Elephant Talk's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Elephant Talk (ETAK)

Elephant Talk Communications Corp. (NYSEMKT:ETAK)

Q2 2013 Results Earnings Call

August 8, 2013 11:00 AM ET


Peter Salkowski - The Blueshirt Group, IR

Steven van der Velden - Chairman and CEO

Pat Carroll - CEO, ValidSoft

Mark Nije - Chief Financial Officer


Edward Woo - Ascendiant Capital


Ladies and gentlemen, thank you for standing by. Welcome to the Elephant Talk Communications Second Quarter 2013 Conference Call. At this time, all participates are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instruction will be provide at that time. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, August 8, 2013. I would now like to turn the conference over to Peter Salkowski from The Blueshirt Group. Please go ahead, sir.

Peter Salkowski

Thank you, Angel. Good morning, everyone in the United States and good afternoon to our European listeners. And thank you for joining us for Elephant Talk Communications’ second quarter 2013 shareholder update conference call.

Joining me on today’s call is Steven van der Velden, Chairman and CEO of Elephant Talk; Pat Carroll, CEO of ValidSoft; and Mark Nije, CFO of Elephant Talk. Following management discussion, we will open the call for your questions.

This morning the company issued a news release announcing its second quarter 2013 financial results, that news release is available on the company’s website at www.elephanttalk.com.

Before we begin, I would like to remind everyone that on the call we will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities should be considered forward-looking statements.

These forward-looking statements may include comments about our plans and expectation of future performance. Forward-looking statements are subject to number of risks and uncertainties which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K and any of our other SEC filings for a more complete description of these risks.

Our statement on this call are made as of today, August 8, 2013 and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein, whether as a result of new information, future events, changes and expectations or otherwise for any reason.

During the call today, we will discuss adjusted EBITDA in the press release issued today and in the company’s filings with the SEC each of which are posted on our website. You will find additional disclosures regarding this non-GAAP financial measures and reconciliations of net loss to adjusted EBITDA.

With that, I will now turn the call over to Elephant Talk’s Chairman and CEO, Mr. Steven van der Velden. Steven?

Steven van der Velden

Thank you, Peter. And thank you to everyone who joined us today for our shareholder update call. I will begin today by providing an update on the developments that have occurred at Elephant Talk Communications since our last call. I will then turn the call over to Pat for an update on ValidSoft. Pat will then turn the call over to Mark for a recap of the company’s second quarter results. We will conclude by opening the call for questions.

Management believes more strongly then ever in our proprietary solutions and monthly recurring revenue business model. With nearly 90% of second quarter revenues generated from our mobile solutions and security systems operations. We believe the transformation of Elephant Talk from a telecommunications company to a software company is direct split.

Going forward, our mission is to provide an end-to-end service portfolio. Enabling and securing big data in the mobile cloud. Through our mobile services we empower Mobile Network Operators and Mobile Virtual Network Operators by providing a Tier 1, innovative, outsource mobile communication infrastructure.

This infrastructure provides a full suite of (inaudible) self-service and features that include a full range of support services, as well as the required third-party interface. In addition, our infrastructures able to provide cyber security technology, that enable organizations to secure old cloud and electronic-based consumer financial transaction channels within single platform.

We are very excited about that strategic direction of the company, as well as the increasing number of clients and partners that we have signed. We believe the current market valuation does not accurately reflect changes we’ve implemented and the programs we have made.

On today’s call I will focus on the following, first of all, the continued success of our core mobile solutions and security systems businesses. Secondly, I will provide an update on achieving positive operational cash flow and briefly discuss our current cash burn rate. Thirdly, I will provide an update on our progress implementing Elephant Talk’s proprietary Software DNA platform with Iusacell, major network operator in Mexico.

Fourth, I will discuss the two new telecommunications agreements we signed in July, with NEO-SKY in Spin and Axiom in the Middle East. Fifth, I will provide an update on the success we are started to see with Elephant Talk (inaudible). Lastly, I will summarize our successful efforts in strengthen company’s balance.

