination/Termination Partners ETCI’s
network is connected to over a dozen Wholesale Partners that work together
on a
commercial basis to provide each with Least Cost Routing capabilities, to
globally originate and terminate calls at the best possible cost/quality
levels.
Payment
Partners.
Through
their clearing houses and platforms ETCI is able to charge and collect monies
due from end-customers, using any form of payment and transfer said funds
accordingly to any of its marketing, content and carrier partners around the
globe.
Management
& Personnel
During
2007 ETCI strengthened its organization in order to prepare itself for its
current growth strategy by hiring a new CFO, a Corporate Controller, a General
Manager for the Middle East & Africa, a manager for Mobile Operations,
engineers and software developers to expand ETCI’s VoIP, Intelligent Network
Platform, and Billing-CRM capabilities, and sales managers in Europe. In January
2008 ETCI retained the services of a Chief Marketing Officer whose main task
will be to streamline all of ETCI’s commercial activities and prepare the
company for accelerated growth in revenues.
In
addition to our corporate management staff, as of March 31, 2008 ETCI employed
24 full time and 3 part time employees. The Company has retained on a long
term
basis the services of 16 independent consultants. We consider relations with
our
employees and consultants to be good. Each of our current employees and
consultants has entered into confidentiality and non-competition agreements
with
the Company.
At
the
same time the Company is pursuing the aforementioned opportunities, Management
is attempting to improve the internal structuring of the organization and to
realize a fully integrated organization. This will have to be achieved not
only
on a corporate level but also in the financial, technical and operational
departments of the Company in order to implement new services, connectivity
in
new countries and extra capacity.
Competition
The
Company experiences fierce competition in each of the market segments in which
it operates.
Carrier
(Pre) Select (CS/CPS)
By
far
the biggest competition still comes from each of the incumbent telecom operators
like France Telecom, KPN, Telecom Italia and Telekom Austria. Originally they
started with virtually 100% market shares, and although certainly market share
has been lost, they usually still have a dominant position. Other competitors
are either specialized Pan European telecom retail providers like for example
Tele2. The strongest price competition usually comes from smaller, locally
established players.
Service
Numbers / Premium Rate (PRS) &
Toll Free Services
Also
here
traditional incumbents are strong competitors if customers solely need domestic
oriented services, as they also here started originally out with around 100%
market shares. In certain countries also some of the Cable Companies have
established larger market shares, while some other markets see strong
competition from either succesfull foreign incumbents, like British Telecom
in
the Netherlands, or highly specialized local services companies, like DTMS
in
Germany. As ETCI combines traffic originating from a dozen European markets
into
one single network, ETCI is in a more favourable competitive position if
customers are for a substantial part also looking at such cross border traffic.
Page
14
Domestic
Toll Free traffic is again dominated by the various incumbent carriers in the
various countries ET operates in. However also for these kind of services,
ETCI’s single network approach for traffic from over a dozen European markets,
creates a unique selling point for ETCI to service for example major Pan
European call centres. In this cross border segment companies like COLT Telecom
pose serious competition.
Two
Stage Dialing
Over
the
years the Two-Stage dialing service has encountered more competition from VoIP
call services such as Skype but also from lower international call charges
by
incumbents and other telecommunication companies in general. However, immigrant
user groups tend to have only limited access to these alternative international
call facilities and often depend on a mobile device only. Consequently,
Two-Stage Dialing continuous to be essential for its niche market group users
and the call volume of this service has only been little affected by its
competition.
Streaming,
Media & Content Services
The
internet as such is by far the strongest competition for all kind of content
distribution and streaming services. However more and more content distributors
and content owners start to question the long term healthyness of the sometimes
free for all distribution capabilities via internet. A free content model
whereby revenue is solely driven by ad expenditures, based on unique traffic
to
one’s website might simply not be suitable for any content party. ET provides
tools to deliver electronic content in a more controlled fashion and either
receive payments for specific usage, or provide valuable customer profiling
from
specific customers allowed to see the content, or a combination of
both.
Mobile
Services
Even
though ETCI as a Mobile Virtual Network Provider, will keep on creating
excellent opportunities for MNO’s to increase the addressable market that can
service profitably, at some moment in time such MNO’s may be considering to not
only take on larger MVNO’s directly, but to again start servicing such smaller
MVNO’s directly. This may especially be true if new technologies make it easier
for these MNO’s to service such smaller non-retail customers directly. Also
other MVNE’s may possibly create strong competition, especially if such new
MVNE’s will be created by MNO’s as a consequence of ETCI’s success in profitably
cooperating with various other MNO’s that already have a succesfull MVNE
relation with ETCI.
So
far
there are very few truly MVNE’s, running all the required network elements to
offer an integrated platform with a flexible, user-friendly services, currently
operating, although this may change in the near future.
Item
1A. RISK FACTORS
Risks
related to our company
Our
substantial and continuing losses, coupled with significant ongoing operating
expenses, raise doubt about our ability to continue as a going
concern.
We
have
sustained substantial losses. Such losses continue due to ongoing operating
expenses and a lack of revenues sufficient to offset operating expenses. We
have
raised capital to fund ongoing operations by private sales of our securities,
some of which sales have been highly dilutive and involve considerable expense.
In our present circumstances, there is substantial doubt about our ability
to
continue as a going concern absent significant sales of our products and
telecommunication services, substantial revenues from new licensing or
co-development contracts, or the sale of our securities.
Page
15
We
incurred net losses of $12,057,732 and $4,829,665 for the years ended
December 31, 2007 and 2006, respectively. As of December 31, 2007, we had an
accumulated deficit of $29,019,832, derivative liabilities of $18,255,065
related to the obligations to issue 613,492,498 shares of our common stock,
accounts payable of $4,857,229 and current portion of notes payable of
$6,484,063.
We
expect
to continue to spend significant amounts to acquire businesses and to expand
our
current technology. As a result, we will need to raise additional capital until
we generate significant additional revenue to achieve profitability. There
is no
guarantee that such capital will be available, or that it will be available
on
favorable terms.
We
have recently shifted our business strategy, and we may not prove successful
in
our new focus.
In
2007,
the Company began to shift its focus from market of international call
termination to the Carrier (Pre) Select, Premium Rate, Toll Free, Content
Distribution and Mobile Services global markets. We have limited experience
in
these areas, and there is no guarantee that we will be able to enter and compete
in these markets, or achieve profitability.
We
may not be able to integrate new technologies and provide new services in a
cost-efficient manner.
The
telecommunications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on our competitive position,
our
profitability or the industry generally. Technological developments may reduce
the competitiveness of our networks and require additional capital expenditures
or the procurement of additional products that could be expensive and time
consuming. In addition, new products and services arising out of technological
developments may reduce the attractiveness of our services. If we fail to adapt
successfully to technological advances or fail to obtain access to new
technologies, we could lose customers and be limited in our ability to attract
new customers and/or sell new services to our existing customers. In addition,
delivery of new services in a cost-efficient manner depends upon many factors,
and we may not generate anticipated revenue from such services.
Disruptions
in our networks and infrastructure may cause us to lose customers and incur
additional expenses.
To
be
successful, we will need to continue to provide our customers with reliable
and
timely service over our networks. We face the following risks to our networks
and infrastructure:
|
·
|
our
territory can have significant weather events which physically damage
access lines;
|
|
·
|
power
surges and outages, computer viruses or hacking, and software or
hardware
defects which are beyond our control;
and
|
|
·
|
unusual
spikes in demand or capacity limitations in our or our suppliers’
networks.
|
Disruptions
may cause interruptions in service or reduced capacity for customers, either
of
which could cause us to lose customers and/or incur expenses, and thereby
adversely affect our business, revenue and cash flow.
Integration
of acquisitions ultimately may not provide the benefits originally anticipated
by management and may distract the attention of our personnel from the operation
of our business.
We
strive
to increase the volume of voice and data traffic that we carry over our existing
global network in order to reduce transmission costs and other operating costs
as a percentage of net revenue, improve margins, improve service quality and
enhance our ability to introduce new products and services. We may pursue
acquisitions in the future to further our strategic objectives. Acquisitions
of
businesses and customer lists, a key element of our historical growth strategy,
involve operational risks, including the possibility that an acquisition does
not ultimately provide the benefits originally anticipated by management.
Moreover, there can be no assurance that we will be successful in identifying
attractive acquisition candidates, completing and financing additional
acquisitions on favorable terms, or integrating the acquired business or assets
into our own. There may be difficulty in migrating the customer base and in
integrating the service offerings, distribution channels and networks gained
through acquisitions with our own. Successful integration of operations and
technologies requires the dedication of management and other personnel, which
may distract their attention from the day-to-day business, the development
or
acquisition of new technologies, and the pursuit of other business acquisition
opportunities, and there can be no assurance that successful integration will
occur in light of these factors.
Page
16
Uncertainties
and risks associated with international markets could adversely impact our
international operations.
We
have
significant international operations in Europe, the Middle East and the Far
East. In international markets, we are smaller than the principal or incumbent
telecommunications carrier that operates in each of the foreign jurisdictions
where we operate. In these markets, incumbent carriers are likely to control
access to, and the pricing of, the local networks; enjoy better brand
recognition and brand and customer loyalty; generally offer a wider range of
product and services; and have significant operational economies of scale,
including a larger backbone network and more correspondent agreements. Moreover,
the incumbent carrier may take many months to allow competitors, including
us,
to interconnect to our switches within our territory, and we are dependent
upon
their cooperation in migrating customers onto our network. There can be no
assurance that we will be able to obtain the permits and operating licenses
required for us to operate; obtain access to local transmission facilities
on
economically acceptable terms; or market services in international markets.
In
addition, operating in international markets generally involves additional
risks, including unexpected changes in regulatory requirements, taxes, tariffs,
customs, duties and other trade barriers, difficulties in staffing and managing
foreign operations, problems in collecting accounts receivable, political risks,
fluctuations in currency exchange rates, restrictions associated with the
repatriation of funds, technology export and import restrictions, and seasonal
reductions in business activity. Our ability to operate and grow our
international operations successfully could be adversely impacted by these
risks.
Because
a significant portion of our business is conducted outside the United States,
fluctuations in foreign currency exchange rates could adversely affect our
results of operations.
A
significant portion of our net revenue is derived from sales and operations
outside the United States. The reporting currency for our consolidated financial
statements is the United States dollar (USD). The local currency of each country
is the functional currency for each of our respective entities operating in
that
country. In the future, we expect to continue to derive a significant portion
of
our net revenue and incur a significant portion of our operating costs outside
the United States, and changes in exchange rates have had and may have a
significant, and potentially adverse, effect on our results of operations.
Our
primary risk of loss regarding foreign currency exchange rate risk is caused
by
fluctuations in the following exchange rates: USD/EUR, USD/CHF, USD/HKD, USD/CNY
and USD/BHD. Due to the large percentage of our operations conducted outside
of
the United States, strengthening or weakening of the USD relative to one or
more
of the foregoing currencies could have an adverse impact on future results
of
operations. We historically have not engaged in hedging transactions and do
not
currently contemplate engaging in hedging transactions to mitigate foreign
exchange risks. In addition, the operations of affiliates and subsidiaries
in
foreign countries have been funded with investments and other advances
denominated in foreign currencies. Historically, such investments and advances
have been long-term in nature, and we accounted for any adjustments resulting
from currency translation as a charge or credit to accumulated other
comprehensive loss within the stockholders’ deficit section of our consolidated
balance sheets.
We
are substantially smaller than our major competitors, whose marketing and
pricing decisions, and relative size advantage, could adversely affect our
ability to attract and retain customers and are likely to continue to cause
significant pricing pressures that could adversely affect our net revenues,
results of operations and financial condition.
Page
17
The
long
distance telecommunications, Internet, broadband, DSL, data and wireless
industry is significantly influenced by the marketing and pricing decisions
of
the larger long distance, Internet access, broadband, DSL and wireless business
participants. Prices in the long distance industry have continued to decline
in
recent years, and as competition continues to increase within each of our
service segments and each of our product lines, we believe that prices are
likely to continue to decrease. Customers frequently change long distance,
wireless and broadband providers, and ISPs in response to the offering of lower
rates or promotional incentives, increasingly as a result of bundling of various
services by competitors. Moreover, competitors’ VOIP and broadband product
rollouts have added further customer choice and pricing pressure. As a result,
generally, customers can switch carriers and service offerings at any time.
Competition in all of our markets is likely to remain intense, or even increase
in intensity and, as deregulatory influences are experienced in markets outside
the United States, competition in non-United States markets is becoming similar
to the intense competition in the United States. Many of our competitors are
significantly larger than us and have substantially greater financial, technical
and marketing resources, larger networks, a broader portfolio of service
offerings, greater control over network and transmission lines, stronger name
recognition and customer loyalty, long-standing relationships with our target
customers, and lower debt leverage ratios. As a result, our ability to attract
and retain customers may be adversely affected. Many of our competitors enjoy
economies of scale that result in low cost structures for transmission and
related costs that could cause significant pricing pressures within the
industry. We compete on the basis of price, particularly with respect to our
sales to other carriers, and also on the basis of customer service and our
ability to provide a variety of telecommunications products and services. If
such price pressures and bundling strategies intensify, we may not be able
to
compete successfully in the future, may face quarterly revenue and operating
results variability, and may have heightened difficulty in estimating future
revenues or results.
Our
positioning in the marketplace as a smaller provider places a significant strain
on our resources, and if not managed effectively, could result in operational
inefficiencies and other difficulties.
Our
positioning in the marketplace may place a significant strain on our management,
operational and financial resources, and increase demand on our systems and
controls. To manage this position effectively, we must continue to implement
and
improve our operational and financial systems and controls, invest in critical
network infrastructure to maintain or improve our service quality levels,
purchase and utilize other transmission facilities, and train and manage our
employee base. If we inaccurately forecast the movement of traffic onto our
network, we could have insufficient or excessive transmission facilities and
disproportionate fixed expenses. As we proceed with our development, operational
difficulties could arise from additional demand placed on customer provisioning
and support, billing and management information systems, product delivery and
fulfillment, on our support, sales and marketing and administrative resources
and on our network infrastructure. For instance, we may encounter delays or
cost-overruns or suffer other adverse consequences in implementing new systems
when required. In addition, our operating and financial control systems and
infrastructure could be inadequate to ensure timely and accurate financial
reporting.
We
are subject to the economic risks inherent in the Asian and European
economies.
An
economic crisis in Asia or Europe where a substantial portion of our client
base
is and will be located could result in a decrease in our revenues. Several
countries in Asia have experienced currency devaluation and/or difficulties
in
financing short-term obligations. We cannot assure you that the effect of an
economic crisis on our customers will not impact operations, or that the effect
on our customers in that region will not adversely affect both the demand for
our services and the collection of receivables.
We
could suffer adverse tax and other financial consequences if U.S. or foreign
taxing authorities do not agree with our interpretation of applicable tax
laws.
Our
corporate structure is based, in part, on assumptions about the various tax
laws, including withholding tax, and other relevant laws of applicable non-U.S.
jurisdictions. We cannot assure you that foreign taxing authorities will agree
with our interpretations or that they will reach the same conclusions. Our
interpretations are not binding on any taxing authority and, if these foreign
jurisdictions were to change or to modify the relevant laws, we could suffer
adverse tax and other financial consequences or have the anticipated benefits
of
our corporate structure materially impaired.
We
must attract and retain skilled personnel. If we are unable to hire and retain
technical, sales and marketing and operational employees, our business could
be
harmed.
Our
ability to manage our growth will be particularly dependent on our ability
to
develop and retain an effective sales force and qualified technical and
managerial personnel. We intend to hire additional employees, including software
engineers, sales and marketing employees and operational employees. The
competition for qualified sales, technical, and managerial personnel in the
communications industry is intense, and we may not be able to hire and retain
sufficient qualified personnel. In addition, we may not be able to maintain
the
quality of our operations, control our costs, maintain compliance with all
applicable regulations, and expand our internal management, technical,
information and accounting systems in order to support our desired growth,
which
could have an adverse impact on our operations.
If
we are not able to use and protect our intellectual property domestically
and
internationally, it could have a material adverse effect on our business.
Our
ability to compete depends, in part, on our ability to use
intellectual property in the United States and internationally. We rely
on a
combination of trade secrets, trademarks and licenses to protect our
intellectual property. We are also subject to the risks of claims
and litigation alleging infringement of the intellectual property
rights of others. The telecommunications industry is subject to
frequent litigation regarding patent and other intellectual
property rights. We rely upon certain technology, including hardware
and software, licensed from third parties. There can be no assurance that
the technology licensed by us will continue to provide competitive
features and functionality or that licenses for technology currently used
by us or other technology that we may seek to license in the future will be
available to us on commercially reasonable terms or at
all.
Page
18
Risks
related to our industry
Changes
in the regulation of the telecommunications industry could adversely affect
our
business, revenue or cash flow.
We
operate in a heavily regulated industry. The majority of our revenue has been
generally supported by and subject to regulation at the federal, state and
local
level. Certain foreign, federal, and state regulations and local franchise
requirements have been, are currently, and may in the future be, the subject
of
judicial proceedings, legislative hearings and administrative proposals. Such
proceedings may relate to, among other things, the rates we may charge for
our
local, network access and other services, the manner in which we offer and
bundle our services, the terms and conditions of interconnection, unbundled
network elements and resale rates, and could change the manner in which
telecommunications companies operate. We cannot predict the outcome of these
proceedings or the impact they will have on our business, revenue and cash
flow.
If
competitive pressures continue or intensify and/or the success of our new
products is not adequate in amount or timing to offset the decline in results
from our legacy businesses, we may not be able to service our debt or other
obligations.
There
are
substantial risks and uncertainties in our future operating results,
particularly as aggressive pricing and bundling strategies by certain incumbent
carriers and incumbent local exchange carriers have intensified competitive
pressures in the markets where we operate, and/or if we have insufficient
financial resources to market our services. The aggregate anticipated margin
contribution from our new products may not be adequate in amount or timing
to
offset the declines in margin from our legacy long distance voice and dial-up
ISP business.
We
experience intense domestic and international competition which may adversely
affect our results of operations and financial condition.
The
local
and long distance telecommunications, data, broadband, Internet, VOIP and
wireless industries are intensely competitive with relatively limited barriers
to entry in the more deregulated countries in which we operate and with numerous
entities competing for the same customers. Recent and pending deregulation
in
various countries may encourage new entrants to compete, including ISPs,
wireless companies, cable television companies, who would offer voice,
broadband, Internet access and television, and electric power utilities who
would offer voice and broadband Internet access. Moreover, the rapid enhancement
of VOIP technology may result in increasing levels of traditional domestic
and
international voice long distance traffic being transmitted over the Internet,
as opposed to traditional telecommunication networks. Currently, there are
significant capital investment savings and cost savings associated with carrying
voice traffic employing VOIP technology, as compared to carrying calls over
traditional networks. Thus, there exists the possibility that the price of
traditional long distance voice services will decrease in order to be
competitive with VOIP. Additionally, competition is expected to be intense
to
switch customers to VOIP product offerings, as is evidenced by numerous recent
market announcements in the United States and internationally from industry
leaders and competitive carriers concerning significant VOIP initiatives. Our
ability to effectively retain our existing customer base and generate new
customers, either through our traditional network or our own VOIP offerings,
may
be adversely affected by accelerated competition arising as a result of VOIP
initiatives, as well as regulatory developments that may impede our ability
to
compete, such as restrictions on access to broadband networks owned and operated
by others. As competition intensifies as a result of deregulatory, market or
technological developments, our results of operations and financial condition
could be adversely affected.
Page
19
A
deterioration in our relationships with facilities-based carriers could have
a
material adverse effect upon our business.
We
primarily connect our customers’ telephone calls and data/Internet needs through
transmission lines that we lease under a variety of arrangements with other
facilities-based long distance carriers. Many of these carriers are, or may
become, our competitors. Our ability to maintain and expand our business depends
on our ability to maintain favorable relationships with the facilities-based
carriers from which we lease transmission lines. If our relationship with one
or
more of these carriers were to deteriorate or terminate, it could have a
material adverse effect upon our cost structure, service quality, network
diversity, results of operations and financial condition. If we experience
difficulties with our third-party providers, we may not achieve desired
economies of scale or otherwise be successful in growing our business.