Turning now to our results, this firm operating momentum of our mobile platform and transaction security businesses in the first half of 2013 lead us to believe that our entire business has reached an inflection point, whereby Elephant Talk’s should be considered a provider or software and managed software solutions to our customers.

In the second quarter, mobile and security revenues were $4.5 million, a year-over-year increase approximately 61% compared to the second quarter of 2012. This was the eight consecutive quarter in which mobile and security revenue grew on a quarter-to-quarter basis.

Mobile and security revenue comprise nearly 90% of total company revenues, a miracle evidence of our transformation from the telecommunication business to the software and service business.

Margin, defined as revenues less cost of service increased significantly to $3.5 million or new high of 71% of revenue, compared to a margin of $1.9 million or 20% revenues in the year ago period.

For the six-month ending June 30, margins have improved from 8% in 2011 to 23% in 2012 to 57% in 2013. This growth is expected to continue.

Mobile and security are the core of our business and will continue to account for the majority for the company’s revenue and more importantly, the majority of margin contribution going forward.

Second, regarding the company’s operational cash flow position, I’m pleased to report that we were operational cash flow positive for the month of June. Our next challenge, we will be achieving this key milestone on a consistent basis. Once we achieve this, we believe we can leverage our high margin monthly recurring revenue model to provide returns similar to or even greater than that of the software industry.

We estimate operational cash flow by using adjusted EBITDA, defined as earnings before derivative accounting such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization, impairments, non-operating income and expenses, and stock-based compensation.

Our next target is achieving the first full quarter of being operational cash flow positive. We believe this is likely to occur in the second half of the year, as we see an increase in our security revenue from ValidSoft’s and generating recurring mobile revenues in Mexico and Saudi Arabia.

Another example of management efforts to reduce cash burn is evidence in the net cash used from operating activity, shown in the cash flow statement that was published in today’s earning press release.

For the first six months 2013 cash used for operations was approximately $1.1 million. We ended the second quarter of cash approximately $3 million. This substantial improvement in cash flow from operations for the first six months of 2013 is primarily attributable to increase revenue from our higher margin mobile and security business, which led to a lower net cash use in operating activity. In addition, we reduced working capital primarily to financing arrangements made with others.

This brings me to Elephant Talk’s deployment as Iusacell in Mexico. The deployment is on schedule, with the first test conducted with the senior officer of Iusacell back in June. We will begin migrating revenue generating mobile customers from Iusacell and ask (inaudible) subscribers to our Software DNA platform by the end of September.

We anticipate 1.5 million subscribers in Mexico will be added to Elephant Talk’s platform by the end of 2013, more than doubling the number of subscribers on our platform. Iusacell platform will have an initial capacity of 11 million subscribers and has the capacity to scale to 20 million subscribers in next couple of years.

The Iusacell implementation is an excellent milestone for Elephant Talk as it illustrates our ability to install end-to-end solution with the major telecommunications platform. We are very proud of our accomplishments in Mexico and expect our success there to translate into additional implementations of our software defined network architecture.

In fact in July, we made two mobile platform announcements that support our Mobile Operator and Virtual Operator strategy. NEO-SKY became the sixth virtual operator in Spain to be powered by Elephant Talk’s network and mobile platform.

NEO-SKY is targeting high-end corporate clients as Elephant Talk’s sophisticated solutions. NEO-SKY expects to reach 100,000 subscribers over the next few years. This recent expansion in Spain has established new sales initiatives and force strategic relationships that we believe will allow us to rapidly increase current revenue and further improvement availability.

In addition to our relationship with Zain group in the Kingdom of Saudi Arabia to provide our mobile platform services. We signed a long-term agreement directly with Axiom Telecom to provide Axiom with our dedicated mobile managed services platform that will enable them to offer custom mobile services throughout the region.

Axiom is the largest primary authorized retailer and distributor of leading international mobile phones of our accessories and PDA user in the Middle East. We are very pleased that Axiom has recognized the possibility of Elephant Talk’s Software DNA platform, local presence is crucial when it comes to successfully making use of any holding market.

Our common goal is to build a long lasting partnership that will create important revenue stream for both companies. More countries are opening up in the Middle East for new entrance like Axiom to offer mobile service.

Turning to marketing and full set innovative services will be important to capturing sizable market share in this region. We are very pleased to see that Axiom has committed substantial marketing resources that we are finding.

In North America, I’m very pleased to report that Elephant Talk North America, our U.S. based mobile enabling company that in April this year acquired the asset of Telnicity. Signed its first contract and recognized its first revenues will be at modest in the second quarter. We expect to be able to provide further details regarding this contract during the third quarter.

Overall, the transaction pipeline in North America is looking promise. We believe that the composition of the major customers we serve, Vodafone in Spain, Zain in Saudi Arabia, Iusacell in Mexico represents strong use cases for us as we look to bring Elephant Talk’s Software DNA platform into other markets.

Now for a brief look at Elephant Talk’s balance sheet. In the second quarter, the company raised over $13.5 million with $12 million from an equity giving. I personally contributed $4.5 million to the equity rates, strong indication of my commitment to the future of the company.

Portion of the net proceeds from the equity rates was used to repay the remaining balance on the March 2012 debt. In July, the loan that was executed in the second quarter from our member, the Board of Directors for approximately $1.3 million was fully converted in equity. As a result, this two transactions company is now essentially debt free.

With that, I will now turn the call over to Pat.

Pat Carroll

Thank you, Steven, and good day, everyone. Second quarter 2013 has been a very busy for ValidSoft. On the commercial front, our relationship with FICO/Adeptra continues to show very positive progress and as I previously mentioned, FICO/Adeptra was awarded a contract with a major U.K. bank for complete set of services it specifically involves the ValidSoft solutions at SIM Swap and Proximity Correlation.

Our contract negotiations continued in quarter two, we are now discussing deployment phase likely to be in either the third or fourth quarter of 2013. The ValidSoft services one part of a complete package with FICO/Adeptra can do for it and subsequently one in refund to these times RFP for renewal of the existing Adeptra services.

During the second quarter, the FICO/Adeptra platform was upgraded to seamlessly integrate our POS solution, which was greatly facilitates the deployment of our solutions in a totally integrated manner.

Regarding Santander, our SIM Swap continues to run very smoothly in production and as of today we have crosses in access of 9 million transactions. We are also currently discussing deployment of our POS solutions at Santander and anticipate this product will be live this year.

Another large U.K. retail bank is now planning a second activity correlation proof-of-concept for cross-border cause by some transaction in anticipation of a production implementation again this year.

They are currently working with FICO/Adeptra and ValidSoft in conjunction with the legal department in access what if any changes are required to existing terms and conditions, as well as the technical requirement for FICO/Adeptra integration of the service.

Along side this we have completed a highly success product with U.K. bank’s major credit card issuer and that would have positive in future, effect acknowledge by the issuer themselves. Discussions on this and a number of other points are ongoing at this point of time.

This progress confirms that our solutions are at the cutting edge of broad detection and prevention, solving mass duration at the core of electronic payment processing industry and adoption is well underway.

On the product front, we launched VALid-SVP with Santander into Verification platform and ValidSoft proprietary voice biometrics solution. VALid-SVP is a leading-edge voice biometric engine that support text-dependent, text-independent and conversational voice verification, which is biometrics post knowledge. We believe that VALid-SVP is unique and that it is costly built to operate in the mobile environment and programs to except short occurrences.

Based on our performance and the trials held by the U.S. government National Institute of Standards and Technology better known as NIST at the end of last year. We now believe that we have been number one commercial voice biometric engine available in the world today of both the functional and technical perspective. NIST is an effective benchmark for the evaluation of voice biometrics capability in the world today.

On the IP front, we’ve continued to invest in and grow our unique intellectual property portfolio by filing for several new patents which combat sophisticated fraud and even more sophisticated right.