The
telecommunications industry is rapidly changing, and if we are not able to
adjust our strategy and resources effectively in the future to meet changing
market conditions, we may not be able to compete effectively.
The
telecommunications industry is changing rapidly due to deregulation,
privatization, consolidation, technological improvements, availability of
alternative services such as wireless, broadband, DSL, Internet, VOIP, and
wireless DSL through use of the fixed wireless spectrum, and the globalization
of the world’s economies. In addition, alternative services to traditional fixed
wireline services, such as wireless, broadband, Internet and VOIP services,
are
a substantial competitive threat. If we do not adjust our contemplated plan
of
development to meet changing market conditions and if we do not have adequate
resources, we may not be able to compete effectively. The telecommunications
industry is marked by the introduction of new product and service offerings
and
technological improvements. Achieving successful financial results will depend
on our ability to anticipate, assess and adapt to rapid technological changes,
and offer, on a timely and cost-effective basis, services including the bundling
of multiple services that meet evolving industry standards. If we do not
anticipate, assess or adapt to such technological changes at a competitive
price, maintain competitive services or obtain new technologies on a timely
basis or on satisfactory terms, our financial results may be materially and
adversely affected.
If
we are not able to operate a cost-effective network, we may not be able to
grow
our business successfully.
Our
long-term success depends on our ability to design, implement, operate, manage
and maintain a reliable and cost-effective network. In addition, we rely on
third parties to enable us to expand and manage our global network and to
provide local, broadband Internet and wireless services.
Page
20
We
are subject to potential adverse effects of regulation which may have a material
adverse impact on our competitive position, growth and financial performance.
Our
operations are subject to constantly changing regulation. There can be no
assurance that future regulatory changes will not have a material adverse effect
on us, or that regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable regulations, any
of
which could have a material adverse effect upon us. As a multinational
telecommunications company, we are subject to varying degrees of regulation
in
each of the jurisdictions in which we provide our services. Local laws and
regulations, and the interpretation of such laws and regulations, differ
significantly among the jurisdictions in which we operate. Enforcement and
interpretations of these laws and regulations can be unpredictable and are
often
subject to the informal views of government officials. Potential future
regulatory, judicial, legislative, and government policy changes in
jurisdictions where we operate could have a material adverse effect on us.
Domestic or international regulators or third parties may raise material issues
with regard to our compliance or noncompliance with applicable regulations,
and
therefore may have a material adverse impact on our competitive position, growth
and financial performance.
Our
computer network is vulnerable to hacking, viruses and other
disruptions.
Inappropriate
use of our Internet and phone services could jeopardize the security of
confidential information stored in our computer system, which may cause losses
to us. Inappropriate use of the Internet includes attempting to gain
unauthorized access to information or systems - commonly known as "cracking"
or
"hacking." Although we intend to implement security measures to protect our
facilities, such measures could be circumvented. Alleviating problems caused
by
computer viruses or other inappropriate uses or security breaches may require
interruptions, delays or cessation in our services.
There
are political, economic and regulatory risks associated with doing business
in
China and Asia.
China's
economy has experienced significant growth in the past decade, but such growth
has been uneven across geographic and economic sectors and has recently been
slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our
business.
Part
of our facilities and operations are currently located in Hong Kong. Hong Kong
is a Special
Administrative Region ("SAR") of China with its own government and legislature.
Hong Kong enjoys a high degree of autonomy from China under the principle of
"one country, two systems". We can give no assurance that Hong Kong will
continue to enjoy autonomy from China. The Hong Kong dollar has remained
relatively constant due to the U.S. dollar peg and currency board system that
has been in effect in Hong Kong since 1983. We can give no assurance that the
Hong Kong economy will not worsen or that the historical currency peg of the
Hong Kong dollar to the U.S. dollar will be maintained. Continued recession
in
Hong Kong, deflation or the discontinuation of the historical currency peg
could
adversely affect our business.
Regulation
of the information industry in China may adversely affect our
business
China
has
enacted regulations governing Internet access and the distribution of news
and
other information. We cannot predict the effect of further developments in
the
Chinese legal system, particularly with regard to the Internet and mobile
services including promulgation of the new laws, changes to the existing laws
or
the interpretation or enforcement thereof, or the preemption of local
regulations by national laws.
Page
21
Risks
related to our securities
Existing
shareholders likely will experience increased dilution when we satisfy our
obligations to issue shares of our common stock.
We
are
currently obligated to issue 613,492,498 shares of common stock, though we
currently do not have enough authorized but unissued shares of common stock
to
satisfy these obligations On January 15, 2008, our shareholders approved a
25 to
one reverse stock split. Upon our execution of the reverse split and the
satisfaction of our obligations to issue these shares, our current stockholders
will experience substantial dilution. Furthermore, many of the shares issuable
are to certain affiliated parties. Therefore, the positions of these parties
in
our company will increase while our other shareholders will experience
disproportionate dilution. Currently there are 238,265,927 shares of our
common stock outstanding held by our current shareholders, comprising 95% of
our
authorized shares. Upon effecting the reverse split, our current shareholders
will own about 4% of our authorized shares. In addition, upon the issuance
of
the total amount of shares issuable under the various obligations, our current
shareholders will then hold 23% of our then-outstanding shares of common stock.
As many of the shares are issuable to Rising Water Capital (“RWC”), an entity
controlled by our chief executive officer, the positions of our other
shareholders will be diluted while RWC's position will increase to up to 58.3%
of our outstanding common stock. See “Shares to be Issued” under Note 14 of the
accompanying financial statements.
We
have no dividend history and have no intention to pay dividends in the
foreseeable future.
We
have
never paid dividends on or in connection with our common stock and do not intend
to pay any dividends to common stockholders for the foreseeable
future.
Our
common stock is considered a penny stock. Penny stocks are subject to special
regulations, which may make them more difficult to trade on the open
market.
Securities
in the OTC market are generally more difficult to trade than those on the NASDAQ
National Market, the NASDAQ SmallCap Market or the major stock exchanges. In
addition, accurate price quotations are also more difficult to obtain. The
trading market for our common stock is subject to special regulations governing
the sale of penny stock.
A
“penny
stock” is defined by regulations of the Securities and Exchange Commission as an
equity security with a market price of less than $5.00 per share. The market
price of our common stock has been less than $5.00 for several
years.
If
you
buy or sell a penny stock, these regulations require that you receive, prior
to
the transaction, a disclosure explaining the penny stock market and associated
risks. Furthermore, trading in our common stock would be subject to Rule 15g-9
of the Exchange Act, which relates to non-NASDAQ and non-exchange listed
securities. Under this rule, broker-dealers who recommend our securities to
persons other than established customers and accredited investors must make
a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per
share.
Penny
stock regulations will tend to reduce market liquidity of our common stock,
because they limit the broker-dealers' ability to trade, and a purchaser's
ability to sell the stock in the secondary market. The low price of our common
stock will have a negative effect on the amount and percentage of transaction
costs paid by individual shareholders. The low price of our common stock may
also limit our ability to raise additional capital by issuing additional shares.
There are several reasons for these effects. First, the internal policies of
many institutional investors prohibit the purchase of low-priced stocks. Second,
many brokerage houses do not permit low-priced stocks to be used as collateral
for margin accounts or to be purchased on margin. Third, some brokerage house
policies and practices tend to discourage individual brokers from dealing in
low-priced stocks. Finally, broker's commissions on low-priced stocks usually
represent a higher percentage of the stock price than commissions on higher
priced stocks. As a result, our shareholders will pay transaction costs that
are
a higher percentage of their total share value than if our share price were
substantially higher.
Page
22
Item
2. Description of Property.
For
the
first eleven months of 2007, the Company's principal executive office was
located at 438 East Katella Avenue, Suite 217, Orange, California 92867. We
occupied this location on a month-to-month rental basis. The monthly rent was
$374. In December 2007, the Company’s principal executive office was relocated
to Schiphol Boulevard 249, 1118 BH Schiphol, The Netherlands. The new executive
office is comprised of two offices with monthly rental of $5,082 and $3,240
that
carry rental leases until September 2011 and April 2013 respectively. Elephant
Talk Communications S.L.U. is currently leasing two office spaces at Paratge
Bujonis, despacho 1 and 20, 17220 Sant Feliu de Guixols, (Girona) Spain, on
a
quarter-to-quarter lease at a monthly rent of $2,168. Elephant Talk Limited
is
currently leasing an office space at Room 2116, 21/F, Metro Centre II, 21 Lam
Hing Street, Kowloon, Hong Kong for a period of two years commencing Aug 15,
2007 at a monthly rent of $3,094. The Company is currently leasing space for
storage of its telecom switches at co-locations at a monthly rent of $28,303.
The Company leases various co-location spaces in Guangzhou, Los Angeles,
Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Brussels and other places
where our telecommunications equipment are located.
We
believe that the facilities currently under lease are adequate for the Company's
present activities, and that additional facilities are available on competitive
market terms to provide for such future expansion of the Company's operations
as
may be warranted.
Item
3. Legal Proceedings.
a)
Beijing Chinawind
On
September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
organized and existing under the laws of the People’s Republic of China
(“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), filed two
lawsuits against Guangdong Elephant Talk Network Consulting Limited, a company
organized and existing under the laws of the People’s Republic of China and an
agent of the Company (“ETGD”), in the Beijing Civil Courts. The lawsuit alleged
that a) ETGD failed to pay the remaining consideration of $787,748 under an
Equity Transfer Agreement, dated January 4, 2006 (the “CW Agreement”), between
ETGD and Beijing Zhongrun, which provided for the acquisition by ETGD from
Beijing Zhongrun of 60% of the registered capital of Beijing Chinawind; and
b)
ETGD induced the minority shareholders of Beijing Chinawind to accept, pursuant
to the CW Agreement, consideration of $1,000,000 through the issuance of
10,000,000 common shares of the Company valued at $0.10 per common share. The
lawsuit further alleged that Chinese law prohibits citizens of the People’s
Republic of China from accepting shares of companies listed on the United States
Over-The-Counter Bulletin Board Quotation Service, which is regulated by the
National Association of Securities Dealers, Inc., as compensation in an
acquisition transaction
The
judgment of the Beijing Haiding Civil Court was recently received. On October
the 18th
the
verdict was given in the two cases:
The
CW
Agreement was confirmed to be effective. All requests from CW are rejected.
In
addition, the Court confirmed the opinion of ETGD: that the resolutions of
the
shareholders meeting of China Wind held on January 27, 2007 are invalid, as
the
meeting was not conducted in a proper way.
(b)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.
As
previously described in the Company’s 2004 Annual Report, parties mutually
agreed to terminate this Purchase Agreement. The Company returned the received
shares of New Times Navigation Limited to the concerned shareholders and
received back 2,252,500 common shares out of the 5,100,000 issued by the Company
for the purchase. In addition the Company issued 37 unsecured convertible
promissory notes for a total amount of US$3,600,000. On request of the Company
21 were returned with a total value of US$2,040,000.
The
Company is presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return
a
total of 2,847,500 common shares (valued at $381,565) and also to have them
return the remaining 18 unsecured convertible promissory notes representing
a
total amount of US$1,740,000 and rescind the Purchase Agreement. The case is
currently pending.
Page
23
Item
4. Submission of Matters to a Vote of Security Holders.
|
1.
|
On
January 15, 2008, we held the annual meeting of stockholders in New
York,
New York. Proxies were saliated pursuant to our Schedule 14A filed
on
December 28, 2007.
|
|
2.
|
Our
stockholders elected the following individuals to our board of directors:
Steven van der Velden, Willem Ackermans, Martin Zuurbier, Johan Dejager;
Yves van Sante, Roderick de Greef, and Bruce W.
Barren.
|
|
3.
|
Our
stockholders also voted on the following
proposals:
|
|
a.
|
To
approve a twenty five to one reverse split (the “Reverse Split Proposal”)
of our issued and outstanding common
stock.
|
|
b.
|
To
approve the adoption of an Amended and Restated Articles of Incorporation
(the “Amendment Proposal”) to: (1) authorize 50,000,000 shares of
Preferred Stock, which may be issued in one or more series, with
such
rights, preferences, privileges and restrictions as shall be fixed
by the
Company's Board of Directors from time to time; (2) revise the purpose
clause of the Company in the Certificate to engage in any lawful
act under
the corporate laws of the State of California; (3) to change the
number of
directors from nine to any number between six and eleven, such number
to
be determined in the manner provided in the by-laws; (4) include
indemnification provisions for directors and other agents of the
Company;
and (5) enact other such ancillary changes necessary to accomplish
the
aforesaid which appear in the amended and restated articles of
incorporation; and
|
|
c.
|
To
adopt our 2008 Long-Term Incentive Plan (the “Plan
Proposal”).
|
|
Election
of Director Proposal
|
Number
of Shares Voted For:
|
%
of Shares Cast
|
|||||
|
Steven
van der Velden
|
140,009,721
|
100
|
%
|
||||
|
Willem
Ackermans
|
140,009,721
|
100
|
%
|
||||
|
Martin
Zuurbier
|
140,009,721
|
100
|
%
|
||||
|
Johan
Dejager
|
140,009,721
|
100
|
%
|
||||
|
Yves
van Sante
|
140,009,721
|
100
|
%
|
||||
|
Roderick
de Greef
|
140,009,721
|
100
|
%
|
||||
|
Bruce
W. Barren
|
140,009,721
|
100
|
%
|
||||
|
Name
|
Number
of Shares Voted For
|
%
of Shares Cast
|
Number
of Shares Voted Against
|
%
of Shares Cast
|
Number
of Shares Abstained
|
|||||||||||
|
140,009,501
|
99
|
%
|
220
|
<.01
|
%
|
0
|
||||||||||
|
140,008,051
|
99
|
%
|
1,670
|
<.01
|
%
|
0
|
||||||||||
|
140,009,721
|
100
|
%
|
0
|
0
|
%
|
0
|
Page
24
PART
II
Our
common stock is listed for quotation on the OTC BB under the symbol “ETLK”. The
range of reported high and reported low bid prices per share for our common
stock for each fiscal quarter during 2007, as reported by the OTC BB, is set
forth below. The quotations merely reflect the prices at which transactions
were
proposed, and do not necessarily represent actual transactions.
Quarterly
Common Stock Price Ranges
|
Common
Stock
|
|||||||
|
Quarter
Ended
|
High
|
Low
|
|||||
|
December
31, 2007
|
$
|
0.08
|
$
|
0.07
|
|||
|
September
30, 2007
|
$
|
0.09
|
$
|
0.09
|
|||
|
June
30, 2007
|
$
|
0.09
|
$
|
0.09
|
|||
|
March
31, 2007
|
$
|
0.09
|
$
|
0.09
|
|||
|
December
31, 2006
|
$
|
0.09
|
$
|
0.09
|
|||
|
September
30, 2006
|
$
|
0.11
|
$
|
0.11
|
|||
|
June
30, 2006
|
$
|
0.12
|
$
|
0.11
|
|||
|
March
31, 2006
|
$
|
0.19
|
$
|
0.16
|
|||
At
December 31, 2007, the Company had approximately 3,120 holders of record of
its
common stock. In addition, there are approximately 4,200 holders in the street
name. The holders of common shares are entitled to one vote for each share
held
of record on all matters submitted to a vote of stockholders. Holders of common
shares have no preemptive rights and no right to convert their common stock
into
any other securities. There is no redemption of sinking fund provisions
applicable to the common stock.
No
cash
dividends have been paid on the common stock to date. We currently intend to
retain any earnings for further business development.
Securities
Authorized for Issuance under Equity Compensation Plans
|
Plan
category
|
Number of securities
to be issued upon
exercise of
outstanding options
and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance
|
|||||||
|
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved by security holders
|
7,120,833
|
$
|
0.09
|
2,877,167
|
||||||
|
Equity
compensation plans not approved by security holders
|
$
|
|
||||||||
|
Total
|
7,120,833
|
$
|
0.09
|
2,877,167
|
||||||
Recent
Sales of Unregistered Securities
None.
Page
25
Dividends
The
Company has not declared any cash dividends since inception and does not
anticipate paying any dividends in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend
on
the Company’s earnings, capital requirements, financial condition, and other
relevant factors. There are no restrictions that currently limit the Company’s
ability to pay dividend on its Common Stock other than those generally imposed
by applicable state law.
The
Company has no preferred stock issued or outstanding as of December 31, 2007.
Item
6. Selected Financial Data
We
are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
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.
Overview
Elephant
Talk Communications Inc. (“ETCI”), until recently was engaged in the long
distance telephone business in China and the Special Administrative Region
Hong
Kong.
In
2006
the Company adopted the strategy to position itself as an international telecom
operator and enabler to the multi-media industry by facilitating to the
distribution of all forms of content and telecommunications services to various
global customers. Through intelligent design and organizational structure the
Company pursues this strategy by building a worldwide network based on both
clear and IP bandwidth that is managed centrally by its self-developed
IN-CRM-Billing platform.
In
January 2007, through the acquisition of various assets in Europe, the Company
established a foothold in the European Telecommunications Market, particularly
in the market of Service Numbers like Toll Free and Premium Rate Services and
to
a smaller extent Carrier (Pre) Select Services. Furthermore, through the human
and IT resources thereby acquired, the company obtained expertise of telecom
and
multi-media systems, telecom regulations and European markets.
The
Company currently operates a switch-based telecom network with national licenses
and direct fixed line interconnects with the Incumbents/National Telecom
Operators in eight (8) European countries, one (1) in the Middle East (Bahrain),
licenses in Hong Kong and the U.S.A. and partnerships with telecom operators
in
Scandinavia, Poland, Germany, Greece and Hong Kong. Codec and media streaming
servers are currently located in six centers geographically spread around the
world. Together with the centrally operated and managed IN-CRM-Billing platform,
the Company thus offers geographical, premium rate, toll free, personal, nomadic
and VoIP numbers. Services are primarily provided to the business market and
include traditional telecom services, VOIP, media streaming and distribution
including the necessary billing and collection. Through its European and Chinese
development centers, ETCI develops in-house telecom and media related systems
and software.
In
the
third quarter of 2007 the Company finalized testing and commissioned
additional national interconnects in the United Kingdom (British Telecom) and
Bahrain (Batelco), further enlarging the Company’s footprint in fixed line
infrastructure. In the Caribbean and the Middle East, the Company installed
its
first Wifi test sites, aimed at creating own broadband mobile access networks
in
emerging markets with relatively poor (or relatively expensive) infrastructures.
Page
26
In
Europe, a step was made towards building a mobile enabled infrastructure on
top
of the Company’s fixed line infrastructure by committing capital expenditure and
implementation resources towards becoming a Mobile Virtual Network Enabler
(MVNE).
In
order
to finance this business opportunity the Company entered into stock purchase
agreements with certain investors for the sale of its common stock. During
the
year ended December 31, 2007, the Company received $8,498,471 in total under
these agreements.
At
the
same time the Company is pursuing above described business opportunities,
attention is paid by its Management to improve the internal structuring of
the
organization and to realize a fully integrated organization. This will have
to
be achieved not only on a corporate level but also in the financial, technical
and operational departments of the Company in order to implement new services,
connectivity in new countries and extra capacity.
Comparison
of the fiscal years ended December 31, 2007 and December 31, 2006
Revenues
and Cost of Revenues:
Revenues
recorded
by the Company were $47,361,028 and $158,292 for the years ended December 31,
2007 and 2006, respectively. Revenues consisted of telecommunications services
such as premium rate, carrier select, carrier pre-select, freephone (toll free),
voice and data transmission like IDD and pre-paid calling cards services
provided to a wide range of customers. The increase in revenues for 2007
were contributed by our newly acquired European entities whose major revenues
came from premium rates, carrier select and carrier pre-select services. The
revenue from IDD and pre-paid calling card services continue to decline during
the year mainly due to significant pricing pressure and reduction in demand
on
its products. The long-distance and calling card revenue decreases were impacted
by continued weakness in the telecommunications industry and ongoing economic
and competitive pressures from other telecommunications services providers
in
Hong Kong and around the world.
Cost
of revenue
was
$47,189,533 and $144,727 for the years ended December 31, 2007 and 2006,
respectively. Cost of revenue included depreciation and amortization directly
attributable to revenue, network 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. Gross margin for the year ended
December 31, 2007 was 0.362% of the revenues compared to 8.5% of the revenues
for the year ended December 31, 2006. Gross margin decreased in 2007 primarily
due to the shift of business to premium rate services, which is a low profit
margin business in nature, plus the continuous decline in the volume of calling
card business resulting inadequate volume offsets to the fixed network costs.
In
addition, $1,580,976 was due to reporting regulation to include appropriate
depreciation expenses in the cost of revenue in 2007.
On
June
28, 2007, the Board approved to issue over a three years periods as of January
1, 2007 in total 72,036,800 shares of common stock to its officers and directors
of which 51,761,600 shares of common stock valued at $4,399,736 were recognized
at June 28, 2007 as compensation for employment commitments for a term of
three
years as of January 1, 2007. The remaining 20,275,200 valued at $1,723,392
will
be amortized over a period of three years as of January 2007. Therefore,
for
compensation for services for the 12 months ended December 31, 2007 6,758,400
shares of stock valued at $574,464 was awarded to Management in 2007. The
shares
were valued at the closing market price of eight and one-half cents ($0.085)
on
June 28, 2007, the date of grant. The Company has recorded such shares to
be
issued as a liability in the accompanying financial statements as of December
31, 2007. Subsequent to the grant of such shares, the Board of Directors
and the
above-referenced officers and directors determined that it is unlikely that
the
shares of common stock will be issued in the form and within the timeframe
originally agreed upon, if at all. The Board of Directors and management
of the
Company are currently in discussions regarding modifications to the original
compensation plan and expect to finalize a revised plan in 2008.
Payroll
taxes for management compensation for the year ended December 31, 2007 amounted
to $479,420.
Operating
expenses:
Selling, general and administrative (SG&A) expenses were $10,871,386 and
$2,426,175 for the years ended December 31, 2007 and 2006, respectively.
SG&A expenses increased by $8,445,211 or 348% in 2007 compared to 2006
primarily due to the expansion of the company in Europe by increasing the number
of operation units and the sign-in bonus for the senior management compensation.
Other
Income and Expenses: Interest
Income was
$101,324 and $18,943 for the year ended December 31, 2007 and 2006 respectively.
Interest income was earned on the amount due from entities related to officers,
directors and shareholders during the year of 2006. Interest
Expenses was
$849,212 and $592,618 for the year ended December 31, 2007 and 2006
respectively. The interest expense increase was due to continuous increase
of
the default payments.
Minority
Interest: The
Company’s majority owned subsidiaries Elephant Talk Communications PRS U.K.
Limited, Elephant Talk Communications Premium Rate Services Netherlands B.V.,
Elephant Talk Communications Luxembourg SA, Elephant Talk Middle East &
Africa (Holding) W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan
L.L.C., Elephant Talk Middle East & Africa Bahrain W.L.L., Elephant Talk
Middle East & Africa FZ-LLC incurred losses of $43,325 attributed to
minority shareholders’ interest in the year ended December 31, 2007. During the
year ended December 31, 2006, the Company’s majority owned subsidiaries Elephant
Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
W.L.L., Elephant Talk Middle East & Africa FZ-LLC incurred losses of
$117,824 attributed to minority shareholders’ interest.
Page
27
Comprehensive
Income (Loss):
The
Company records foreign currency translation gains and losses as comprehensive
income or loss. The Company recorded a gain of $1,426,898 and $21,133 for the
year ended December 31, 2007 and 2006 respectively. The increase is contributed
to the translation gain due to the sharp increase of exchange value from Euro
to
USD.
Liquidity
and Capital Resources:
The
Company’s principle capital requirements during the year 2007 are to fund the
internal operations and acquire profitable growth-oriented telecommunications
and related business in Europe, Asia and North America. The Company raised
necessary funds by selling shares of its common stock to selected investors
and
bringing in business partners whose contributions include cash. In view of
low
borrowing interest rates, the Company continues to actively pursue additional
credit facilities with accredited investors and financial institutions in
Europe, Middle East and USA as a mean to obtain new funding.
As
shown
in the accompanying financial statements, the Company incurred a net loss of
$12,057,732 for the year ended December 31, 2007 as compared to a net loss
of
$4,829,663 for the same period in 2006. Additionally, the Company current
liabilities exceeded its current assets by $24,429,464 as of December 31,
2007.
Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with
the
ability to continue as a going concern for the coming two quarters. Management
has devoted considerable efforts during the period ended December 31, 2007
and
in the first few months of 2008 towards (i) obtaining additional equity
financing (ii) controlling of salaries and general and administrative expenses
(iii) management of accounts payable (iv) settlement of debt by issuance
of
common shares and (v) strategically acquire profitable companies that bring
synergies to the Company’s products and services.
Management
believes our existing available cash, cash commitments, cash equivalents
and
short term investments as of December 31, 2007 in combination with continuing
contractual commitments will be sufficient to meet our anticipated capital
requirements until the May 2008.
Management
is pursuing a number of alternatives available to meet the continuing capital
requirements of our operations, such as collaborative agreements and public
and
private financings. In the past the Company has demonstrated its ability
to
correct its operating cash deficiencies and there is currently no evidence
to
support that they cannot continue to do so in spite of the fact that 2007
operations showed an operating loss. However, there can be no absolute assurance
that any of these funding will be consummated in the time frames needed for
continuing operations or on terms favorable to us. If adequate funds are
not
available, we will be required to significantly curtail our operating plans
and/or possibly cease operations.
Operating
Activities: Net
cash
used in operating activities for the year ended December 31, 2007 was
$3,449,351. The increase is primarily due to the increase in loss of $7,228,067
in 2007, decrease in accounts receivable of $991,412, increase in prepaid
expenses of $183,556, decrease in accounts payable and customer deposits of
$916,376, decrease in deferred revenue of $11,444 and increase in accrued
expenses and other payable of $1,428,141.
Investment
Activities:
Net cash
used in investment activities for the year ended December 31, 2007 was
$2,037,269. Cash used to purchase plant and equipment was $2,154,559, restricted
cash deposit for inter-connect was $23,266, cash paid for acquisition of
subsidiary was $241,883 and cash obtained from acquisitions was
$382,439.
Financing
Activities: Net
cash
received by financing activities for the year ended December 31, 2007 was
$9,085,991. The Company received $8,498,471 from the sales of shares of its
common stocks and $561,520 from third parties.
As
a
result of the above activities, the Company recorded a cash and cash equivalent
balance of $4,366,312 as of December 31, 2007, a net increase in cash and cash
equivalent of $4,034,311 for the year ended December 31, 2007. The ability
of
the Company to continue as a going concern is still dependent on its success
in
obtaining additional financing from the institutional investors or by selling
its common shares to accredited investors and fulfilling its plan to
restructuring as outlined above.
Application
of Critical Accounting Policies and Estimates
Revenue
Recognition, Cost of Revenue and Deferred Revenue:
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. The Company derives revenues from activities as a fixed-line
provider with its own carrier network and its own switching technology and
from
transport, internet and VPN solutions. The Company also derives revenues from
sale of minutes of calling time via sale of its prepaid calling cards. Costs
of
revenues of the services supplied to attain the sales comprise the total
acquisition and production costs and cost of sales for the products and services
sold during the reporting period. Cost of revenues includes the cost of capacity
associated with the revenue recognized within the corresponding time period.
Revenue is deferred upon activation of the calling cards and is recognized
as
the prepaid calling card balances are reduced based upon minute usage,
imposition of administrative fees, or no further obligations exist with respect
to a calling card. Deferred revenues represent amounts received from its
customers for the unused minutes of the prepaid calling cards sold to its
customers since the Company recognizes revenues only on the usage of the
minutes.
Page
28
Stock-based
Compensation:
The
Company follows the prescribed accounting and reporting standards for all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights in accordance
with SFAS No. 148 “Accounting for Stock-Based Compensation.” SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used, on reported results.
Issuance
of Shares for Services:
The
Company accounts for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value
of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
Impact
of Accounting Pronouncements
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial statements.
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)’. This Statement improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
|
a)
|
A
brief description of the provisions of this Statement
|
|
b)
|
The
date that adoption is required
|
|
c)
|
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on financial statements.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject
to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
Page
29
The
new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities.
Material
Transactions
Mobile
Virtual Network Enabler and Operator
Elephant
Talk Communication Premium Rate Services Netherlands BV, a company belonging
to
the ETCI group, received on July 3, 2007 from the OPTA, the Dutch
telecommunications market authority, the definitive license to act as a Mobile
Network Operator (MNO). Elephant Talk Communication Holding AG entered into
a
MVNE agreement in June 2007 with T/Mobile-Orange, one of the four (4) MNO’s in
the Netherlands.
The
Company entered into an Intermediation Agreement with QMG and Amelia &
Associates S.A. to assist the Company in raising funds.
The
Board
approved on August 22, 2007 in writing and confirmed in their meeting of
September 26, 2007 two agreements with Quercus Management Group and Amelia
&
Associates S.A. to provide intermediation versus investors for additional
funding on a no cure no pay basis. The commission to be paid for funding through
these agreements is 5%.
On
August
22, 2007, the Board approved the sale of approximately 91 million restricted
common shares to 5 accredited investors for a total consideration of
approximately $5.2 million.
The
shares were valued at a 30% discount over the closing price on August 22, 2007,
resulting in an issuance price of $0.0595, before consultancy fee of 5%. The
company has received a cash consideration in Dollar of $5,271,658 in 2007.
The
Company has recorded 90,998,790 shares to be issued as a liability in the
accompanying financial statements as of December 31, 2007.
Page
30
Item
8. Financial
Statements
ELEPHANT
TALK COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF
DECEMBER 31, 2007
TABLE
OF
CONTENTS
|
PAGE
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
32
|
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
|
33
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AND
2006
|
34
|
|
CONSOLIDATED
STATEMENTS OF CHANGES TO STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
ENDED DECEMBER 31, 2007 AND 2006
|
35
|
|
CONSOLIDATED
STATEMENTES OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007
AND
2006
|
36
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
37-55
|
Page
31
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of:
Elephant
Talk Communications, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Elephant Talk
Communications, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and cash flows for the years ended December 31, 2007 and 2006. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated 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 includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 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 consolidated financial position of Elephant Talk
Communications, Inc. as of December 31, 2007 and 2006 and the consolidated
results of its operations and its cash flows for the years ended December 31,
2007 and 2006 in conformity with accounting principles generally accepted in
the
United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 23 to the
consolidated financial statements, the Company had a net loss of $12,057,732,
a
working capital deficit of $24,429,464 an accumulated deficit of $29,019,832
and
cash used in operations of $3,449,351. These factors raise substantial doubt
about its ability to continue as a going concern. Management’s plans concerning
these matters are also described in Note 23. The accompanying consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
Kabani & Company, Inc.
Los
Angeles, California
March
20,
2008
Page
32
|
ELEPHANT
TALK COMMUNICATIONS, INC AND SUBSIDIARIES
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
AS
AT DECEMBER 31, 2007 AND 2006
|
|
|
ASSETS
|
|
|
2007
|
2006
|
||||||
| CURRENT ASSETS | |||||||
|
Cash
and cash equivalents
|
$
|
4,366,312
|
$
|
332,001
|
|||
|
Restricted
cash
|
23,266
|
-
|
|||||
|
Accounts
receivable, net
|
4,438,224
|
18,929
|
|||||
|
Loans
receivable
|
-
|
3,606,983
|
|||||
|
Earnest
Deposits
|
442,853
|
-
|
|||||
|
Prepaid
expenses, deposits and other current assets
|
372,331
|
169,810
|
|||||
|
Due
from related parties
|
18,514
|
-
|
|||||
|
Total
Current Assets
|
9,661,500
|
4,127,723
|
|||||
|
PROPERTY
AND EQUIPMENT - NET
|
3,484,224
|
158,234
|
|||||
|
INTANGIBLE
ASSETS - NET
|
11,462,504
|
-
|
|||||
|
OTHER
ASSETS
|
-
|
40,247
|
|||||
|
Deposits
|
-
|
326,029
|
|||||
|
Due
from related parties
|
-
|
9,043,080
|
|||||
|
Earnest
Deposits for acquisitions
|
-
|
9,409,356
|
|||||
|
Total
Other Assets
|
|||||||
|
TOTAL
ASSETS
|
$
|
24,608,228
|
$
|
13,695,313
|
|||
|
CURRENT
LIABILITIES
|
|||||||
|
Bank
Overdraft
|
$
|
197,815
|
$
|
171,819
|
|||
|
Accounts
payable
|
4,857,229
|
51,549
|
|||||
|
Deferred
revenue
|
93,661
|
105,105
|
|||||
|
Accrued
expenses, interest and other payable
|
3,011,267
|
1,119,599
|
|||||
|
Advances
from third parties
|
201,191
|
||||||
|
Loans
payable
|
875,432
|
883,010
|
|||||
|
Shares
to be issued
|
18,255,065
|
4,782,396
|
|||||
|
Convertible
promissory note payable to related party -current
|
6,484,063
|
-
|
|||||
|
Due
to related parties
|
115,241
|
195,834
|
|||||
|
Total
Current Liabilities
|
34,090,964
|
7,309,312
|
|||||
|
LONG-TERM
LIABILITIES
|
|||||||
|
Convertible
promissory note payable to related party
|
-
|
5,525,221
|
|||||
|
MINORITY
INTEREST
|
231,575
|
127,455
|
|||||
|
COMMITMENT
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|||||||
|
Common
stock, no par value, 250,000,000 shares authorized, 238,265,927
issued and
outstanding as at December 31, 2007 & 2006
|
17,868,448
|
17,814,933
|
|||||
|
Subscription
receivable
|
-
|
(9,683
|
)
|
||||
|
Loans
receivable
|
-
|
(120,000
|
)
|
||||
|
Comprehensive
gain
|
1,437,073
|
10,175
|
|||||
|
Accumulated
deficit
|
(29,019,832
|
)
|
(16,962,100
|
)
|
|||
|
Total
Stockholders' Equity (Deficit)
|
(9,714,311
|
)
|
733,325
|
||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
|
24,608,228
|
$
|
13,695,313
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
33
|
ELEPHANT
TALK COMMUNICATIONS, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
|
||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND
2006
|
|
2007
|
2006
|
||||||
|
REVENUES
|
$
|
47,361,028
|
$
|
158,292
|
|||
|
COST
OF REVENUE (including depreciation and amortization of $1,580,976
in 2007
and $0 in 2006)
|
47,189,533
|
144,727
|
|||||
|
GROSS
PROFIT
|
171,495
|
13,565
|
|||||
|
OPERATING
EXPENSES
|
|||||||
|
Selling,
general and administrative
|
10,871,386
|
2,426,175
|
|||||
|
Depreciation
and amortization
|
652,478
|
42,326
|
|||||
|
Total
Operating Expenses
|
11,523,864
|
2,468,501
|
|||||
|
LOSS
FROM OPERATIONS
|
(11,352,369
|
)
|
(2,454,936
|
)
|
|||
|
OTHER
INCOME (EXPENSE)
|
|||||||
|
Interest
income
|
101,324
|
18,943
|
|||||
|
Interest
expense
|
(849,212
|
)
|
(592,618
|
)
|
|||
|
Miscellaneous
income
|
-
|
1,923
|
|||||
|
Total
Other Expense
|
(747,888
|
)
|
(571,752
|
)
|
|||
|
LOSS
BEFORE INCOME TAX
|
(12,100,257
|
)
|
(3,026,687
|
)
|
|||
|
Provision
for Income Tax
|
800
|
800
|
|||||
|
LOSS
FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST
|
(12,101,057
|
)
|
(3,027,487
|
)
|
|||
|
Minority
interest
|
43,325
|
117,824
|
|||||
|
|
|
||||||
|
LOSS
FROM CONTINUING OPERATIONS
|
(12,057,732
|
)
|
(2,909,663
|
)
|
|||
|
DISCONTINUED
OPERATIONS
|
|||||||
|
Abandonment
of Investment
|
-
|
(2,152,247
|
)
|
||||
|
Income
(loss) from operations of abandoned entity
|
-
|
232,247
|
|||||
|
LOSS
FROM DISCONTINUED OPERATIONS
|
-
|
(1,920,000
|
)
|
||||
|
NET
LOSS
|
(12,057,732
|
)
|
(4,829,663
|
)
|
|||
|
OTHER
COMPREHENSIVE INCOME
|
|||||||
|
Foreign
currency translation gain
|
1,426,498
|
21,133
|
|||||
|
COMPREHENSIVE
LOSS
|
$
|
10,630,834
|
|
$
|
(4,808,530
|
)
|
|
|
Net
loss per share from continuing operations
|
$
|
(0.045
|
)
|
$
|
(0.017
|
)
|
|
|
Net
loss per share from discontinued operations
|
$
|
-
|
$
|
(0.011
|
)
|
||
|
Net
Loss per share - Basic & Diluted
|
$
|
(0.045
|
)
|
$
|
(0.028
|
)
|
|
|
Weighted
average shares outstanding during the period - basic and diluted
|
238,265,927
|
173,863,813
|
|||||
Page
34
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY (DEFICIT)
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
|
Description
|
Common
Share
|
Amount
|
Shares
issued as advances
|
Subscrip-tions
receivable
|
Earnest
Deposit
|
Other
compre-hensive income (loss)
|
Accum-mulated
Deficit
|
Total
stock-holders Equity (Deficit)
|
||||||||||||||||||||||
|
Balance
- December 31, 2005
|
177,507,588
|
$ |
14,543,586
|
$
|
0 |
$
|
(8,991
|
)
|
$
|
(720,000
|
)
|
|
$
|
(10,958
|
)
|
$
|
(12,132,435
|
)
|
$
|
1,671,202
|
||||||||||
|
Shares
issued to officers for compensation
|
28,108,339
|
348,847
|
348,847
|
|||||||||||||||||||||||||||
|
Shares
issued to consultants for services
|
2,400,000
|
120,000
|
(120,000
|
)
|
||||||||||||||||||||||||||
|
Shares
issued to employee for compensation
|
250,000
|
22,500
|
22,500
|
|||||||||||||||||||||||||||
|
Shares
issued as earnest deposit - Beltrust
|
40,000,000
|
3,000,000
|
3,000,000
|
|||||||||||||||||||||||||||
|
Cancellation
of shares issued for Phone Tone acquisition
|
(20,000,000
|
)
|
(720,000
|
)
|
720,000
|
|||||||||||||||||||||||||
|
Shares
issued for acquisition
|
10,000,000
|
500,000
|
500,000
|
|||||||||||||||||||||||||||
|
Stock
subscriptions receivable
|
(692
|
)
|
(692
|
)
|
||||||||||||||||||||||||||
|
Comprehensive
income
|
21,133
|
21,133
|
||||||||||||||||||||||||||||
|
Net
Loss
|
(4,829,665
|
)
|
(4,829,665
|
)
|
||||||||||||||||||||||||||
|
Balance
- December 31, 2006
|
238,265,927
|
|
17,814,933
|
|
(120,000
|
)
|
|
(9,683
|
)
|
|
0
|
|
10,175
|
|
(16,962,100
|
)
|
|
733,325
|
||||||||||||
|
|
||||||||||||||||||||||||||||||
|
Advance
adjusted against the purchase consideration
|
120,000
|
120,000
|
||||||||||||||||||||||||||||
|
Subscription
receivable
|
9,683
|
9683
|
||||||||||||||||||||||||||||
|
Amortization
of Stock Options expense
|
53,515
|
53,515
|
||||||||||||||||||||||||||||
|
Comprehensive
Income
|
1,426,898
|
1,426,898
|
||||||||||||||||||||||||||||
|
Net
Loss
|
(12,057,732
|
)
|
(12,057,732
|
)
|
||||||||||||||||||||||||||
|
Balance
- December 31, 2007
|
238,265,927
|
$
|
17,868,448
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
1,437,073
|
$
|
(29,019,832
|
)
|
(9,714,311
|
)
|
||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
35
|
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
|
||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND
2006
|
|
2007
|
2006
|
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
|
Net
loss
|
$
|
(12,057,732
|
)
|
$
|
(4,829,665
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|||||||
|
Depreciation
and amortization
|
2,233,454
|
42,326
|
|||||
|
Stock
issued for acquisition
|
371,347
|
||||||
|
Provision
for uncollectible amounts
|
135,877
|
65,968
|
|||||
|
Issuance
of stock for compensation of services
|
--
|
--
|
|||||
|
Gain
on disposal of subsidiary
|
-- |
(232,247
|
)
|
||||
|
Loss
from discontinued operations
|
-- |
2,152,247
|
|||||
|
Minority
interest
|
(43,325
|
)
|
117,824
|
||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
(Increase)
Decrease in accounts receivable
|
991,412
|
(81,692
|
)
|
||||
|
(Increase)
Decrease in prepaid expenses, deposits and other assets
|
(183,556
|
)
|
158,203
|
||||
|
Increase
(decrease) in accounts payable, proceeds form related parties and
customer
deposits
|
(916,376
|
)
|
15,420
|
||||
|
Increase
(decrease) in deferred revenue
|
(11,444
|
)
|
(2,327
|
)
|
|||
|
Increase
in Minority Interest
|
-- | 10,698 | |||||
|
Increase
(decrease) in accrued expenses and other payable
|
6,402,339
|
881,839
|
|||||
|
Net
cash used in operating activities from continued operations
|
(3,449,351
|
)
|
(1,330,059
|
)
|
|||
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
--
|
--
|
|||||
|
Net
cash used in operating activities
|
(3,449,351
|
)
|
(1,330,061
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchase
of property and equipment
|
(2,154,559
|
)
|
(113,731
|
)
|
|||
|
Cash
paid for deposits
|
--
|
(171,804
|
)
|
||||
|
Restricted
cash
|
(23,266
|
)
|
--
|
||||
|
Cash
paid for acquisition of subsidiary
|
(241,883
|
)
|
(1,420,000
|
)
|
|||
|
Cash
received from acquisition of subsidiary
|
382,439
|
--
|
|||||
|
Net
cash used in investing activities from continued operations
|
(2,037,269
|
)
|
(1,705,535
|
)
|
|||
|
Net
cash provided by (used in) investing activities from discontinued
operations
|
--
|
--
|
|||||
|
Net cash used in investing activities
|
(2,037,269
|
)
|
(1,705,535
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Payment
on notes/loans
|
-- | (941,504 |
)
|
||||
|
Cash
overdraft
|
26,000
|
72,486
|
|||||
|
Repayment
of bank loans
|
--
|
(82,577
|
)
|
||||
|
Proceeds
from note payable
|
561,520
|
2,954,921
|
|||||
|
Proceeds
from sale of shares
|
8,498,471
|
944,500
|
|||||
|
Cash
from formation of subsidiary
|
--
|
176,332
|
|||||
|
Payments
to related parties
|
--
|
--
|
|||||
|
Net
cash provided by financing activities from continued operations
|
9,085,991
|
3,124,159
|
|||||
|
Net
cash provided by (used in) financing activities from discontinued
operations
|
|||||||
|
Net
cash provided by financing activities
|
9,085,991
|
3,124,159
|
|||||
|
EFFECT
OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
434,940
|
44,620
|
|||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
4,034,311
|
133,185
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
332,001
|
198,816
|
|||||
|
|
|
||||||
|
CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
$
|
4,366,312
|
$
|
332,001
|
|||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|||||||
|
Cash
paid during the period for interest
|
$
|
25,467
|
$
|
--
|
|||
|
Cash
paid during the period for income taxes
|
$
|
800
|
$
|
800
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
36
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
| Note 1 |
Summary
of Significant accounting policies and
organization
|
(A) Organization
and Nature of Operations
Elephant
Talk Communications, Inc. (herein referred to as “Elephant Talk,” “ETCI” or
“Company,” formerly known as Staruni Corporation), incorporated on February 5,
1962 under the laws of the state of California as Altius Corporation, was
involved in the manufacturing of freeway signs. In March 1997, Altius acquired
Starnet Universe Internet, Inc., a web developer and Internet Service Provider
(ISP) and changed its name to Staruni Corporation. On January 4, 2002, Staruni
Corporation merged with Elephant Talk Limited, a company incorporated in Hong
Kong, and filed a Certificate of Amendment of Articles of Incorporation to
amend
the corporate name to Elephant Talk Communications, Inc. This name change was
done in conjunction with the merger and to emphasize that the Company’s new
focus is the business of Elephant Talk Limited.