In terms of patent filing, we have filed for patent protection for the following new inventions, in-band transaction verification or ITV. This is a new in-band method for detecting and preventing Man-in-the-Browser and Man-in-the-Middle attack you would have thought.

[Call Forensic Analysis] or CFA, this is a method to detect forger attack by transaction into the detection of compromised telephone lines between the bank and its customer. Browser manipulation detection or BMD is Man-in-the-browser combating inventions presents among several things, credential harvesting, transaction manipulation and transaction injection.

Most importantly, zero latency correlation or ZLC. This invention provides a method which leverages the increasing penetration of smartphone and when integrated with mobile wallets or apps, we have the capability to perform real-time proximity correlation and other fraud prevention method without highly dependency on mobile operator.

This capability is a crucial point in our mobile platform and in this we play a key role. In addition to these patent application filed this year, we also have a number of other inventions which we assume to also protect the patent application. In short, we are a key player and advice the owner in the area of sophisticated fraud prevention and in addition to protecting our existing, multi-factor authentication patent and patent applications.

We have filed patents in multiple jurisdictions including the EU, USA, Russia, China, Brazil and others. We’ve been patiently building our intellectual property portfolio, commercializing our security solutions and establishing relationship that we believe are essential to create maximum value for our shareholders.

Our vision of a transaction-based security model whereby our partnership will enable access to multi-billion transaction pool have taken more time than we expected but we are confident in the continued growth throughout this year and future years.

On this positive note, I would like to conclude and turn the call over to Mark Nije so that he may discuss our financial. Over to you, Mark.

Mark Nije

Thanks Pat. I will now discuss the company’s financial results for the second quarter of 2013. I will begin with revenue results for second quarter. Revenue for the higher margin mobile and security solutions business increased approximately 61% year-over-year to a new level of nearly $4.5 million and accounted for nearly 90% of second quarter revenue.

In the prior year period, mobile and security revenue accounted for only 39% of total revenue. Total revenue for the periods was $5 million, down 30% year-over-year when compared to total revenue of $7.1 million for the second quarter of 2012. The majority of the decrease was the result of the 88% drop in the lower margin landline revenue, down to $0.5 million.

Turning your attention now to second quarter reported cost of services and margin as we defined as revenue minus cost of service. Margin for the second quarter increased 86% year-over-year to $3.5 million and represented approximately 71% of revenue. This compares to margin of only $1.9 million or 27% of revenue for the prior-year period.

The margin improvement was driven by an increased percentage of revenue coming from the higher margin mobile and security activities. The increased percentage of higher margin revenue contributed to a $3.7 million or nearly 72% year-over-year decline in cost of services from $5.2 million in 2012 to $1.5 million this quarter.

Turning to SG&A, reported SG&A of $4.5 million remained relatively flat for the second quarter compared to the $4.6 million in the prior year period. Adjusted EBITDA for the second quarter was a loss of $0.9 million which is an improvement of $1.8 million compared to the loss of $2.7 million last year.

With this brief financial update, I would like now to turn the call back over to our CEO for final comments. Steven, the floor is yours.

Steven van der Velden

Thank you, Mark. This concludes management’s update portion of the call. I would now like to open up the floor for any questions you may have. Thank you.

Question-and-Answer Session


(Operator Instructions) And your first question will come from the line of Mr. Edward Woo from Ascendiant Capital. Please go ahead. I apologize it will be (inaudible). Can you go ahead sir with your questions?

Unidentified Analyst

Yeah, Steve. A good quarter guys. I appreciate the update. Wanted to ask general question about number of users that the company is expecting from the Zain-Axiom contract. Is that an overview you guys alluded to, a number of users are expecting from Iusacell and Vodafone. We haven’t heard anything with regards to the Axiom and Zain. What we’re expecting to achieve from them? Thank you.

Steven van der Velden

Thank you. Yeah. Very good question, of course, actually, we have not given any guidance in this respect and in honesty, we are also reluctant to do so. But in the past, both Axiom as well as Zain as handful of allies regarding the opening up of the Saudi markets like three virtual operator entrants has speculated that it could easily grow into a 10 million to 20 million subscriber business to be held by virtual operator.