On
January 1, 2007, the Company completed its acquisition of Elephant Talk
Communications Europe Holding AG, formerly known as Benoit Telecom Holding
AG
(herein referred to as “Benoit Telecom”), an international telecom operator and
multi-media distributor servicing primarily the business-to-business segment
of
the telecommunications and media market. Benoit Telecom offers a broad range
of
products and services based on the integration of telecom, VoIP, SMS, FAX,
Conferencing and Streaming services all integrated with a Customer Relationship
Management and Billing application.
Furthermore,
on June 1, 2007, the Company, through its ET Europe Holding BV, acquired 3U
Telecom SARL, a private company with limited liability registered in France.
3U
Telecom SARL is actively involved in Carrier Select/Carrier Pre Select
activities in France.
(B)
Use of Estimates
The
preparation of the accompanying financial statements conforms with accounting
principles generally accepted in the United States of America 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. Actual results could differ
from those estimates and assumptions.
(C)
Foreign Currency Translation
The
functional currency was Euros for its wholly-owned subsidiary Elephant Talk
Europe Holding B.V. and subsidiaries and Hong Kong Dollar for its wholly-owned
subsidiary Elephant Talk Limited. The financial statements of the Company were
translated to USD using year-end exchange rates as to assets and liabilities
and
average exchange rates as to revenues and expenses. Capital accounts were
translated at their historical exchange rates when the capital transaction
occurred. Net gains and losses resulting from translation of foreign currency
financial statements are included in the statements of stockholder’s equity as
other comprehensive income (loss). Foreign currency translation gains and losses
are included in consolidated income (loss).
(D) Cash
and Cash Equivalent
For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.
(E) Restricted
Cash
Restricted
cash represents cash deposited as bank guarantee for interconnects.
Page
37
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
(F) Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk are cash and accounts receivable. The Company places its cash with
financial institutions deemed by management to be of high credit quality. The
amount on deposit in any one institution that exceeds federally insured limits
is subject to credit risk. All of the Company’s revenue and majority of its
assets are derived from operations in Europe.
(G) Accounts
Receivable:
The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Reserves are recorded primarily on
a
specific identification basis. As of December 31, 2007 and 2006 the reserve
for
doubtful debts was $146,215 and $65,968 respectively.
(H) Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
is
provided using the straight-line method over the estimated useful life of the
assets from three to ten years. Expenditures for maintenance and repairs are
charged to expense as incurred.
(I) Income
Taxes
The
Company accounts for income taxes under the Financial Accounting Standards
Board
Statement of Financial Accounting Standards No.109 "Accounting for Income Taxes"
('Statement 109"). Under Statement 109, deferred tax assets and liabilities
are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in
tax rates is recognized in income in the period that includes the enactment
date.
(J) Revenue
Recognition, Cost of Revenue and Deferred Revenue
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. The
Company derives revenues from activities as a fixed-line telecom provider with
its own carrier 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). Cost
of
revenues includes the cost of capacity associated with the revenue recognized
within the corresponding time period, payments
made to content providers and depreciation of network infrastructure and
equipment
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. Cost of revenue
includes the cost of capacity associated with the revenue recognized within
the
corresponding time period.
Deferred
revenue represents amounts received from the customers against future sales
of
services since the Company recognizes revenue upon performing the services.
Deferred revenue was $93,661 and $105,105 as of December 31, 2007 and 2006
respectively.
Page
38
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
(K) Long-Lived
Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment
or
disposal of long-lived assets and supersedes SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No.30, "Reporting
the
Results of Operations for a Disposal of a Segment of a Business." The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. As of December 31, 2007, there was no impairment
recorded in the accompanying financials.
(L) Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards No.107, “Disclosures About Fair Value of
Financial Instruments” requires disclosures of information about the fair value
of certain financial instruments for which it is practicable to estimate that
value. For purposes of this disclosure, the fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s accounts and other receivables, accounts
payable, accrued liabilities, factor payable, capital lease payable and notes
and loans payable approximates fair value due to the relatively short period
to
maturity for these instruments.
(M) Reporting
Segments
Statement
of financial accounting standards No. 131, Disclosures about segments of an
enterprise and related information (SFAS No. 131), which superseded statement
of
financial accounting standards No. 14, Financial reporting for segments of
a
business enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements
and
requires reporting of selected information about operating segments in interim
financial statements regarding products and services, geographic areas and
major
customers. SFAS No. 131 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 Company allocates its
resources and assesses the performance of its sales activities based upon
geographic locations of its subsidiaries (see
Note
22).
(N) Stock-based
Compensation
Effective
January 1, 2006, the Company adopted Statement No.123R, Share-Based Payment
(SFAS 123R), which requires companies to measure and recognize compensation
expense for all stock-based payments at fair value. SFAS 123R is being applied
on the modified prospective basis. Prior to the adoption of SFAS 123R, the
Company accounted for its stock-based compensation plans under the recognition
and measurement principles of Accounting Principles Board (APB) Opinion No.25,
Accounting for Stock Issued to Employees, and related interpretations, and
accordingly, recognized no compensation expense related to the stock-based
plans. Under the modified prospective approach, SFAS 123R applies to new awards
and to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled.
(O) Comprehensive
Income
Page
39
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
Statement
of financial accounting standards No.130, Reporting comprehensive income (SFAS
No.130), establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity, except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No.130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in
financial statements that are displayed with the same prominence as other
financial statements.
(P) Advertising
and Marketing Costs
Advertising
and marketing expenses were insignificant for the Company’s operation. We
expense costs of advertising and marketing as incurred. Advertising and
marketing expenses for the year ended December 31, 2007 and 2006 amounted to
$18,858 and $0 respectively.
(Q) Reclassifications
For
comparative purposes, prior years' consolidated financial statements have been
reclassified to conform with report classifications of the current year.
(R) Principles
of Consolidation
The
accompanying consolidated financial statements for the year ended December
31,
2007 included the accounts of Elephant Talk Communications, Inc., its
wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned
subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiary
Elephant Talk Communications S.L.U., its wholly-owned subsidiary Cardnet
Clearing Services B.V., its wholly-owned subsidiary Elephant Talk Communication
Austria GmbH, its wholly-owned subsidiary Vocalis Austria GmbH, its wholly-owned
subsidiary Elephant Talk Communications Italy S.R.L., its wholly-owned
subsidiary ET-Stream GmbH, its wholly-owned subsidiary Elephant Talk
Communication Carrier Services GmbH, its wholly-owned subsidiary Elephant Talk
Communication (Europe) GmbH, its wholly-owned subsidiary Elephant Talk
Communication Schweiz GmbH, its majority owned (51%) subsidiary Elephant Talk
Communications Premium Rate Services Netherlands B.V., its wholly-owned
subsidiary Elephant Talk Communications France S.A.S., its majority owned (51%)
subsidiary Elephant Talk Communications PRS U.K. Limited, its majority owned
(99.76275%) subsidiary Elephant Talk Communications Luxembourg SA, its
wholly-owned subsidiary Elephant Talk Global Holding B.V., its wholly-owned
subsidiary Elephant Talk Business Services W.L.L., its wholly-owned subsidiary
Elephant Talk Limited, its wholly-owned subsidiary Full Mark Technology Ltd.,
its wholly-owned subsidiary Jinfuyi Technology Limited, its majority owned
(51%)
subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its majority
owned (51%) subsidiary Elephant Talk Middle East & Africa (Holding) Jordan
L.L.C., its majority owned (50.49%) subsidiary Elephant Talk Middle East &
Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk
Middle East & Africa FZ-LLC. The consolidated financial statements for the
year ended December 31, 2006 included the accounts of Elephant Talk
Communications, Inc., its wholly owned subsidiary Elephant Talk Limited, its
wholly owned subsidiary Full Mark Limited, its wholly-owned subsidiary Elephant
Talk Europe Holding BV, its majority owned (51%) subsidiary Elephant Talk
Communications PRS UK Ltd., its majority owned (51%) subsidiary Elephant Talk
Middle East & Africa (Holding) W.L.L., its majority owned (51%) subsidiary
Elephant Talk Middle East and Africa Jordon L.L.C., and its majority owned
(50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(S) New
Accounting Pronouncements
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial statements.
Page
40
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No.87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
| a. |
A
brief description of the provisions of this Statement
|
| b. |
The
date that adoption is required
|
| c. |
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on financial statements.
In
February 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities--Including an amendment of FASB Statement
No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management believes that this
statement will not have a significant impact on the financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and
the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results
of
operations or financial position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that
the
acquirer achieves control. This statement requires an acquirer to recognize
the
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 141 to
have a significant impact on its results of operations or financial
position.
Page
41
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
In
March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location
and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.
| Note 2 |
Acquisitions
|
On
January 1, 2007, the Company, through its wholly-owned subsidiary Elephant
Talk
Europe Holding B.V., completed its acquisition of Elephant Talk Communication
Holding AG (formerly known as “Benoit Telecom Holding AG” or “Benoit Telecom”),
a European telecom company. Benoit Telecom is an international telecom operator
and multi-media distributor servicing primarily the business-to-business segment
of the telecommunications and media market. Benoit Telecom offers a broad range
of products and services based on the integration of telecom, VoIP, SMS, FAX,
Conferencing and Streaming services all integrated with a sophisticated Customer
Relationship Management and Billing application and using its own fixed-line
national interconnects and partner interconnects in numerous European countries.
The Company purchased all of the 100,000 issued and outstanding shares of Benoit
Telecom in exchange for a) cash payment of $6,643,080 and b) 40,000,000 shares
of the Company’s common stock valued at $3,000,000. The common shares were
valued at the actual date of issuance of such shares. The total consideration
for the purchase of Benoit Telecom was valued at $9,643,080.
A
summary
of the assets acquired and liabilities assumed for Benoit Telecom are:
|
Cash
& cash equivalents
|
$
|
409,174
|
||
|
Accounts
receivables
|
4,485,259
|
|||
|
Property
& equipment
|
2,163,157
|
|||
|
Customer
contracts & licenses
|
11,504,192
|
|||
|
Other
assets
|
1,299,647
|
|||
|
Total
Assets acquired
|
|
19,861,430
|
||
|
Accounts
payable
|
|
1,535,504
|
||
|
Accrued
expenses and other payables
|
3,631,658
|
|||
|
Payable
to third parties
|
4,013,056
|
|||
|
Others
|
125,160
|
|||
|
Liabilities
assumed
|
|
9,305378
|
||
|
Net
assets acquired
|
|
10,556,052
|
||
|
Consideration
paid
|
|
9,643,080
|
||
|
Negative
goodwill
|
$
|
(912,972
|
)
|
Page
42
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
The
Company has reduced the recorded value of the non-current assets acquired,
by
the negative goodwill of $912,972. The purchase price allocation for Benoit
Telecom acquisition is based on the fair value of assets acquired and
liabilities assumed. Immediately after the execution of the definitive
agreement, the Company obtained effective control over Benoit Telecom.
Accordingly, the operating results of Benoit Telecom have been consolidated
with
those of the Company starting January 1, 2007.
In
accordance with paragraph 44 of SFAS 142, any excess of cost over net assets
acquired shall be allocated as a pro rata reduction of the amounts that
otherwise would have been assigned to all of the acquired assets except
financial assets other than investments accounted for by the equity method,
assets to be disposed of by sale, deferred tax assets, prepaid assets relating
to pension or other postretirement benefit plans and any other current assets.
The
value
of the shares issued by the Company in connection with this acquisition exceeded
the fair market value of the net assets acquired. Thus, “negative goodwill”
generated was allocated to reduce the cost of the non-current assets acquired.
The
Company included the financial results of Benoit Telecom in its consolidated
2007 financial results from the date of the purchase, January 1, 2007 through
December 31, 2007.
On
January 1, 2007, the Company’s subsidiary Elephant Talk Europe Holding B.V.,
entered into a Share Purchase Agreement with 3U Telecom AG, and acquired all
of
the issued and outstanding shares of 3U Telecom SARL France, for a consideration
of 180,000 Euros (approximately $241,935). The Agreement entitled the Company
to
a 100% share of the economic benefits of the operations of 3U Telecom SARL.
On
June 1, 2007, all the terms and conditions of the Agreement were completed,
and
the Company acquired total assets $419,365 and assumed liabilities of $177,430
upon completion of this acquisition.
The
following un-audited pro forma consolidated financial information for the year
ended December 31, 2007 and 2006, as presented below, reflects the results
of
operations of the Company as of January 1, 2007 and assuming that the
acquisition occurred on January 1, 2006, respectively, and after giving effect
to the purchase accounting adjustments. These pro forma results have been
prepared for information purposes only and do not purport to be indicative
of
what operating results would have been had the acquisitions actually taken
place
on January 1, 2007 and 2006 respectively, and may not be indicative of future
operating results.
|
For
the year ended December 31
|
|||||||
|
2007
|
2006
|
||||||
|
REVENUES,
net
|
$
|
47,361,028
|
$
|
32,234,126
|
|||
|
LOSS
FROM OPERATIONS
|
$
|
(11,352,369
|
)
|
$
|
(3,956,511
|
)
|
|
|
NET
LOSS
|
$
|
(12,057,732
|
)
|
$
|
(6,346,401
|
)
|
|
|
Loss
per share - basic and fully diluted
|
$
|
(0.045
|
)
|
$
|
(0.037
|
)
|
|
|
Weighted
average shares outstanding during the period - basic and
diluted
|
238,265,927
|
173,863,813
|
|||||
Page
43
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
|
Note
3
|
Earnest
deposit
|
Earnest
deposits to various telecom carriers during the course of its operations amount
to $442,853
as at December 31, 2007compared with $0 for the same period of 2006. The
deposits are refundable at the conclusion of the business relationship with
the
carriers.
| Note 4 |
Prepaid
expenses and other current
assets
|
Prepaid
expenses and other current assets recorded as $372,331 as at December 31, 2007.
The amount consists primarily of VAT prepaid and receivable from various
European authorities.
| Note 5 |
Property
and equipment
|
Property
and equipment at December 31, 2007 consist of:
|
2007
|
2006
|
||||||
|
Leasehold
improvements
|
$
|
36,897
|
$
|
6,410
|
|||
|
Furniture
and fixtures
|
194,322
|
91,879
|
|||||
|
Computer,
communication and network equipment
|
6,083,545
|
2,155,996
|
|||||
|
Automobiles
|
137,726
|
-
|
|||||
|
Construction
in progress
|
687,962
|
-
|
|||||
|
|
7,140,452
|
2,254,285
|
|||||
|
Less:
accumulated depreciation
|
(3,656,228
|
)
|
(2,096,051
|
)
|
|||
|
$
|
3,484,224
|
$
|
158,234
|
||||
Depreciation
expense amounted to $652,478 and $42,326 for the year ended December 31, 2007
and 2006 respectively.
| Note 6 |
Intangible
assets - Customer contracts, licenses and
interconnects
|
Intangible
assets comprising of Customer contracts, licenses and interconnects include
the
acquisitions of large customer contracts, telecommunication licenses and
integrated multi-country, centrally managed switch-based national interconnects
in Europe, CRM Billing System and software. The telecommunications services
acquired and customers obtained are primarily in the “service number” industry
(also “Premium Rate Services”), low-cost telephony services such as Carrier
Select and Carrier Pre Select and Freephone (Toll-Free) number services. These
services offered and customers served are done through ET Europe’s fixed-line
switch-based telecom network, including the acquired interconnections and
licenses with the National Incumbents and Regulators in Spain, Netherlands,
Italy, Switzerland, Austria, France and Belgium.
Customer
contracts, licenses and interconnects, at December 31, 2007 consist of the
following:
|
$
|
15,219,998
|
|||
|
Accumulated
Depreciation Customer Contracts & Licenses
|
(3,757,496
|
)
|
||
|
Customer
Contracts & Licenses, net
|
$
|
11,462,504
|
There
were no intangible assets as of December 31, 2006.