We believe that Axiom is, together with Zain, very well positioned to grab big slice of that because first of all they are our local company with local presence, being the largest distributor of handsets, PDAs, airtime currently in Saudi Arabia and many other markets. So they are very low anchored locally. And we believe that I think combination with being using the slow most of the three mobile operator networks being Zain in combination with our sophisticated platform positions Axiom in a very good entry for this market.

Again, I think that they could ultimately grab very serious slice of the market that is estimated to be somewhere between 10 million and 20 million customers. But I would rather like to leave it to that because so far we have not given any guidance. And I just wanted to give you some color on this market but I would like to leave it to this.

Unidentified Analyst

Thank you.

Steven van der Velden



(Operator Instructions) And your next question will come from the line of Mr. Edward Woo from Ascendiant Capital. Please go ahead.

Edward Woo - Ascendiant Capital

Yeah. Thank you for taking my question. It looks like you guys are having pretty good growth in Latin America and the Middle East and now possibly deal in the U.S. Now how do you see other communities on a global basis going forward. Are you going to stay within these three regions or do you think there is more opportunities out there?

Steven van der Velden

Thank you. Let me first address this from the platform business point of view and then I may hand over the call to Pat for his specific views on the security side of our business. With respect to the platform business as I said a little while ago, the fact that we are now having three platforms in place that will hopefully start to generate substantial levels of revenue in each of the three regions, the Europe, the Middle East as well as in Latin America.

We feel that we are building up excellent use cases to ultimately address the needs of many, many mobile operators around the world. And surely, we’ll ultimately not limit our focus to these three markets. But we believe that in those three markets, let’s say Europe, Middle-East and Africa and the Americas, there are so many opportunities where we could serve virtual operators as well as mobile operators with our platform that this will be the first angle of our attention.

And we will concentrate the sources in these regions using of course the references that we are currently building up. After that, if good opportunities would rise, in Asia and the Pacific and so forth we would certainly entertain the idea to go after those as well. But that would not be our short-term vision. Pat, maybe from your side, you want to add something from the security business perspective?

Pat Carroll

Yeah. I mean I think from my point of view, it will -- I think I made the point on the call that things have taken longer than we would have liked them in terms of the traction that we were guessing in the market place or proceed with you would have thought months ago. But what’s started to happen now is the adoption of a product services and in fact ---- the only thing the market has got bigger because of this whole movement towards mobile and the new expansion apparency under-band and on-band areas.

So those are the whole mobile payments work. Without doubt the largest target possible for us in the world would be U.S. market. And we’ve made tremendous head roads progress now in U.K. with a great benchmark against which we have launched out to get better country.

So we are extremely excited about Europe as a market where we are today, the U.S. certainly is the largest market for us. And also the Americas themselves and the potential that they offer, we start to look at some of the chances that they have and the volumes of customers that it was in the banking frame on those areas as well. So I think it is quite exciting thing (inaudible) the group in general.

Edward Woo - Ascendiant Capital

Great. So in fact, the platform that you have reaffirmed now, how much incremental cost is that to expand it in new region or is there a significant cost involved to be able to subtract it out possibly in other regions of the world?

Steven van der Velden

I would say, good question. Well, let’s spread out in basically three elements. First of all, the hardware, any new platform would costs normally a few million dollars to deploy. We are in a fortunate position to be able to fund that mostly under financing as all these onerous like to be part of these next-gen platforms that can serve us in the mobile industry.

So the hardware challenges finance them are relevantly limited. Secondly, of course, we have our software. As we discussed the few times before, we own most of the software that had to be redeployed and aside of giving us pricing capabilities that also provides us without additional investments, the possibility to provide end-to-end services without huge third-party costs.

So also the investments in that area would be limited. I would think that probably the largest investment would build up regional teams with all the capabilities and know-how and knowledge of the markets, knowledge of the specific cultural elements that may play a role in those markets. And that’s actually the largest cash out investment that we would be having to do in case you want to spread out.