Amortization
expense for the year ended December 31, 2007 amounted to $1,580,976 compared
to
$0 for the same period of 2006.
| Note 7 |
Due
from related parties
|
The
Company advanced funds to entities that officers and/or shareholders have an
ownership interest in. The funds were advanced to these entities prior to 2007.
The balances of funds advanced as of December 31, 2007 amounted to $18,514.
Page
44
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
| Note 8 |
Overdraft
|
The
Company has executed a credit facility with a bank in Hong Kong under which
the
Company has borrowed funds from the bank under an overdraft account. As of
December 31, 2007 and 2006 the overdraft balance amounted to $197,815 and
$171,819 respectively. The accrued interest for the years ended December 31,
2007 and 2006 was $25,465 and $22,493, respectively. The interest rate and
default payment interest rate were charged at 2% and 6% per annum above the
Lender’s Hong Kong Dollar Prime Rate quoted by the Lender from time to time.
| Note 9 |
Accrued
Expenses
|
As
at
December 31, 2007 and 2006, the accrued expenses comprised of the following
:-
|
2007
|
2006
|
||||||
|
Accrued
SG&A expenses
|
$
|
877,901
|
$
|
224,841
|
|||
|
Accrued
cost of sales and network
|
521,398
|
||||||
|
Accrued
taxes
|
43,941
|
||||||
|
Accrued
interest payable
|
1,473,811
|
||||||
|
Other
|
94,216
|
||||||
|
Total
accrued expenses
|
$
|
3,011,267
|
$
|
224,841
|
|||
| Note 10 |
Payable
To Third Parties
|
As
at
December 31, 2007 and 2006 the Company had $201,191 and $0 respectively as
payable to third parties in relation to advances received at various times
for
its working capital requirements. The advances received were non-interest
bearing, unsecured and due on demand.
| Note 11 |
Loans
Payable
|
Loans
payable at December 31, 2007 are summarized as follows:
|
Installment
loan payable due December 24, 2006, secured by personal guarantees
of two
shareholders, a director, and a third party
|
$
|
318,481
|
||
|
Installment
loan payable, bank, monthly principal and interest payments of $2,881
including interest at bank's prime rate plus 1.5% per annum, 8.75%
at
December 31, 2007, due December 24, 2011, secured by personal guarantees
of three shareholders and a director
|
190,299
|
|||
|
Installment
loan payable, bank, monthly principal and interest payments of $1,740
including interest at bank's prime rate plus 1.5% per annum, 8.75%
at
December 31, 2007, due June 28, 2009, secured by personal guarantees
of
three shareholders and a director
|
84,612
|
|||
|
Term
loan payable, bank, monthly payments of interest at bank's prime
rate,
7.0% at December 31, 2007
|
282,040
|
|||
|
Total
|
$
|
875,432
|
Page
45
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
Loans
payable at December 31, 2006 are summarized as follows:
|
Installment
loan payable, bank, monthly principal and interest payments of $12,804
including interest at bank's prime rate plus 1.5% per annum, 9.5%
at
December 31, 2006, due December 24, 2006, secured by personal guarantees
of two shareholders, a director, and a third party
|
$
|
326,037
|
||
|
Installment
loan payable, bank, monthly principal and interest payments of $2,924
including interest at bank's prime rate plus 1.5% per annum, 9.5%
at
December 31, 2006, due December 24, 2011, secured by personal guarantees
of three shareholders and a director
|
190,306
|
|||
|
Installment
loan payable, bank, monthly principal and interest payments of $1,751
including interest at bank's prime rate plus 1.5% per annum, 9.5%
at
December 31, 2006, due June 28, 2009, secured by personal guarantees
of
three shareholders and a director
|
84,615
|
|||
|
Term
loan payable, bank, monthly payments of interest at bank's prime
rate,
8.0% at December 31, 2006
|
282,052
|
|||
|
Total
|
$
|
883,010
|
The
Company has executed a credit facility with a bank in Hong Kong since June
29,
2004 under which the Company has borrowed funds from the bank under three
installment loans and a term loan arrangement. The Company is in default of
making loan payments on all the loans and has recorded an accrued interest
amounting to $309,443 as of December 31, 2007. As a result of the default,
the
entire loan balance outstanding at December 31, 2007 is immediately due and
payable to the bank. Furthermore, the Company is obligated to pay a default
interest rate at the rate of 4.25% per annum in addition to the prescribed
interest rate of the installment loans and term loan. The Company has recorded
$12,218 and $132,262
in
interest expense and default interest expense, respectively, on loans payable
as
of December 31, 2007 and $72,316 and $41,798 in interest expense as of December
31, 2006.
| Note 12 |
Due
to related parties
|
The
Company received advances from entities that certain shareholders and former
officers have an ownership interest and has payables to individuals who are
shareholders of the company. These amounts are due on demand, unsecured and
non-interest bearing. As at December 31, 2007 and 2006, the due to related
party
were as follows:
|
2007
|
2006
|
||||||
|
Due
to an entity related to a shareholder and former officer
|
$
|
14,755
|
158,612
|
||||
|
Due
to shareholders and former officers
|
100,486
|
37,222
|
|||||
|
$
|
115,241
|
195,834
|
|||||
| Note 13 |
Convertible
promissory note payable to related party
|
On
December 15, 2005, the Company executed a Convertible Promissory Note (the
“Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
an investor and an entity controlled by the Chief Executive Officer, funds
to be
drawn in stages. The Note is convertible during the term, in whole or in part,
into shares of common stock at the conversion price of three and one-half cents
($0.035) of principal amount per share of common stock. The Note did not have
any beneficial conversion factor attached to it since the conversion rate was
equal to the market price of the common stock of $0.035, on the closing of
agreement. The Note is convertible to the extent that the Company has sufficient
authorized common stock. In that regard, there are currently 5,586,580 shares
out of the Company’s 250,000,000 authorized common shares available for issuance
upon conversion. The Note has a term of thirty (30) months during which time
interest at the rate of 10% per annum will accrue from the date advances drawn
by the Company. The Note is secured by shares owned or to be owned by (an agent
of) the Company in its subsidiaries. The Note would have to be paid in full
at
the end of the thirty month term with a balloon payment of principal and accrued
interest or converted into common stock. RWC has not converted the principal
drawn by the Company as of December 31, 2007 in exchange for the common shares
of the Company. As of December 31, 2007, the entire principal of $3.5 million
had been received. The Company recorded accrued interest expense of $350,000
and
$341,709 for the year ended December 31, 2007 and 2006 respectively.
Page
46
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
On
May
26, 2006, the Company executed a second Convertible Promissory Note (the
“2nd
Note”)
in the principal sum of $3,000,000 with Rising Water Capital, an entity
controlled by the Chief Executive Officer. The 2nd
Note has
a term of thirty (30) months, during which time interest on the Principal Amount
will accrue from the date of this 2nd
Note at
an annual interest rate of 10%. The 2nd
Note
will be paid in full at the end of the thirty month term with a balloon payment
of principal and interest accrued. The 2nd
Note
shall be convertible during the term, in whole or in part, into common shares
at
the conversion price of seven cents ($0.07) per share provided, however, that
this 2nd
Note
shall not be convertible during the term when the Company has insufficient
authorized common shares to issue to the 2nd
Note
holder when a demand for conversion is made. The Note did not have any
beneficial conversion factor attached to it since the conversion rate was equal
to the market price of the common stock of $0.07 on the closing of agreement.
The 2nd
Note is
secured by shares owned or to be owned by (an agent of) the Company in its
subsidiaries. The Company has received the principal balance $2,984,063 and
has
recorded accrued interest of $280,898 in the accompanying financial statements
as of December 31, 2007. For the same period ended December 31, 2006, the
Company received the principal balance $1,983,160 and recorded accrued interest
of $106,100. The note has been presented as a long term liability on the
accompanying financials.
On
March
26, 2008, the Company received a letter of Rising Water Capital A.G. regarding
the above mentioned Promissory Notes, notifying that they agreed to waive any
and all defaults or continuing defaults for a period of time commencing on
the
date of the letter and continuing for 3 months hereafter.
| Note 14 |
Stockholders’
equity
|
(A)
Common Stock
The
Company is presently authorized to issue 250,000,000 shares of no par value
Common Stock. The Company currently has 238,265,927 Shares of Common Stock
issued and outstanding as of December 31, 2007. The shares issued and
outstanding as per the stock transfer agent’s records are 244,413,420. 6,147,493
shares were cancelled by the company prior to 2006, however, these shares were
not returned to the stock transfer agent and never cancelled on records. These
shares have been blocked for trading by the Stock Transfer Agent.
Shares
to be Issued
Pursuant
to a Stock Purchase Agreement dated June 30, 2005, the Company sold to an
accredited investor Rising Water Capital (RWC) (an entity controlled by the
Chief Executive Officer) 195,947,395 shares of restricted common stock for
a
total cash consideration of $7,837,896. As of December 31, 2006, the
Company has issued to RWC 100,000,000 of its restricted common shares valued
at
$4,000,000. The common shares were valued at $0.04 cents per share pursuant
to
the terms of the agreement. As a result, per that same date the Company still
had to issue 95,947,395 common shares, valued at $3,837,896 to RWC. The Company
has recorded such shares to be issued as a liability in the accompanying
financials as of December 31, 2006.
On
October 30, 2006, the Company agreed to issue to RWC an additional
258,546,313 shares of common stock as price adjustment for failed acquisitions
by the Company leading to lower market value than anticipated. The result of
the
price adjustment was to bring the ownership of RWC in the Company, as of October
30, 2006, to 72.5% of total of shares of common stock (excluding the hereunder
mentioned promissory notes).
Page
47
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
Pursuant
to a Stock Purchase Agreement, on December 28, 2006, the Company agreed to
sell
109,480,000 restricted common shares to five accredited investors for a total
consideration of $4,105,500. The shares were valued at 50% discount over the
last five days average market price on the date of execution of the agreement.
On December 31, 2006 the Company had received a cash consideration of $944,500
from one investor relating to 25,186,667 shares. In 2007 the Company received
the remaining cash consideration from the other four investors of $3,161,000
and
interest for late payment amounting to $65,813. The aggregate number of shares
to be issued to those four investors is 84,293,333 bringing the total number
of
shares to be issued to the five accredited investors to the agreed 109,480,000
number of shares.
On
June
28, 2007, the Board approved to issue over a three years periods as of January
1, 2007 in total 72,036,800 shares of common stock to its officers and directors
of which 51,761,600 shares of common stock valued at $4,399,736 were recognized
at June 28, 2007 as compensation for employment commitments for a term of three
years as of January 1, 2007. The remaining 20,275,200 valued at $1,723,392
will
be amortized over a period of three years as of January 2007. Therefore, for
compensation for services for the 12 months ended December 31, 2007 6,758,400
shares of stock valued at $574,464 was awarded to Management in 2007. The shares
were valued at the closing market price of eight and one-half cents ($0.085)
on
June 28, 2007, the date of grant. The Company has recorded such shares to be
issued as a liability in the accompanying financial statements as of December
31, 2007. Subsequent to the grant of such shares, the Board of Directors and
the
above-referenced officers and directors determined that it is unlikely that
the
shares of common stock will be issued in the form and within the timeframe
originally agreed upon, if at all. The Board of Directors and management of
the
Company are currently in discussions regarding modifications to the original
compensation plan and expect to finalize a revised plan in 2008.
On
August
22, 2007, the Board approved the sale of approximately 91 million restricted
common shares to 5 accredited investors for a total consideration of
approximately $5.2million.
The
shares were valued at a 30% discount over the closing price of August 22, 2007,
resulting in an issuance price of $0.0595, before consultancy fee of 5%. The
company has received a cash consideration in dollars of $5,414,128 in 2007
and
paid fees for raising financing of $142,470. The Company has recorded 90,998,790
shares to be issued as a liability in the accompanying financial statements
as
of December 31, 2007.
Per
December 31, 2007 the total number of shares to be issued amounted to
613,492,498 (excluding Promissory Notes) valued at $18,255,065.
| Computation of Full Dilution - December 31, 2007 |
Number
of shares to be issued
|
|||
|
Shared
O/S at December 31, 2007 (issued)
|
238,265,927
|
|||
|
Add'l
shares to be issued - RWC - sale of shares
|
95,947,395
|
|||
|
Add'l
shares to be issued to bring the ownership to 72.5%
|
258,546,313
|
|||
|
Shares
sold to five investors - $4,105,500 @$0.0375 per share
|
109,480,000
|
|||
|
Shares
sold to 5 accredited investors $ 5,271,658 @ $ 0.0595
|
90,998,790
|
|||
|
Sign
In Bonus Officers
|
51,761,600
|
|||
|
Management
Compensation until 31.12.2007
|
6,758,400
|
|||
|
Add'l
shares to be issued - RWC - $3.5 MM CPNote
|
100,000,000
|
|||
|
RWC
- $3 MM CPNote @ conv. price of $0.07 per share
|
38,005,871
|
|||
|
31.12.2007
Total number of shares issued and to be issued
|
989,764,206
|
Page
48
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
(B)
Class B Preferred Stock
The
Company’s Articles of Incorporation (Articles”) authorize the issuance of
50,000,000 shares of no par value Class B 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, 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 shareholder 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
the fiscal year ended December 31, 2007, the Company did not issue any shares
of
Preferred Stock or warrants.
| Note 15 |
Basic
and diluted net loss per share
|
Net
loss
per share is calculated in accordance with the Statement of financial accounting
standards No.128 (SFAS No.128), “Earnings per share”. 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. 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.
| Note 16 |
Employee
benefit plan and non-qualified stock option and compensation
plan
|
Employee
Benefit Plan
The
Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
options to acquire the Company’s common stock, no par value, from time to time
to employees of the Company or its subsidiaries. In addition, at the discretion
of the Board of Directors, shares may be granted under this Plan to other
individuals, including consultants or advisors, who contribute to the success
of
the Company or its subsidiaries, provided that bona fide services shall be
rendered by consultants and advisors and such services must not be in
conjunction with the offer or sale of securities in a capital raising
transaction. No stock may be issued or options granted under the Plan to
consultants, advisors or other persons who directly or indirectly promote or
maintain a market for the Company’s securities. The Plan is intended to aid the
Company in maintaining and developing a management team, attracting qualified
officers and employees capable of assuring the future success of the Company,
and rewarding those individuals who have contributed to the success of the
Company. The Plan is administrated under the direction of the Board of
Directors. A total of 4,000,000 (four million) common shares and 4,000,000
(four
million) stock options to acquire common shares may be subject to, or issued
pursuant to, benefits granted under the Plan. At any time any stock option
is
granted under the terms of this Plan, the Company will reserve for issuance
the
number of shares of Stock subject to such option until it is exercised or
expired. The Plan Administrator shall determine from time to time the terms,
conditions and price of the options granted. Options shall not be construed
to
be stock and cannot be exercised after the expiration of its term. Under the
Plan, 300,000 shares of common stock and 4,000,000 stock options remain
available for grant at December 31, 2007.
2006
Non-Qualified Stock and Option Compensation Plan
The
Board
of Directors approved on September 26, 2007 a proposal to issue under the
2006
Non-Qualified Stock and Option Plan non-qualified stock options to staff
and key consultants. In total there were 7,483,333 options granted.
Page
49
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
The
options were granted with an exercise price of $0.09, the share closing price
as
of September 26, 2007. The options will vest on December 31, 2009 or so much
earlier as there will be a change of control of the Company. The options will
be
exercisable though December 31, 2011.
The
fair
market value of the options of $460,280 was calculated using the Black-Sholes
options model. The assumptions used for the Black Scholes calculation are:
volatility of 102%, term of 3 years and a Discount Rate of 4.5%.
Common
stock purchase options and warrants consisted of the following as of December
31, 2007:
|
#
shares
|
Exercise
Price
|
Aggregate
Intrinsic Value
|
||||||||
|
Options:
|
||||||||||
|
Outstanding
as of December 31, 2006
|
-
|
-
|
-
|
|||||||
|
Granted
|
7,483,333
|
0.09
|
-
|
|||||||
|
Exercised
|
-
|
-
|
-
|
|||||||
|
Expired
|
362,500
|
0.09
|
-
|
|||||||
|
Outstanding
as of December 31, 2007
|
7,120,833
|
0.09
|
$
|
-
|
||||||
Following
is a summary of the status of options outstanding at December 31,
2007:
|
Range
of Exercise Price
|
Total
Options
Outstanding
|
Weighted
Average Remaining Life
|
Weighted
Average Exercise Price
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.09
|
7,120,833
|
4
years
|
$
|
0.09
|
-
|
-
|
||||||||||
| Note 17 |
Income
taxes
|
Income
tax expense (benefit) for the year ended December 31, 2007 and 2006 is
summarized as follows:
|
December
31, 2007
|
December
31, 2006
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
(4,099,629
|
)
|
$
|
(1,642,086
|
)
|
|
|
State
|
(723,464
|
)
|
(289,780
|
)
|
|||
|
Deferred
Taxes
|
4,823,893
|
1,932,666
|
|||||
|
Income
tax expense (benefit)
|
$
|
800
|
$
|
800
|
|||
Page
50
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
The
following is a reconciliation of the provision for income taxes at the United
States federal statutory rate to the foreign income tax rate at December 31,
2007:
|
2007
|
||||
|
Tax
expense (credit) at statutory rate-federal
|
(34
|
%)
|
||
|
State
tax expense net of federal tax
|
(
6
|
%)
|
||
|
Foreign
income tax rate difference
|
13.5
|
%
|
||
|
Change
in valuation allowance
|
26.5
|
%
|
||
|
Tax
expense at actual rate
|
--
|
|||
|
Deferred
tax assets:
|
||||
|
Deferred
Tax Asset
|
$
|
11,607,933
|
||
|
Total
gross deferred tax assets
|
11,607,933
|
|||
|
Less:
Valuation allowance
|
(11,607,933
|
)
|
||
|
Net
deferred tax assets
|
$
|
--
|
The
net
change in the valuation allowance during the twelve months period ended December
31, 2007 was $4,823,093.
| Note 18 |
Minority
interest in subsidiary
|
The
Company had minority interest in several of its subsidiaries. The balance of
the
minority interest as of December 31, 2007 and 2006 was as follows:
|
Minority
|
Minority
Interest Balance at December 31,
|
|||||||||
| Subsidiary |
Interest
%
|
2007
|
2006
|
|||||||
|
ETC
PRS UK
|
49
|
%
|
$
|
10,807
|
$
|
8,327
|
||||
|
ETC
PRS Netherlands
|
49
|
%
|
144,344
|
-
|
||||||
|
ET
ME&A Holding WLL
|
49
|
%
|
39,254
|
82,234
|
||||||
|
ET
Bahrain WLL
|
1
|
%
|
1,955
|
515
|
||||||
|
ET
ME&A FZ LLC
|
49.46
|
%
|
35,214
|
36,379
|
||||||
|
Total
|
$
|
231,575
|
$
|
127,455
|
||||||
| Note 19 |
Discontinued
operations
|
On
January 4, 2006, the Company, through its agent Guangdong Elephant Talk Network
Consulting Limited (“ETGD”), entered into an agreement to acquire sixty percent
(60%) of the registered capital of Beijing China Wind. Pursuant to the
Agreement, the purchase price for 60% of Beijing China Wind was agreed to be
$4,800,000, subject to adjustments based on Beijing China Wind’s audited net
income for fiscal years 2005 and 2006, and is payable (a) in cash of $2,800,000
in five installments, the last of which is to be paid on January 31, 2007,
and
(b) by issuance of 20,000,000 restricted common shares valued at $0.10 per
share
to the owners of Beijing China Wind in four equal installments, the last of
which is to be issued on January 31, 2007. The owners of Beijing China Wind
have
the right to exercise an option within 30 days after July 31, 2007 to return
the
20,000,000 restricted common shares either in exchange for a 25% equity interest
in Beijing China Wind or for settlement in cash within 90 days. The Company
on
behalf of its agent ETGD has issued 10,000,000 restricted common shares valued
at $500,000 and has made cash payments of $1,420,000 to the owners of Beijing
China Wind towards ETGD’s 60% ownership equity in Beijing China Wind as of
September 30, 2006. The restricted common shares were valued at the closing
market price of shares on the day of execution of the agreement. If Beijing
China Wind is able to achieve the net profits and revenue targets for 2006
as
agreed pursuant to the terms of the Agreement, ETGD will have a obligation
to
pay $1,380,000 in cash and 10,000,000 restricted shares of common stock of
the
Company on or before January 31, 2007 for the agreed purchase price of
$4,800,000 for ETGD’s 60% equity ownership in Beijing China Wind.