Today, we have three teams focused on three markets supported by our overhead teams, Spain and China and elsewhere. And we feel very comfortable that once we have these three platforms fully up and running, servicing million and millions of customers that we can easily spread out, create a force and maybe down the road even at 15 to address other needs in other regions, because ultimately each team should be capable of running a couple of platforms in each region.

So from that perspective, we believe that the scalability of the platform business is really there. And only limited investments would be required to add up capabilities in new markets and open up new platforms over there.

Edward Woo - Ascendiant Capital

Great. Thank you and good luck.

Steven van der Velden

Thank you, Ed.


And your next question will come from the line of Mr. [Robert Scott]. Please go ahead.

Unidentified Analyst

Hi, Steven and Pat. Great quarter. Thanks for the update. Steven, a couple of times you have said that the Iusacell is going to be a 1.5 clients and baked on something like 6 million. We have capacity of 10, why is there a constantly reminder that we are going to have the capability for 20 years, based on new initiative that we’ll -- that makes it look like the opportunity in Mexico is over 10 million?

Steven van der Velden

We believe that down the road that opportunity definitely is over 10 million, but let’s step back. And off course, we are always building platforms based up on the requirements given to us by the mobile operator. Iusacell is the third carrier in Mexico with an ambitious expansion program.

They switched from CDMA only into GSM 3G and later on LTE as well. They created a network sharing agreement with Telefonica providing them exactly the same network as Telefonica in Mexico, basically providing an excellent coverage throughout the region whereas in the past they may have been hampered by a limited resources and limited coverage.

So this all adds up to an ambitions plan by Iusacellto expand their markets and to expand the capabilities to offer sophisticated services driven by the Elephant Talk platform. That made Iusacell to believe that with those tools in hand they surely can expand their business. Aside of the fact that a market as Mexico is still growing even though penetration rates are relevantly high.

We believe that Iusacell will be able to increase its market share over time and thereby adding a few million customers at least. That was the background why Iusacell stipulated in their requirements to have a platform with their capability to handle at least 10 million customers. And of course, imagine that over the next couple of years, they will indeed be able to drive their business in that direction, there would probably be additional capabilities to expand the market even further.

And that’s the reason why ultimately even though the platform today is not able to carry 20 million customers but the architecture has made such that with limited additional investments, the platform can indeed be expanded into 20 million customer, thereby providing Iusacell the tool to seamlessly grow into their mark.

Unidentified Analyst

Thank you. And you also mentioned the hardware of the bandwidth, is that relevantly off the shelf hardware or is it a specific IBM computer or a Hewlett-Packard or -- what exactly is it?

Steven van der Velden

It’s a mix basically of very, very sophisticated processing platforms. You have to understand that the whole reason for our existence is to be able to process huge data amounts in real time so not in sequence but in parallel. You need to have very big processing capabilities and storing capabilities to make that work especially if you do this for millions and million of customers simultaneously.

That’s really to drive our business, that’s kind of the unique selling point that we have. And of course platforms -- the most sophisticated platforms like companies like IBM have are required to make this reality. So those are even though they are highly specialized, kind of generic processing platforms.

Next to that, you have, of course, specific mobile or telecommunications oriented hardware that you need to seamlessly integrate with the rest of the platform. So if you look at overall, I would say that’s possibly around half of such CapEx investments albeit generic computing platforms and the other half would be highly specialized telecom related platforms blended in together into our single platform approach.

Unidentified Analyst

Thank you.

Steven van der Velden



(Operator Instructions) And your next question will come from the line of [Steven Bethem]. Please go ahead.

Unidentified Analyst

Good afternoon, everybody. Steven and the team, please apologize for my English. I am not so fluent like everybody else. I would like to start by saying that I have been a shareholder now almost three years and proud. And I would like to give a compliment to Martin Zuurbier, whose efforts are without limitation. And I believe he is a very important player in the success of Elephant Talk.

Having said that, I have a question, several questions actually. I have a question about the stock-based compensation which has gone up, if I’m not mistaken from 1.5 million to 2.9 million in this quarter, my question is why? That’s one.