Page
51
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
Investment
in Beijing China Wind Telecommunication Information Technology Co.
Limited
|
Consideration
payable for Beijing China Wind on acquisition date January 4,
2006:
|
|
|||
|
Cash
payable
|
$
|
1,600,000
|
||
|
Common
shares to be issued - 20,000,000 shares
|
1,000,000
|
|||
|
Total
consideration payable
|
$
|
2,600,000
|
||
|
|
||||
|
Fair
value of net assets received on acquisition date January 4,
2006:
|
||||
|
Cash
|
$
|
95,786
|
||
|
Accounts
receivable, net of allowances
|
1,071,595
|
|||
|
Other
receivables and prepayments
|
36,256
|
|||
|
Due
from directors
|
323,657
|
|||
|
Due
from a related company
|
3,849
|
|||
|
Property
and equipment, net
|
218,471
|
|||
|
Other
assets
|
1,712,510
|
|||
|
Accounts
payable
|
(437,943
|
)
|
||
|
Other
payables and accrued expenses
|
(926,781
|
)
|
||
|
Value
added tax payable
|
(47,289
|
)
|
||
|
Notes
payable
|
(30,544
|
)
|
||
|
Due
to stockholders
|
(27,253
|
)
|
||
|
|
1,992,314
|
|||
|
Minority
interest - 40%
|
(796,926
|
)
|
||
|
|
$
|
1,195,388
|
||
|
Goodwill
|
1,404,612
|
|||
|
Total
consideration
|
$
|
2,600,000
|
||
The
Company recorded goodwill on consolidation of its acquired entities in the
total
amount of $3,117,123 upon completion of acquisition of Beijing Chinawind.
Beijing Chinawind revenues and profitability have consistently declined over
several months due to the change in business outlook and change in telecom
policies of network carriers in China. The Company has taken a position to
abandon its investment in Beijing Chinawind since ETGD lost its control over
the
operations of Beijing Chinawind. The Company decided to discontinue its
operations effective September 30, 2006 and recorded a loss of $2,152,247 from
abandoning Beijing Chinawind’s operations. The Company has placed restrictions
on the tradability of the 10,000,000 shares issued to the owners of Beijing
Chinawind and is pursuing the return of such shares.
| Note 20 |
Commitments
and contingencies
|
Commitments
of the Company relating to leases, co-location and office rents, regulatory
and
interconnection fees are as follows:
|
December
31, 2008
|
$
|
3,279,580
|
||
|
December
31, 2009
|
1,649,315
|
|||
|
December
31, 2010
|
1,600,272
|
|||
|
December
31, 2011
|
1,518,634
|
|||
|
December
31, 2012
|
1,472,900
|
|||
|
Total
|
$
|
6,241,121
|
Page
52
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
| Note 21 |
Litigation
|
a)
Beijing Chinawind
On
September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
organized and existing under the laws of the People’s Republic of China
(“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), filed two
lawsuits against Guangdong Elephant Talk Network Consulting Limited, a company
organized and existing under the laws of the People’s Republic of China and an
agent of the Company (“ETGD”), in the Beijing Civil Courts. The lawsuit alleged
that a) ETGD failed to pay the remaining consideration of $787,748 under an
Equity Transfer Agreement, dated January 4, 2006 (the “CW Agreement”), between
ETGD and Beijing Zhongrun, which provided for the acquisition by ETGD from
Beijing Zhongrun of 60% of the registered capital of Beijing Chinawind; and
b)
ETGD induced the minority shareholders of Beijing Chinawind to accept, pursuant
to the CW Agreement, consideration of $1,000,000 through the issuance of
10,000,000 common shares of the Company valued at $0.10 per common share. The
lawsuit further alleged that Chinese law prohibits citizens of the People’s
Republic of China from accepting shares of companies listed on the United States
Over-The-Counter Bulletin Board Quotation Service, which is regulated by the
National Association of Securities Dealers, Inc., as compensation in an
acquisition transaction.
The
judgment of the Beijing Haiding Civil Court was recently received. On October
the 18th
the
verdict was given in the two cases:
The
CW
Agreement was confirmed to be effective. All requests from CW are rejected.
In
addition, the Court confirmed the opinion of ETGD: that the resolutions of
the
shareholders meeting of China Wind held on January 27, 2007 are invalid, as
the
meeting was not conducted in a proper way.
(b)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.
As
previously described in the Company’s 2004 Annual Report, parties mutually
agreed to terminate this Purchase Agreement. The Company returned the received
shares of New Times Navigation Limited to the concerned shareholders and
received back 2,252,500 common shares out of the 5,100,000 issued by the Company
for the purchase. In addition the Company issued 37 unsecured convertible
promissory notes for a total amount of US$3,600,000. On request of the Company
21 were returned with a total value of US$2,040,000.
The
Company is presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return
a
total of 2,847,500 common shares (valued at $381,565) and also to have them
return the remaining 18 unsecured convertible promissory notes representing
a
total amount of US$1,560,000. The case is currently pending.
Page
53
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
| Note 22 |
Segment
information
|
During
the year ended December 31, 2006, the Company operated in a single segment.
The
segment information for the year ended December 31, 2007 is as
follows:
Twelve
months ended December 31, 2007
|
EUROPE
|
||||||||||||||||||||||||||||
|
Netherlands
|
Spain
|
Switzerland
|
Others
|
Total
|
Far
East
HK/PRC |
Middle
East
|
USA
|
TOTAL
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Revenues
from unaffiliated entities
|
$ | 33,455,599 | $ | 3,644,270 | $ | 9,449,789 | $ | 698,594 | $ | 47,248,253 | $ | 112,775 | $ | - | $ | - | $ | 47,361,028 | ||||||||||
|
|
||||||||||||||||||||||||||||
|
Operating
income (loss)
|
$ | (2,391,884 | ) | $ | 777,797 | $ | (1,714,001 | ) | $ | (654,951 | ) | $ | (3,983,039 | ) | $ | (1,211,476 | ) | $ | (87,951 | ) | $ | (6,069,903 | ) | $ | (11,352,369 | ) | ||
|
|
||||||||||||||||||||||||||||
|
Net
income (loss):
|
$ | (2,368,518 | ) | $ | 777,797 | $ | (1,714,001 | ) | $ | (654,951 | ) | $ | (3,959,673 | ) | $ | (1,431,595 | ) | $ | (87,951 | ) | $ | (6,578,513 | ) | $ | (12,057,732 | ) | ||
|
|
||||||||||||||||||||||||||||
|
Identifiable
assets
|
$ | 10,256,348 | $ | 1,924,809 | $ | 10,748,723 | $ | 1,029,314 | $ | 23,959,195 | $ | 393,108 | $ | 245,582 | $ | 10,343 | $ | 24,608,228 | ||||||||||
|
|
||||||||||||||||||||||||||||
|
Depreciation
and amortization
|
$ | (182,074 | ) | $ | (205,041 | ) | $ | (1,823,900 | ) | $ | 15,885 | $ | (2,195,129 | ) | $ | (38,023 | ) | $ | - | $ | (301 | ) | $ | (2,233,454 | ) | |||
|
|
||||||||||||||||||||||||||||
|
Capital
expenditure
|
$ | 32,472 | $ | 51,405 | $ | 2,018,901 | $ | 24,348 | $ | 2,127,125 | $ | 27,434 | $ | - | $ | - | $ | 2,154,559 | ||||||||||
| Note 23 |
Going
concern
|
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principle, which contemplate continuation of
the
Company as a going concern. The Company has an accumulated deficit of
$29,019,832 including a net loss of $12,057,732 for the year ended December
31,
2007 and default on its bank loans. This raises a substantial doubt about the
Company’s ability to continue as a going concern. In view of the matters
described below, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Company’s ability to raise
additional capital, obtain financing and to succeed in its future
operations.
Page
54
ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company
be
unable to continue as a going concern.
Substantial
additional capital resources will be required to fund continuing expenditures
related to our research, development, manufacturing and business development
activities.
Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with
the
ability to continue as a going concern for the coming two quarters. Management
has devoted considerable efforts during the period ended December 31, 2007
and
in the first few months of 2008 towards (i) obtaining additional equity
financing (ii) controlling of salaries and general and administrative expenses
(iii) management of accounts payable (iv) settlement of debt by issuance
of
common shares and (v) strategically acquire profitable companies that bring
synergies to the Company’s products and services.
Management
believes our existing available cash, cash commitments, cash equivalents and
short term investments as of December 31, 2007 in combination with continuing
contractual commitments will be sufficient to meet our anticipated capital
requirements until the May 2008.
Management
is pursuing a number of alternatives available to meet the continuing capital
requirements of our operations, such as collaborative agreements and public
and
private financings. In the past the Company has demonstrated its ability to
correct its operating cash deficiencies and there is currently no evidence
to
support that they cannot continue to do so in spite of the fact that 2007
operations showed an operating loss. However, there can be no absolute assurance
that any of these funding will be consummated in the time frames needed for
continuing operations or on terms favorable to us. If adequate funds are not
available, we will be required to significantly curtail our operating plans
and/or possibly cease operations.
| Note 24 |
On
January 3, 2008, with effective date January 2, 2008 Elephant Talk Global
Holding B.V.( ET Global) signed a joint venture agreement with United
Telecommunication Services NV (UTS), the incumbent telecom operator in the
Dutch
Antilles organized and existing under the laws of Curacao, Netherland Antilles.
This cooperation enables ET
Global
and UTS to design, install, and operate WIFI networks throughout the Dutch
and
French Caribbean, as well as the Islands of St. Kitts and Nevis. As a
consequence ET Global incorporated on March 19, 2008, Elephant Talk
Caribbean BV (ET Caribbean), organized and existing under the laws of the
Netherlands. ET Caribbean will participate for 51% in a specially to be created
company (Newco) in Curacao, Netherlands Antilles. The other 49% will be a
participation of an entity of UTS. The Newco will head the joint
venture.
On
March
26, 2008, the Company received a news letter of Rising Water Capital A.G.
regarding a Promissory Note of May 26, 2006 (see note 13 of the consolidated
financial statements) in which they agreed to waive any and all defaults or
continuing defaults for a period of time commencing on the date of the letter
and continuing for 3 months hereafter.
Item
9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.
On
January 23, 2007, Jimmy C. H. Cheung & Co. (“Jimmy Cheung”) was dismissed as
the Company’s auditors. The decision to dismiss Jimmy Cheung was approved by the
Company’s Board of Directors upon recommendation by its audit committee. Jimmy
Cheung served as the Registrant's independent auditor for the Company’s fiscal
year ended December 31, 2005. Jimmy Cheung’s report on the Company’s
consolidated financial statements for the year ended December 31, 2005 (the
“Report”) did not contain an adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles. However, the Report was modified to include an explanatory paragraph
wherein Jimmy Cheung expressed substantial doubt about the Registrant’s ability
to continue as a going concern.
During
the Company’s fiscal year ended December 31, 2005, and during the period from
January 1, 2006 until January 23, 2007, there were no disagreements with Jimmy
Cheung on any matter of accounting principles or practices, financial statement
disclosures, or auditing scope or procedure, which disagreements, if not
resolved to Jimmy Cheung’s satisfaction, would have caused Jimmy Cheung to make
reference thereto in their report on the Registrant’s financial statements for
this fiscal year.
On
January 24, 2007, the Company engaged Kabani & Company, Inc. (“Kabani”),
Certified Public Accountants, as the Company's independent accountant to report
on the Company’s consolidated balance sheet as of December 31, 2006, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. The decision to appoint Kabani was approved
by
the Company's Board of Directors upon recommendation by its audit committee.
Prior to engaging the new accountant, the Company did not consult with Kabani
regarding the application of accounting principles to any contemplated or
completed transactions nor the type of audit opinion that might be rendered
on
the Company’s financial statements, and neither written nor oral advice was
provided that would be an important factor considered by the Company in reaching
a decision as to an accounting, auditing or financial reporting issue.
Page
55
Item
9A(T). Controls and Procedures
Our
Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)
Internal
control over financial reporting is promulgated under the Exchange Act as a
process designed by, or under the supervision of, our CEO and CFO and effected
by our board of directors, management and other personnel, 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 and includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or disposition of our assets that could
have a
material effect on the financial
statements.
|
Readers
are cautioned that internal control over financial reporting, no matter how
well
designed, has inherent limitations and may not prevent or detect misstatements.
Therefore, even effective internal control over financial reporting can only
provide reasonable assurance with respect to the financial statement preparation
and presentation.
Our
management has evaluated the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the
end of the period covered by this Report but
has
not evaluated them based upon the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) due to the fact that the Company does not
have
the personnel resources nor technological infrastructure in place to perform
this evaluation. Management has identified this lack of personnel and
technological resources as a material weakness in the Company’s internal control
over financial reporting. While management believes the financial reports
included in this Annual Report fairly represent the financial condition of
the
Company, due to the Company’s inability to evaluate its internal controls over
financial reporting based
on
the framework developed by COSO, there is no guarantee that the financial
reports accurately represent our financial condition.
The
Company has begun to take appropriate steps to remediate the material weakness
described above. The Company has hired a Sarbanes-Oxley consultant and intends
to purchase software designed to strengthen internal controls over financial
reporting. The Company expects to initiate these remediation efforts in the
second half of 2008. The effectiveness of our internal controls following our
remediation efforts will not be known until we test those controls in connection
with management’s tests of internal control over financial reporting that will
be performed after the close of our third fiscal quarter of 2008, ending
September 30.
This
Report does not include an attestation report of our registered public
accounting firm regarding our internal controls over financial reporting. The
disclosure contained under this Item 9A was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only the disclosure under this Item 9A in this
Report.
Page
56
PART
III
Item
10. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Our
directors and executive officers and their ages as of March 31, 2008 are as
follows:
|
Director
|
||||||
|
Name
|
|
Age
|
|
Position
|
|
Since
|
|
Steven
Van der Velden
|
|
51
|
|
Chairman
of the Board President, Chief Executive Officer and
Director
|
|
2006
|
|
Willem
Ackermans
|
|
52
|
|
Chief
Financial Officer and Director
|
|
2007
|
|
Martin
Zuurbier
|
|
48
|
|
Chief
Operating Officer, Chief Technical Officer and Director
|
|
2007
|
|
Yves
R. Van Sante
|
|
47
|
|
Director
|
|
2006
|
|
Johan
Dejager
|
|
48
|
|
Director
|
|
2006
|
|
Bruce
W. Barren (1)(2)(3)
|
|
66
|
|
Director
|
|
2008
|
|
Roderick
de Greef (1)(2)(3)
|
|
47
|
|
Director
|
|
2008
|
|
Mark
Nije
|
45
|
General
Manager, Europe
|
n/a
|
| (1) |
Member
of Audit and Finance Committee.
|
| (2) |
Member
of Nominating and Corporate Governance
Committee.
|
| (3) |
Member
of Compensation Committee
|
Background
The
following is a brief summary of the background of each Director of the
Company:
Steven
Van der Velden has
been
director since October 24, 2006 and the Chairman, President and Chief Executive
Officer since October 30, 2006. Mr. Van der Velden has experience in
consultancy, logistics, real estate development, and telecommunications,
e-commerce and investment management. He founded his first consultancy firm
in
1983 and since then Mr. Van der Velden has started over a dozen companies.
Mr.
Van der Velden is involved in various Information Communication Technology
ventures throughout Europe, North America and the Far East, and currently serves
as Chairman of the Board of QAT Investments SA in Luxembourg. In 2000, he
co-founded E-commerce Park NV, which has developed a 50,000 sq.ft. data centre
and Internet hosting facility, located on top of the various fiber optic landing
points in Curacao. In 1994, Mr. Van der Velden co-founded the ITA International
Telemedia Association, known today as the Network for Online Commerce, and
served as its first Chairman. In the same year, he co-founded InTouch Telecom
SA/NV to offer a wide range of business and consumer telecom applications to
the
Belgian Market, and served as its CEO until the company was sold to Global
TeleSystems, Inc. in 1999. From 1988 until 1992 he served as the
first Managing Director of Antillephone NV. Currently he is a Director of Unicom
NV. Between 1986 and 1988, Mr. Van der Velden co-headed a team of 16
consultants, which advised on and implemented a wide range of measures to
balance budgets and to restructure the internal organizations of the Governments
of both the Dutch Antilles and the island of Curacao. Mr. Van der Velden earned
his Master’s Degree in Business Administration from Rotterdam School of
Management, the Netherlands, and a Master’s Degree in Law from Leiden
University, the Netherlands. He splits his time between Curacao, Dutch Antilles
and Brussels, Belgium.
Willem
Ackermans has
been the Chief Financial Officer and a director since January 1,
2007.
Mr.
Ackermans is also a partner in M-Ventures B.V., a Dutch based firm focusing
on
new business development and venture capital activities in the information
technology, energy and healthcare industries in Europe. From April 2006 to
December 2006, Mr. Ackermans served as an independent consultant and provided
amongst others services focused on the development of certain payment systems
in
the Dutch healthcare sector and services generally in the energy sector. From
April 2003 to April 2006, Mr. Ackermans served as Director of Corporate
Development and Strategy, M&A, Regulatory Affairs, Sustainability and
Environmental Affairs, Technology & Knowledge Management. From October 2001
to March 2003, Mr. Ackermans served as Chief Financial Officer of Telemedia
N.V., a wholly-owned subsidiary of the Dutch telecommunications company
Koninklijke KPN NV. From 1995 to 2001, Mr. Ackermans served in several positions
with the Dutch Telecommunications Company KPN, a.o. as Corporate Treasurer
and
CFO KPN International. Since 1999 Mr. Ackermans served as CFO in the Joint
Venture between KPN and Qwest; KPNQwest. Before 1995, Mr. Ackermans acted as
Corporate Treasurer and Financial Director of the Dutch dredging company Royal
Boskalis Westminster N.V. In 1983, Mr. Ackermans started his career with Amro
Bank NV as Relationship Management Natural Resources. Mr. Ackermans holds a
Masters degree in Engineering from the Dutch Technical University at
Delft.
Page
57
Martin
Zuurbier has
been the Chief Operating Officer/Chief Technical Officer and a director since
January 1, 2007. From January 2005 until January 1, 2007, Mr. Zuurbier had
been
the Chief Operating Officer and Chief Technology Officer of Benoit Telecom
Holding AG, a telecom service provider in Europe that was acquired by the
Company on January 1, 2007. From December 1999 to December 2004, Mr. Zuurbier
served as director and was the founder of Vocalis Telecom Group located in
The
Netherlands and Switzerland. Mr. Zuurbier was responsible for building,
maintaining and operating a telecommunications network spanning eight countries
in Europe, including all back-office, billing and Client Relation Management
systems. From January 1995 to June 1999, Mr. Zuurbier was directly involved
in
the telecommunications industry and was involved in the development of new
switching technology in collaboration with hardware manufacturer Dialogic,
implementation of the Amsterdam Carrier Ring in 1999 with COLT Telecom BV as
the
launch customer, and negotiating increased capacity on behalf of various
international telecommunications companies. Prior to 1995, Mr. Zuurbier was
involved in the production of television commercials for the European
market.
Yves
R. Van Sante has
been
a director since October 24, 2006.Mr. Van Sante founded QAT Investments S.A.
in
2002, where he currently serves as the Chief Executive Officer. Concurrently,
Mr. Van Sante has held various Management and Board functions in companies
supported by Quercus Aimer Trust Investments (“QAT”), the majority shareholder
of ETCI, such as being a member of the Business Club ‘De Warande’ since 1998. In
2000, Mr. Van Sante became the Managing Director of E-port NV in Ostend,
Belgium, a call centre owned by the Port of Ostend. When E-port was sold after
six months to the Dutch call-centre Call-IT, Mr. Van Sante was asked to become
Advisor to the Management Board of Call-IT. In 1999, Mr. Van Sante became
Vice-President Business Services with GTS, a Pan European Telecom operator.