I have a question about the warranties. Please stop me if one question is enough. I have long-term liabilities, do warrant liabilities have gone up from 0 to 2.4 million in this quarter and I would like know why? The net cash compensation has increased significantly I would like to know why as well.

And last question, sorry Steven but I have a -- I would like to ask it can you give me an idea on percentage wise how much percentage of the fantastic revenue that we have comes from ValidSoft versus the efforts of Martin Zuurbier and his team? That’s it.

Steven van der Velden

All right. Well, it’s a whole range of questions. Thanks, Steven, because they are all good. Actually, we are not splitting out the revenues between the security and the mobile services operation for good reasons. And one of the reasons is that sometimes it’s a blurred picture because those platforms or those activities reside on similar platforms, use similar resources, use similar actions.

But I can assure you that those businesses are developing in the right direction. And we are happy to have those businesses as being part of our overall operation. Then addressing the question with respect to the stock-based compensation, yes they indeed went up.

And the main reason for that is that this spring was the first time that we conducted an overall performance-based analysis of our staff and that included granting specific rewards to reflect average, good and excellent contribution to the company. And that basically was the driver for opening up additional options to be rewarded -- to be given to our staff to reward their efforts.

With respect to the warrants, I would like to hand over the call to Mark who is in a better position to address the growth in warrant liabilities.

Mark Nije

Yeah. Thank you both Stevens. The warrant liabilities last year same period we did not have any warrants attached to certain financing instruments. And since we closed a registered direct now in June raising to $12 million, there were warrants attached to it as equity kickers and on the U.S. GAAP, we were required to value those warrants and enter them into the reporting. And so that’s the reason why last year, there were no warrant liabilities in the books and this year following the recent fundraise they were to be valued.

Steven van der Velden

And then with respect to the net cash compensation, Mark, you want to address that as well.

Mark Nije

Yeah, actually I’m wondering Steven what you were referring to the net cash composition went up.

Steven van der Velden

Yeah. I am not sure what Steven was referring to. Of course, if we look at the expansion of the company, for example, the integration of the ETNA team in North America and the further growth of the capabilities was in the company led us to hire more staff that might be part of the reason for more cash compensation but aside that I believe that there was kind of in line with our general development in SG&A.

And as Mark pointed out a little earlier, actually SG&A was pretty stable from $4.6 million in Q2 last year to actually $4.5 million in the recent quarter this year. So actually from that respect, I don’t think there was a substantial increase in cash compensation or in any other element in our SG&A.


And your next question will come from the line of (inaudible). Please go ahead.

Unidentified Analyst

Hey guys, it’s (inaudible). Congratulations on another good quarter that’s eighth sequential quarters of growth. I have two questions. The Iusacell I know it was asked before 1.5 million SIMs but I think I need you guys to be very clear. You believe very strongly that there will be many more SIMs coming after that is what I think I am hearing, please validate that.

And the second question I have is for Pat. I think I’m not clear we mentioned deals with U.K. banks. I’m losing track, can you please verify how many U.K. banks, we have deals with, given that there are only three or four big banks in the United Kingdom. Thank you.

Steven van der Velden

All right. Thanks George. Let me first address the Iusacell question and then I’ll give the floor to Pat to answer the question about the U.K. banks. As you have seen in one of our releases earlier this year, I think it was June when we conducted the first call with the CEO of Iusacell. It was actually the CEO of Iusacell that was called in to say that he expects by the end of this year to have at least 1.5 million of subscribers on the Elephant Talk platform.

I mean so far we have not given any guidance about a higher amount of subscribers down the road. But of course, you can easily conclude yourself from the fact that the requirements of the platform called for a 10 million much better platform, 10 million subscribers and the fact that Iusacell has more than 1.5 million customers that ultimately indeed we could expect more customers down the road.