In
this position, Mr. Van Sante consolidated acquisitions and turned a voice Telco
operator around into an IP operator. In 1994, Mr. Van Sante co-founded and
became partner of InTouch Telecom, a privately owned Belgium Telco company.
As
its Managing Director, Mr. Sante was responsible for Business Development,
Sales
and Marketing. From 1987 until 1993, Mr. Van Sante served as Sales and Marketing
Manager for Central Europe at 3C Communications (currently named Tele-2) in
Luxemburg, where he launched Credit Card Telephony across Europe. Prior to
this
position, Mr. Van Sante became a Business Unit Manager of Public Telephony
at
Belgacom, a former Belgian owned telecom operator, where he managed a department
of over 650 employees. Mr. Van Sante started his career as an Advisor at United
Brokers in 1982. Mr. Van Sante studied Marketing, Communication and Commercial
Management at the High School for Business Economics and Commercial Management
in Ghent, Belgium in 1980.
Johan
Dejager has
been
a director since October 24, 2006. Mr. Dejager is managing director and owner
of
Osta Carpets, a specialized niche producer of area rugs with production plants
in Belgium and a distribution center in Barcelona, and Gaverdal, a finishing
plant for the carpet industry. He is also Managing Director of Ligne Pure,
a
company specialised in the design and manufacturing of handmade carpets for the
decorator market. Mr. Dejager serves as a member of the Board of Directors
of
QAT Investments SA. In addition, he is a shareholder and director of Keyware,
a
provider of identity-related solutions and services, and of SPARNEX, an
engineering company developing and industrializing DSL products for the telecom
industry. Mr. Dejager is a member of the Board of Directors of FEBELTEX (the
Federation of the Belgian Textile Companies). As Vice-President of the company,
Mr. Dejager is in charge of the subdivision of interior textiles. Mr. Dejager
holds a Bachelors degree (1981) and a Masters degree in Commercial Engineering
from the University of Leuven, Belgium (1981) and an MBA from Insead
Fontainebleau, France (1982).
Page
58
Bruce
W. Barren
has been
a Director since January 15, 2008. Mr. Barren has been Group Chairman of The
EMCO/Hanover Group, a privately held, international merchant
banking
company
since 1971. Under EMCO/Hanover's Executive Loan Program, Mr. Barren has assumed
a number of senior on-line managerial positions, ranging from small- and
medium-sized companies to those in the multi-national marketplace. Under this
program, Mr. Barren has acted as a Chief Executive Officer of a California
bank
under FDIC approval; President of a HMO medical provider, with 23 offices in
Southern California, under the State of California, Department of Insurance's
approval; Chairman of a printing/graphic design business and as a Chief
Executive and Administrative Officer for various companies in the
construction/real estate industry, both commercial and residential. Through
2004, Mr. Barren acted as the lead consultant for a medical services company
whose primary activities focused on Mainland China. Mr. Barren also has
experience in the telecommunications industry and experience in Europe. Mr.
Barren received his Bachelor Science Degree in Accounting and Finance from
Babson College in 1962, and received a Master of Science Degree in Finance
and
Economics in 1963 from Bucknell University.
Roderick
de Greef has
served on the Company’s Board of Directors since January, 2008. Mr. de Greef is
the principal of Taveyanne Capital Advisers, Inc., a firm providing corporate
finance consulting services. Mr. de Greef has served as the Chief Financial
Officer of Cambridge Heart from October 2005 to July 2007. Mr. de Greef served
as the Executive Vice President, Chief Financial Officer and Secretary of
Cardiac Science, Inc. from March 2001 to September 2005. From 1995 to 2001,
Mr.
de Greef provided corporate finance advisory services to a number of early
stage
companies including Cardiac Science, where he was instrumental in securing
equity capital beginning in 1997, and advising on merger and acquisition
activity. From 1989 to 1995, Mr. de Greef was Vice President and Chief Financial
Officer of BioAnalogics, Inc. and International BioAnalogics, Inc., both
publicly held development stage medical technology companies located in
Portland, Oregon. From 1986 to 1989, Mr. de Greef was Controller and then Chief
Financial Officer of publicly held Brentwood Instruments, Inc. Mr. de Greef
also
serves on the board of directors of Endologix, Inc., a public medical device
company located in Irvine, California, and BioLife Solutions, Inc., a public
life sciences company based in Bothell, Washington.
Executive
Officers
Mark
Nije
has been
general manager Europe since January 1 2007, a function he held since the end
of
2004 within the acquired Benoit Telecom Group. Mr. Nije has experience in
project management, business development, investment management, logistics
and
telecommunications. Mr. Nije started as project manager and management
consultant for Tebodin Consulting Engineers and Reitsma & Wertheim M&A
specialists, the Netherlands. In 1990 he co-founded Logistic Management
International NV (LMI), an international cargo transportation and airport
handling company at the airport of Curacao, Netherlands Antilles. During those
years he served as a board member and vice-chairman of the Curacao Exporters
Association. From 2000-2002 Mr. Nije was co-founder and director of
PickYourGifts BV, an internet start-up. In 2003 he became partner of QAT
Investments SA, the Luxemburg venture capital fund, where he has been active
as
investment manager and/or board member in various ICT related ventures of QAT.
Currently he is non-executive board member of LMI and member of the Dutch
Association of CEO’s and Directors (NCD). Mr. Nije earned his Master’s Degree in
Business Administration from the Rotterdam School of Management, the
Netherlands, and a Bachelor of Science Degree in Building Construction
Management from the University of Reading, United Kingdom.
There
are
no family relationships between any director or executive officer. There are
no
arrangement between our directors and any other person pursuant to which our
directors were nominated or elected for their positions.
Director
Independence
We
believe that Bruce W. Barren and Roderick de Greef qualify as independent
directors for Nasdaq Stock Market purposes.
Page
59
Committee
Membership, Meetings and Attendance
During
the fiscal year ended December 31, 2007, there were:
|
o
|
3
meetings of the Board of Directors;
|
|
o
|
3
meetings of the Audit Committee;
|
|
o
|
no
meetings of the Compensation Committee (as it was newly formed in
November
2007); and
|
|
o
|
no
meetings of the Nominating Committee (as it was newly formed in November
2007).
|
Each
director attended or participated in at least 2/3rd
of the
meetings of the Board of Directors and his respective committees held during
our
fiscal year ended December 31, 2007 and during his term of service.
We
encourage all of our directors to attend our annual meetings of stockholders.
One of our current directors, who was a director at the time, attended last
year's annual meeting of stockholders.
Board
Committees
Our
board
of directors has established three standing committees: Audit and Finance,
Nominating and Corporate Governance, and Compensation. Each Committee operates
under a charter that has been approved by our board of directors.
Audit
and Finance Committee
We
have a
separately designated standing Audit & Finance Committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934
(the
“Exchange Act”). Our Audit Committee is currently composed of Roderick de Greef
and Bruce W. Barren, each of whom were appointed on January 15, 2008, and is
involved in discussions with management and our independent registered public
accounting firm with respect to financial reporting and our internal accounting
controls. The board of directors has determined that Mr. de Greef is an “audit
committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
The Audit Committee has the sole authority and responsibility to select,
evaluate and replace our independent registered public accounting firm or
nominate the independent auditors for stockholder approval. The Audit Committee
must pre-approve all audit engagement fees and terms and all non-audit
engagements with the independent auditors. The Audit Committee consults with
management but does not delegate these responsibilities. See “Audit Committee
Report.”
The
Audit
Committee reviewed and discussed our audited financial statements as of and
for
the year ended December 31, 2007 with the Board of Directors.
The
Board
of Directors reviewed and discussed with representatives of Kabani &
Company, Inc., our independent registered public accounting firm, the matters
required to be discussed by Statement on Auditing Standards No.61 (Codification
of Statements on Auditing Standards, AU §380), as amended. The Board of
Directors has also received and reviewed the written disclosures and the letter
from Kabani & Company, Inc. required by Independence Standard No.1,
“Independence Discussions with Audit Committees,” as amended by the Independence
Standards Board, and has discussed with Kabani & Company, Inc. their
independence.
Compensation
Committee
Our
Compensation Committee was formed on January 15, 2008 and consists of Roderick
de Greef and Bruce Barren. The Compensation Committee did not meet in
fiscal 2007. Our Compensation Committee will award stock options to officers
and
employees. The Compensation Committee has overall responsibility for approving
and evaluating the executive officer compensation plans, policies and programs
of the company.
Page
60
Nominating
and Corporate Governance Committee
Our
Nominating and Corporate Governance Committee was formed on January 15, 2008
and
consists of Roderick de Greef and Bruce Barren. Therefore, the Nominating and
Corporate Governance Committee did not meet in fiscal 2007. The Nominating
and
Corporate Governance Committee is responsible for (1) reviewing suggestions
of
candidates for director made by directors and others; (2) identifying
individuals qualified to become Board members, and recommending to the Board
the
director nominees for the next annual meeting of stockholders; (3) recommending
to the Board director nominees for each committee of the Board; (4) recommending
to the Board the corporate governance principles applicable to the company;
and
(5) overseeing the annual evaluation of the Board and management. Pursuant
to
the Nominating and Corporate Governance Committee charter, there is no
difference in the manner in which a nominee is evaluated based on whether the
nominee is recommended by a stockholder or otherwise.
Guidelines
for Business Conduct and Governance Guidelines
Our
Board
of Directors has adopted a Code of Business Ethics and Standards of Conduct
which has been designated as the code of ethics for directors, officers and
employees in performing their duties. The Code of Business Ethics and Standards
of Conduct also sets forth information and procedures for employees to report
ethical or accounting concerns, misconduct or violations of the Code in a
confidential manner. The Code of Business Ethics and Standards of Conduct may
be
found on our website at www.elephanttalk.com.
We
intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics
by
posting such information on our website, at the address specified
above.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that our
directors and executive officers and persons who beneficially own more than
10%
of our common stock (referred to herein as the “reporting persons”) file with
the SEC various reports as to their ownership of and activities relating to
our
common stock. Such reporting persons are required by the SEC regulations to
furnish us with copies of all Section 16(a) reports they file. Based solely
upon
a review of copies of Section 16(a) reports and representations received by
us
from reporting persons, and without conducting any independent investigation
of
our own, in 2007, all Forms 3, 4 and 5 were timely filed with the SEC by such
reporting persons except for the following:
|
·
|
In
2007, Steven van der Velden, our Chief Executive Officer, Director,
and
beneficial owner of an excess of five percent of our outstanding
common
stock, failed to report 3 transactions for which the filing of a
Form 4
was required, and did not timely file the Form 5 for the 2007 fiscal
year.
|
|
·
|
In
2007, Johan Dejager, our Director and beneficial owner of an excess
of
five percent of our outstanding common stock, failed to timely file
the
Form 5 for the 2007 fiscal year.
|
|
·
|
In
2007, Alex Vermeulen, our Secretary and General Counsel, failed to
report
2 transactions for which the filing of a Form 4 was required and
failed to
timely file the Form 5 for the 2007 fiscal
year.
|
|
·
|
Willem
Ackermans, our Chief Financial Officer and Director, failed to report
2
transactions for which the filing of a Form 4 was required and failed
to
timely file the Form 5 for the 2007 fiscal
year.
|
|
·
|
Martin
Zuurbier; our Chief Operating Officer, Chief Technical Officer, Director
and beneficial owner of an excess of five percent of our outstanding
common stock, failed to report 2 transactions for which the filing
of a
Form 4 was required and failed to timely file the Form 5 for the
2007
fiscal year.
|
|
·
|
Yves
van Sante, our Director, failed to timely file the Form 5 for the
2007
fiscal year.
|
|
·
|
Rising
Water Capital, A.G., beneficial owner of an excess of five percent
of our
outstanding common stock, failed to report 1 transaction for which
the
filing of a Form 4 was required.
|
|
·
|
We
did not receive written confirmations from any other holders of five
percent or more of our outstanding common stock that they were not
required to file a Form 5 for the fiscal year ended December 31,
2007.
|
Page
61
Item
11. Executive Compensation.
The
following table sets forth all annualized compensation paid to our named
executive officers at the end of the fiscal years ended December 31, 2007 and
2006. Individuals we refer to as our "named executive officers" include our
Chief Executive Officer and our most highly compensated executive officers
whose
salary and bonus for services rendered in all capacities exceeded $100,000
during the fiscal year ended December 31, 2007.
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Total
($)
|
|||||||||||||
|
Steven
van der Velden, CEO
|
2007
|
$
|
0
|
$
|
1,636,760.00
|
(1) |
|
$
|
287,240.50
|
(2) |
|
$
|
1,924,000.50
|
|||||
|
|
2006
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
|||||||||
|
Willem
Ackermans, CFO
|
2007
|
$
|
246,371.13
|
$
|
837,896.00
|
(3) |
|
$
|
17,952.00
|
(4) |
|
$
|
1,099,219.13
|
|||||
|
|
2006
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Martin
Zuurbier, COO,CTO
|
2007
|
$
|
164,247.42
|
$
|
748,136.00
|
(5) |
|
$
|
107,712.00
|
(6) |
|
$
|
1,020,095.42
|
|||||
|
|
2006
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Mark
Nije, General Manager, Europe
|
2007
|
$
|
164,247.42
|
$
|
845,376.00
|
(7) |
|
$
|
107,712.00
|
(8) |
|
$
|
1,117,335.42
|
|||||
|
2006
|
-
|
-
|
-
|
-
|
||||||||||||||
|
(1)
|
Based
on 19,256,000 restricted shares of our common stock granted on January
1,
2007 as an entrance bonus.
|
|
(2)
|
Based
on 3,379,300 restricted shares of our common stock issued as
salary.
|
|
(3)
|
Based
on 9,857,600 restricted shares of our common stock granted on January
1,
2007 as an entrance bonus.
|
|
(4)
|
Based
on 211,200 restricted shares of our common stock issued as
salary.
|
|
(5)
|
Based
on 8,801,600 restricted shares of our common stock granted on January
1,
2007 as an entrance bonus.
|
|
(6)
|
Based
on 1,267,200 restricted shares of our common stock issued as
salary.
|
|
(7)
|
Based
on 9,945,600 restricted shares of our common stock granted on January
1,
2007 as an entrance bonus.
|
|
(8)
|
Based
on 1,267,200 restricted shares of our common stock issued as
salary.
|
Page
62
Narrative
Disclosure to Summary Compensation Table.
Employment
Agreements
Except
as
set forth below, the Company currently has no written or unwritten employment
agreements with any of its officers, directors or key employees.
Steven
Van der Velden, Chief Executive Officer - the
Company intends to enter into an employment agreement with Mr. Van der Velden
which will provide for his continued employment in his present capacity as
Chief
Executive Officer through December 31, 2009. In the interim, the Company has
agreed to issue Mr. van der Velden 19,256,000 shares of restricted common stock,
effective January 1, 2007, as an entrance bonus, and to compensate him with
an
annual award of 10,137,600 shares of restricted common stock. All restricted
shares of common stock are subject to a lockup period until the earlier of
(i)
December 31, 2009, and a change in control of the Company. In the event Mr.
van
der Velden becomes disabled for a consecutive period greater than 12 months,
his
compensation shall be terminated. The Company has recorded such shares to be
issued as a liability in the accompanying financial statements as of December
31, 2007. Subsequent to the grant of such shares, the Board of Directors
and the above-referenced officers and directors determined that it is
unlikely that the shares of common stock will be issued in the form and within
the timeframe originally agreed upon, if at all. The Board of
Directors and management of the Company are currently in discussions
regarding modifications to the original compensation plan and expect to finalize
a revised plan in 2008. In the event of his death, his compensation terminates
immediately; provided, however, his estate will be entitled six months of
compensation. In the case the Company terminates his employment, any
compensation payable through the end of the calendar year shall become due
any
payable immediately. In the case Mr. van der Velden terminates his employment
with the Company, compensation shall cease immediately. Mr. van der Velden
is
also entitled to twenty-five vacation days per year, reimbursement of reasonable
travel costs and other expenses, and the use of a laptop computer and telephone.
Willem
Ackermans, Chief Financial Officer -
the
Company intends to enter into an employment agreement with Mr. Ackermans which
will provide for his continued employment in his present capacity as Chief
Financial Officer through December 31, 2009. In the interim, the Company has
agreed to issue Mr. Ackermans 9,875,600 shares of restricted common stock,
effective January 1, 2007, as an entrance bonus, and to compensate him with
an
annual award of 211,200 shares of restricted common stock and an annual cash
salary of $237,600. All restricted shares of common stock are subject to a
lockup period until the earlier of (i) December 31, 2009, and a change in
control of the Company. The Company has recorded such shares to be issued as
a
liability in the accompanying financial statements as of December 31, 2007.
Subsequent to the grant of such shares, the Board of Directors and the
above-referenced officers and directors determined that it is unlikely that
the
shares of common stock will be issued in the form and within the timeframe
originally agreed upon, if at all. The Board of Directors
and management of the Company are currently in discussions regarding
modifications to the original compensation plan and expect to finalize a revised
plan in 2008. In the event Mr. Ackermans becomes disabled for a consecutive
period greater than 12 months, his compensation shall be terminated. In the
event of his death, his compensation terminates immediately; provided, however,
his estate will be entitled six months of compensation. In the case the Company
terminates his employment, any compensation payable through the end of the
calendar year shall become due any payable immediately. In the case Mr.
Ackermans terminates his employment with the Company, compensation shall cease
immediately. Mr. Ackermans is also entitled to twenty-five vacation days per
year, reimbursement of reasonable travel costs and other expenses, and the
use
of a laptop computer and telephone.
Martin
Zuurbier, Chief Operating Officer, Chief Technical Officer -
the
Company intends to enter into an employment agreement with Mr. Zuurbier which
will provide for his continued employment in his present capacity as Chief
Operating Officer and Chief Technical Officer through December 31, 2009. In
the
interim, the Company has agreed to issue Mr. Zuurbier 8,801,600 shares of
restricted common stock, effective January 1, 2007, as an entrance bonus, and
to
compensate him with an annual award of 1,267,200 shares of restricted common
stock and an annual cash salary of $158,400. All restricted shares of common
stock are subject to a lockup period until the earlier of (i) December 31,
2009,
and a change in control of the Company. The Company has recorded such shares
to
be issued as a liability in the accompanying financial statements as of December
31, 2007. Subsequent to the grant of such shares, the Board of Directors
and the above-referenced officers and directors determined that it is
unlikely that the shares of common stock will be issued in the form and within
the timeframe originally agreed upon, if at all. The Board of
Directors and management of the Company are currently in discussions
regarding modifications to the original compensation plan and expect to finalize
a revised plan in 2008. In the event Mr. Zuurbier becomes disabled for a
consecutive period greater than 12 months, his compensation shall be terminated.
In the event of his death, his compensation terminates immediately; provided,
however, his estate will be entitled six months of compensation. In the case
the
Company terminates his employment, any compensation payable through the end
of
the calendar year shall become due any payable immediately. In the case Mr.
Zuurbier terminates his employment with the Company, compensation shall cease
immediately. Mr. Zuurbier is also entitled to twenty-five vacation days per
year, reimbursement of reasonable travel costs and other expenses, and the
use
of a laptop computer and telephone.
Page
63
Mark
Nije, Europe General Manager - the
Company intends to enter into an employment agreement with Mr. Nije which will
provide for his continued employment in his present capacity as the Europe
General Manager through December 31, 2009. In the interim, the Company has
agreed to issue Mr. Nije 9,945,600 shares of restricted common stock, effective
January 1, 2007, as an entrance bonus, and to compensate him with an annual
award of 1,267,200 shares of restricted common stock and an annual cash salary
of $158,400. All restricted shares of common stock are subject to a lockup
period until the earlier of (i) December 31, 2009, and a change in control
of
the Company. The Company has recorded such shares to be issued as a liability
in
the accompanying financial statements as of December 31, 2007. Subsequent to
the
grant of such shares, the Board of Directors and the above-referenced
officers and directors determined that it is unlikely that the shares of common
stock will be issued in the form and within the timeframe originally agreed
upon, if at all. The Board of Directors and management of
the Company are currently in discussions regarding modifications to the original
compensation plan and expect to finalize a revised plan in 2008.In the event
Mr.
Nije becomes disabled for a consecutive period greater than 12 months, his
compensation shall be terminated. In the event of his death, his compensation
terminates immediately; provided, however, his estate will be entitled six
months of compensation. In the case the Company terminates his employment,
any
compensation payable through the end of the calendar year shall become due
any
payable immediately. In the case Mr. Nije terminates his employment with the
Company, compensation shall cease immediately. Mr. Nije is also entitled to
twenty-five vacation days per year, reimbursement of reasonable travel costs
and
other expenses, and the use of a laptop computer and telephone.
Page
64
Outstanding
Equity Awards
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options Exercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested (#)
|
|||||||||||||||||
|
Steven
van der Velden, CEO
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Willem
Ackermans, CFO
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Martin
Zuurbier, COO,CTO
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Mark
Nije, General Manager, Europe
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
Narrative
Disclosure to Outstanding Equity Awards
There
were no outstanding equity awards at the end of fiscal 2007.
Compensation
of Directors Summary Table
The
following table represents compensation paid in 2007 to our directors who are
not “named executive officers.”
DIRECTOR
COMPENSATION
|
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All
Other Compensation
|
Total
($)
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Russelle
Choi
|
-
|
-
|
-
|
-
|
$
|
40,000-
|
$
|
40,000
|
||||||||||||||
|
Johan
de Jager
|
-
|
-
|
-
|
-
|
-
|
$
|
0
|
|||||||||||||||
|
Yves
van Sante
|
$
|
4,498.73
|
||||||||||||||||||||
|
Eric
Dejonghe
|
||||||||||||||||||||||
Page
65
Narrative
to Director Compensation
Directors
were not compensated in 2007 for their service as directors of the Company.
However, payments for consulting services rendered by Mr. Choi were recorded
in
the amount of $60,000 for the fiscal year ended December 31, 2007. Of the
$60,000, $40,000 had been paid as of December 31. Mr. van Sante received
$4,498.73 for consulting services rendered in fiscal 2007.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Beneficial
Ownership of Principal Stockholders, Officers and
Directors
The
following table sets forth, as of March
31, 2008,
certain
information as to the stock ownership of each person known by the Company to
own
beneficially five (5%) percent or more of the outstanding Common Stock, of
each
of the Company’s named officers and directors who owns any shares and of all
officers and directors as a group. In computing the outstanding shares of Common
Stock, the Company has excluded all shares of Common Stock subject to options
or
warrants that are not currently exercisable or exercisable within 60 days and
are therefore not deemed to be outstanding and beneficially owned by the person
holding the options or warrants for the purpose of computing the number of
shares beneficially owned and the percentage ownership of that person. Unless
otherwise indicated, the address for each person listed below is c/o Elephant
Talk Communications, Inc., Schiphol Blvd 249, 1118 BH Schiphol, The Netherlands.
|
Title
of Class
|
Name
& Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership (A)
|
|
Percent*
|
|
||
|
Common
stock
|
Rising
Water Capital, A.G. (B)(L)
Baarerstrasse
12
Zug,
Switzerland 6300
|
592,499,579
|
|
81.1%
|
|
||
|
Common
stock
|
Calfin
Trust (I)
Postfach
1518 Lettstrasse 10
FL-9490
Vaduz, Liechtenstein
|
40,000,000
|
|
16.8%
|
|
||
|
Common
stock
|
Steven
van der Velden (C)
President,
CEO and Director
|
629,942,550
|
|
82%
|
|
||
|
Common
stock
|
Russelle
Choi (F) (G)
Director
8/F,
145-159 Yeung Uk Road
Tsuen
Wan, Hong Kong
|
18,289,953
|
|
7.7%
|
|
||
|
Common
stock
|
Lam
Kwok Hung, (G)
8/F,
145-159 Yeung Uk Road
Tsuen
Wan, Hong Kong
|
12,032,710
|
|
5.1%
|
|
||
|
Common
stock
|
Yves
R. Van Sante, Director (D)
Avenue
Louise 109
Brussels,
Belgium 1050
|
0
|
|
0%
|
|
||
|
Common
stock
|
Johan
Dejager (E)
|
25,186,667
|
|
9.6%
|
|
||
|
Common
Stock
|
Martin
Zuurbier, Director (J)
|
8,402,132
|
|
3.4%
|
|
||
|
Common
Stock
|
Anarjay
Concepts, Inc. (H)
438
E. Katella Ave., Suite 217
Orange,
CA 92867
|
12,024,221
|
|
5.17%
|
|
||
|
Common
Stock
|
|
Willem
Ackermans
Chief
Financial Officer, Director (K)
|
|
10,280,000
|
|
4.1%
|
|
|
Common
Stock
|
Roderick
de Greef, Director
|
0
|
0%
|
||||
|
Common
Stock
|
Bruce
W. Barren, Director
|
0
|
0%
|
||||
|
All
Officers and Directors as a Group
|
673,811,349
|
|
83.0%
|
|
Page
66
|
(A)
|
Except
as otherwise indicated, each of the parties listed has sole voting
and
investment power with respect to all shares of common stock indicated.
Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under
the Securities Exchange Act of 1934, as amended.
|
|
(B)
|
Rising
Water Capital, A.G. (“RWC”) is the record owner of 100,000,000 shares of
common stock, representing 42%
of the total outstanding shares as of March 31, 2008. RWC has the
right to
acquire within 60 days of the date hereof an additional 492,499,579
shares
of the Company’s common stock based on the following: Pursuant to a stock
purchase agreement dated June 30, 2005, the Company agreed to sell
to RWC
an aggregate of 195,947,395. Of these shares, only the aforementioned
100,000,000 have been issued. The Company is obligated to issue RWC
an
additional 95,947,395 shares based on this agreement. On October
30, 2006,
the Company agreed to issue RWC an additional 258,546,313 shares
of common
stock, none of which have been issued, as part of a settlement agreement.
RWC could also acquire an aggregate of 138,005,871 shares of common
stock
upon the conversion of two outstanding promissory notes (excluding
shares
issuable upon the conversion of outstanding interest, if any), with
principal amounts of $3,500,000 and $2,660,441. The Company currently
does
not have enough authorized but unissued shares of common stock to
satisfy
its obligations to issue to RWC the remaining 492,499,579 shares.
Steven
van der Velden, as a result of his ownership of QAT Investments SA,
as
described in footnote (C) hereof, and as a result of his position
on the
board of directors of QAT Investments as well as on the board of
directors
of RWC, exercises investment and voting control over the shares
beneficially owned by RWC. Mr. Van der Velden disclaims beneficial
ownership of such shares.
|
|
(C)
|
Steven
van der Velden may be deemed to be the beneficial owner of an aggregate
of
629,942,550 shares of the common stock consisting in part of the
following: 19,256,000 shares of common stock payable on June 28,
2007 as
an entrance bonus; 3,379,200 shares of common stock payable for salary
on
January 1, 2007, 3,379,200 shares of common stock payable for salary
on
January 1, 2008. In addition, Mr. van der Velden may be deemed to
be the
beneficial owner of the shares of common stock owned and issuable
to RWC
by virtue of his status as a holder of 31.5% of the outstanding capital
stock of QAT Investments SA, which owns 51% of the outstanding capital
stock of RWC, and by his status as the owner of 50% of the outstanding
capital stock of Interfield, which owns 34% of the outstanding capital
stock of RWC. Mr. van der Velden also sits of the board of directors
of
QAT and RWC, and exercises investment and voting control of the securities
held by RWC. In addition, Mr. van der Velden owns 27.25% of the
outstanding capital stock of CMV Invest, a Belgian entity, which
beneficially owns 11,428,571 shares of the Company’s common stock.
|
|
(D)
|
Yves
R. Van Sante is the beneficial owner of approximately 6.21% of the
issued
and outstanding shares of QAT Investments SA, which is the majority
(51.3%) shareholder of RWC. Mr. Van Sante also owns one third of
the
outstanding capital stock of Amelia & Associates S.A. This entity
purchased 8,733,333 shares of the Company’s common stock in December 2006.
Mr. Van Sante does not control the voting or investment power of
the
shares of the Company’s common stock held by Amelia & Associates.
These shares of common stock have yet to be issued due to our lack
of
authorized shares of common stock.
|
|
(E)
|
Johan
DeJager is the beneficial owner of approximately 7.28% of the issued
and
outstanding shares of QAT Investments SA, which is the majority (51.3%)
shareholder of RWC. On December 28, 2006, Mr. Dejager individually
purchased 25,186,667 shares of the common stock valued at $944,500.
Such
shares have not yet been issued due to the Company’s lack of authorized
shares.
|
|
(F)
|
Russelle
Choi is a beneficial owner of 2,286,080 shares of common stock held
by
Wellgear Far East Limited, and 235,116 shares of common stock held
by
Wiselink Technologies Limited, which shares are included in the ownership
figure reported.
|
|
(G)
|
Lam
Kwok Hung is a beneficial owner of 805,739 shares of common stock
held by
Wiseley International Limited, which shares are included in the ownership
figure reported. Lam Kwok Hung is married to Russelle Choi’s
sister.
|
|
(H)
|
Manu
Ohri is the beneficial owner of Anarjay Concepts,
Inc.
|
|
(I)
|
Mr.
Thomas Nigg exercises investment and voting control over beneficially
owned by Calfin Trust.
|
|
(J)
|
Includes
1,267,200 shares payable on June 28 2007, and additional 8,801,600
shares
payable on June 28, 2008, and an additional 1,267,200 shares payable
1,
2008. At the moment, the company does not have sufficient authorized
shares to issue these shares. Mr. Zuurbier also owns 17% of the
outstanding capital stock of RWC; however, he does not exercise investment
and voting control over the shares beneficially owned by RWC.
|
|
(K)
|
Includes
9,857,600 shares payable on June 28, 2007, an additional 211,200
shares
payable on June 28, 2007, and an additional 211,200 shares payable
on
January 1, 2008. At the moment, the Company does not have
sufficient authorized shares to issue these shares.
|
|
|
|
|
*
|
Calculated
in accordance with Rule 13d-(3)(d)(1) under the Securities Exchange
Act of
1934.
|
Page
67
Item
13. Certain Relationships and Related Transactions and Director Independence.
Steven
Van der Velden, our president, chief executive officer and chairman, owns 31.5%
of QAT Investments, SA, (“QAT”) which owns 51.3% of the issued and outstanding
capital stock of Rising Water Capital, A.G. (“RWC”), the owner of 42% of our
outstanding common stock. In addition, Mr. Van der Velden owns 17% of the
outstanding capital stock of RWC directly. Yves R. Van Sante, a director of
the
Company, is the beneficial owner of 6.21% of the issued and outstanding capital
stock of QAT. Johan DeJager, a director of the Company, owns 7.28% of the issued
and outstanding capital stock of QAT. Martin Zuurbier, a director of the
Company, owns 17% of the issued and outstanding capital stock of
RWC. The preceding respective interests of our officers and directors
shall be incorporated to the following, as applicable.
On
December 15, 2005, the Company entered into a $3.5 million convertible
promissory note with RWC. The Note is payable on demand, and is convertible
at a
price of $0.035 per share. The promissory bears interest at a rate of 10% per
annum. As of the date hereof, no payment of principal or interest has been
made
upon this promissory note, which is currently outstanding.
On
May
26, 2006, the Company entered into a $3.0 million convertible promissory note
with RWC. The largest principal amount outstanding under the Note since its
creation was $2,660,441, which amount is currently outstanding as of the date
hereof. The Note is payable on demand, and is convertible at a price of $0.07
per share. The promissory bears interest at a rate of 10% per annum. As of
the
date hereof, no payment of principal or interest has been made upon this
promissory note which is currently outstanding.
On
August
22, 2007, the Board approved the sale of approximately 104 million restricted
common shares to 5 accredited investors for a total consideration of €4,530,000
and $50,000. CMV Invest, a Belgian entity, agreed to purchase 11,428,571 shares
of our common stock in this transaction. Steven van der Velden, our President,
Chief Executive Officer and Director, beneficially owns 27.25% of the
outstanding capital stock of CMV Invest
All
future transactions between us and our officers, directors or five percent
stockholders, and respective affiliates will be on terms no less favorable
than
could be obtained from unaffiliated third parties and will be approved by a
majority of our independent directors who do not have an interest in the
transactions and who had access, at our expense, to our legal counsel or
independent legal counsel.
To
the
best of our knowledge, other than as set forth above, there were no material
transactions, or series of similar transactions, or any currently proposed
transactions, or series of similar transactions, to which we were or are to
be a
party, in which the amount involved exceeds $60,000, and in which any director
or executive officer, or any security holder who is known by us to own of record
or beneficially more than 5% of any class of our common stock, or any member
of
the immediate family of any of the foregoing persons, has an interest.
Director
Independence
The
Board
of Directors has determined that Roderick de Greef and Bruce Barren are
independent for NASDAQ Stock Market purposes. Roderick de Greef and Bruce
Barren, elected in the shareholders meeting of January 15, 2008, are per the
same date the members of the standing committees of the Board of Directors.
These committees are: the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance
Committee.
In
addition, the members of the Audit Committee each qualify as “independent” under
special standards established by the U.S. Securities and Exchange Commission
(“SEC”) for members of audit committees. The Audit Committee also includes at
least one independent member who is determined by the Board to meet the
qualifications of an “audit committee financial expert” in accordance with SEC
rules, including that the person meets the relevant definition of an
“independent director.” Roderick de Greef is the independent director who has
been determined to be an audit committee financial expert. Stockholders should
understand that this designation is a disclosure requirement of the SEC related
to Mr. de Greef’s experience and understanding with respect to certain
accounting and auditing matters. The designation does not impose upon Mr. de
Greef any duties, obligations or liability that are greater than are generally
imposed on him as a member of the Audit Committee and the Board, and his
designation as an audit committee financial expert pursuant to this SEC
requirement does not affect the duties, obligations or liability of any other
member of the Audit Committee or the Board. The Board has also determined that
each Audit Committee member has sufficient knowledge in reading and
understanding financial statements to serve on the Audit Committee.
Page
68
.
Item
14.
Principal Accountant Fees and Services
Audit
Fees. The
aggregate fees billed by Kabani and Company for professional services rendered
for the audit of our annual financial statements for the years ended
December 31, 2007 and 2006 and the review of the financial statements
included in our Forms 10-QSB totaled $185,000 and $75,000 respectively. The
above amounts include interim procedures as audit fees as well as attendance
at
audit committee meetings.
Audit-Related
Fees. The
aggregate fees billed by Kabani and Company for audit-related fees for the
years
ended December 31, 2007 and 2006 were $12,000 and $13,000, respectively.
Tax
Fees. The
aggregate fees billed by Kabani and Company for professional services rendered
for tax compliance, for the years ended December 31, 2007 and 2006 were
$14,000 and $1,200, respectively.
All
Other Fees. The
aggregate fees billed by Kabani and Company for products and services, other
than the services described in the paragraphs captions “Audit Fees”, and “Tax
Fees” above for the years ended December 31, 2007 and 2006 totaled $0 for
both years.
The
Audit
Committee of our Board of Directors has established its pre-approval policies
and procedures, pursuant to which the Audit Committee approved the foregoing
audit, tax and non-audit services provided by Kabani and Company in 2007.
Consistent with the Audit Committee’s responsibility for engaging our
independent auditors, all audit and permitted non-audit services require
pre-approval by the Audit Committee. The full Audit Committee approves proposed
services and fee estimates for these services. The Audit Committee chairperson
has been designated by the Audit Committee to approve any audit-related services
arising during the year that were not pre-approved by the Audit Committee.
Any
non-audit service must be approved by the full Audit Committee. Services
approved by the Audit Committee chairperson are communicated to the full Audit
Committee at its next regular meeting and the Audit Committee reviews services
and fees for the fiscal year at each such meeting. Pursuant to these procedures,
the Audit Committee approved the foregoing audit services provided by Kabani
and
Company.
Page
69
Part
IV
Item
15. Exhibits,
Financial Statement Schedules
The
following exhibits are filed with this Report.
|
Number
|
|
Description
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation (1)
|
|
3.2
|
Amended
and Restated By-Laws (2)
|
|
|
10.1
|
Stock
Purchase Agreement dated June 30, 2005, by and among the Company
and
Rising Water Capital, A.G. (3)
|
|
|
10.2
|
Convertible
Promissory Note dated December 15, 2005, by the Company, in favor
of
Rising Water Capital, A.G. (4)
|
|
|
10.3
|
Equity
Transfer Agreement, dated January 4, 2006, by and among Zhongrun
Chuangtou
Technology Co. Ltd. and Guangdong Guangxiang Network Information
Co., Ltd
(5)
|
|
|
10.4
|
Exclusive
Technical Consulting and Services Agreement, dated January 2, 2006,
by and
among Jinfuyi Technology (Beijing) Co., Ltd. and Beijing Chinawind
Communication Information Technology Co., Ltd. (5)
|
|
|
10.5
|
Convertible
Promissory Note dated May 26, 2006, by the Company, in favor of
Rising
Water Capital, A.G. (6)
|
|
|
10.6
|
Agreement
of Purchase and Sale, dated November 16, 2006, by and among the
Company,
Elephant Talk Europe Holding B.V. and Beltrust A.G. (7)
|
|
|
10.7
|
Form
of Common Stock Purchase Agreement, dated August 31, 2007, by and
among
the Company and certain investors. (8)
|
|
|
14.1
|
Code
of Ethics (1)
|
|
|
21.1
|
Subsidiaries
of the Registrant *
|
|
|
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
(*)(**)
|
| * |
Filed
Herewith
|
| ** |
A
signed original of this written statement has been provided to the
Company
and will be retained by the Company and furnished to the Securities
and
Exchange Commission or its staff upon request.
|
|
(1)
|
Filed
as part of our Definitive Proxy Statement on Schedule 14A on December
28,
2007.
|
|
(2)
|
Filed
as an Exhibit to our Current Report on Form 8-K on January 22,
2008.
|
|
(3)
|
Filed
as an Exhibit to our Current Report on Form 8-K on July 7,
2005.
|
|
(4)
|
Filed
as an Exhibit to our Current Report on Form 8-K on December 16,
2005.
|
|
(5)
|
Filed
as an Exhibit to our Current Report on Form 8-K on January 13,
2006.
|
|
(6)
|
Filed
as an Exhibit to our Current Report on Form 8-K on June 5,
2006.
|
|
(7)
|
Filed
as an Exhibit to our Current Report on Form 8-K on December 1,
2006.
|
|
(8)
|
Filed
as an Exhibit to our Current Report on Form 8-K on November 19,
2007.
|
Page
70
SIGNATURES
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
|
|
ELEPHANT
TALK COMMUNICATIONS, INC.
|
||||
|
Date:
April 15, 2008
|
|
|
By:
|
|
/s/
Steven van der Velden
|
|
|
|
|
Name:
|
|
Steven
van der Velden
|
||
|
|
|
Title:
|
|
President
and Chief Executive Officer
|
||
In
accordance with the Exchange Act, 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
|
||
|
/s/
Steven van der Velden
|
Chairman
of the Board and Director
|
April
15, 2008
|
||
|
Steven
van der Velden
|
(Principal Executive Officer) | |||
|
/s/
Willem Ackermans
|
Chief
Financial Officer and Director
|
April
15, 2008
|
||
|
Willem
Ackermans
|
(Principal Accounting Officer) | |||
|
/s/
Martin Zuurbier
|
Chief Operating
Officer,
|
April
15, 2008
|
||
|
Martin
Zuurbier
|
Chief Technical Officer, Director. | |||
|
/s/
Yves R. van Sante
|
Director
|
April
15, 2008
|
||
|
Yves
R. van Sante
|
||||
|
/s/
Johan Dejager
|
Director
|
April
15, 2008
|
||
|
Johan
Dejager
|
||||
|
/s/
Bruce W. Barren
|
Director
|
April
15, 2008
|
||
|
Bruce
W. Barren
|
|
|||
|
/s/
Roderick de Greef
|
Director
|
April
15, 2008
|
||
|
Roderick
de Greef
|
Page
71