But I don’t think we would have given any guidance in that respect. And I don’t think it’s appropriate to do so now. And I would personally already be extremely happy if we really did see the 1.5 million customers by the end of December because that would be a huge milestone as a company more than doubling our current amount of subscribers on our platforms and really adding to the use cases so that we can also address a lot of needs of comparable virtual operators and mobile operators like Iusacell and their customers in that region and also in other region.

So I believe that that first focus on these 1.5 million customers let’s cross that bridge and then let’s take it from there. And of course, we ultimately will be prepared to handle many more but I think it’s now too early to simply speculate on what that number could ultimately be. Pat, I would now like to give the floor to you with respect to the U.K. banks.

Pat Carroll

Yeah. Hi George. Well, I guess I’d like to say the U.K. market is not a huge market by any means. So definitely five major operators in terms of the part of (inaudible) that we offer. There are other seven (inaudible) behind that. So Adeptra/FICO have relationships with everyone of the major banks, one, and also the banks that I have relationship with, we have now -- already they have not been awarded contracts in excess of 50% of those. So and that’s a first case right now, with the contract situations between Adeptra/FICO those client that we are close to about 60% or near about that.

Unidentified Analyst

Okay. So that tells me that ValidSoft has agreements through Adeptra or FICO with all apart from one of the big U.K. banks, is that correct?

Pat Carroll

Basically if you look at what’s been happening and basically what happens is that FICO/Adeptra have to be end of quarter businesses at the end of whatever that contract period is. And clearly, if they don’t do that, they’re expanding the services through those to client to include the part of services around securing the channel that’s out to be crucial.

Unidentified Analyst


Pat Carroll

There is no point in offering (inaudible) because it involves communication with your customer base that you found in your channel. So by virtue of the -- if you like to tendering for those business, you’ll also finally be included as a part of those tenders.

Unidentified Analyst

Okay. I got. That’s actually very significant and more significant than I imagine and what is worth guys if I felt the need to ask that question, my guess is that there are probably and likely many more shareholders wanting to ask that question or at least they’re not clear about just how positive it really is but that’s fantastic news? Thank you.

Pat Carroll

All right.


And your next question will come from the line of Mr. Robert (inaudible). Please go ahead.

Unidentified Analyst

Hi Pat. First FICO/Adeptra question, I think it sounds like the installation is complete or near complete, how easy or difficult is it for any given FICO bank to implement SIM Swap or VALid-POS now?

Pat Carroll

Robert, Pat. Yeah, thanks for asking the question. You’d recall that in the course of my update I mentioned that during Q2 we had already FICO that have fully updated the Adeptra bank belongs to incorporate VALid-POS. Elephant Talk is already in there. VALid-POS is dialing and that means that clients have a relatively easy path of incorporate that within their environment because the environment is already in there.

We have do sometimes to (inaudible) but it’s not massive (inaudible) by any means and we would feel very comfortable that from the point of a bank, we want to classify with either SIM or POS that we have four to six days period. We could have those clients in production.

If something really happened like that in reality because what happens is you get the (inaudible) if the bank is involved (inaudible) process and procedures and lot of formal projects. But in terms of the ability to get the clients up and running we can do that in a very, very short period of time.

Unidentified Analyst

Yeah. Thank you.


Gentlemen, there are no further questions at this time. I’ll now turn the call back to Steven van der Velden. Please go ahead sir.

Steven van der Velden

Thank you. In closing, I’m more optimistic than ever in the growth trajectory of our company. It was this optimism that left me to personally make $4.5 million investment in the company recently. Management believes we’re at a critical inflection point in the value of our enterprise as we continue to add users to our mobile platform in Mexico, Spain, Saudi Arabia, as well as increase the number of transactions process with financial institutions for cyber security technology.

As such, I anticipate that our efforts will be favorably recognized into public market providing significant shareholder value for our long-term investors and those who believe as I do the strength of our monthly recurrent subscription and transaction-based business model.

Everyone at the Elephant Talk Communications is very excited about the company’s prospects of future growth. I would like to thank everyone for joining us on today’s call and thanks again to all of our long-term shareholders for their patience and commitment to the company. Thank you and have a great day.


Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your line.

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