Elephant Talk Communications (ETAK) Q1 2016 Results - Earnings Call Transcript

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Elephant Talk Communications Corp. (ETAK) Q1 2016 Results Earnings Conference Call May 17, 2016 11:00 AM ET

Executives

Valter Pinto - Capital Markets Group

Hal Turner - Executive Chairman

Gary Brandt - Chief Restructuring Officer

Erik Kloots - Vice President, Finance and Controller

Analysts

Lisa Thompson - Zacks Investment Company

Operator

Good day and welcome to the Elephant Talk Communications Corporation 2016 First Quarter Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Valter Pinto of Capital Markets Group. Please go ahead.

Valter Pinto

Thank you, operator and good morning. Thank you for joining us for the Elephant Talk Communications 2016 first quarter financial results conference call. On our call today will be Mr. Hal Turner, Executive Chairman, Mr. Gary Brandt, Chief Restructuring Officer and Mr. Erik Kloots, Vice President, Finance and Controller. As is customary following management’s discussion, there will be a Q&A session opens to all participants on the call.

Before we begin, I’m going to review the company’s Safe Harbor statement. Remarks made on this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. All forward-looking statements are inherently uncertain, and they are based on current expectations and assumptions concerning future events or future performance of the company.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions, and speak only for the date hereof. Evaluating such statements, perspective investors should review carefully various risks and uncertainties identified in this conference call and the matters stated in the company’s SEC filings. These risks and uncertainties could cause the company’s actual results to differ materially from those indicated in the forward-looking statements.

With that, I would like to turn the call over to Mr. Hal Turner, Executive Chairman of the company. Hal, the floor is yours.

Hal Turner

Valter, thank you so much, it’s appreciated. And I want to thank everybody on our call today for joining us for Elephant Talks first quarter 2016 financial results conference call. On today’s call we will further elaborate on the vision that we’ve been expressing to you in our prior communication as well as the evolution of Elephant talk and some of the opportunities that we are pursuing to make Elephant talk even better. We’ll also discuss ValidSoft and the recent appointment of Pat Carol as the President. And finally, we are going to bring everybody up to-date on our ongoing restructuring.

As we begin this call today, I’m very pleased to tell you that our company is better; it’s a more viable company than it was six months ago. We are burning substantially fewer dollars monthly, we have a better, tighter focused team and we are extracting more and more strategic results from this company. And we and the management team are continuing to do the things that we have said we would do and we are going to continue to do this to recreate this business and establish its ability to profitably grow once again.

This includes some of the things that you’ve heard me refer to and you are going to get a lot more detail in a moment, but we are approaching cash neutral operations on EBITDA Gary and Erik are going to really tell you more about that later. We’ve transformed and restructured and essentially remade Elephant Talk and that’s looking at the people, every process, every business model that is before us and positioning ourselves to sustain our growth and this will continue because it has to be an ongoing evolution of the business. And again, Gary and the team will provide some more contexts momentarily.

We see more substantial progress on our horizon and will continue to pursue all of these opportunities with a deep passion that we all bring to the table and enthusiasm and vigor to succeed in this business.

As we’ve reflected on our first six months which is covering the period November through May, when I was asked to join Elephant Talk in November of 2015 and following my due diligence, the time horizon that was applied to really understanding what our opportunities were and how we could differentiate, make a real difference in the market place was a three to five year horizon. It was an absolute given and a very very clear mandate that in the short term we knew we had to restructure the company for survival and to ultimately be able to grow again.

We immediately began the review of all segments of our operation and with a very rigorous and determined view point of what is actually required to make this company work. We began to eradicate the operational and financial issues, one by one that were quickly pulling the company downward in a spiral.

We’ve largely accomplished these highest priorities that we have deemed necessary in the Phase I of the overall restructuring. We are now well in the Phase II and we are on track and you’re going to hear more about that in a moment from Gary.

But the longer term question that we ask ourselves was why? Why take on this opportunity? We knew that we could only do so if we believe that there was really a long term strategy that would allow us to create some real value and sustain a long term successful pad with customer wins in the market place, and most importantly, the ability over this period of time to really differentiate from our competition.

Over the past several months, we’ve rapidly changed this company; we’ve executed the processes that are fundamentally transforming it from its history, a very poor performance. It’s history of lack of good business judgement. Its history of poor decision making in my view point and miss milestones all around. It was these conditions that affected our brand in the market place with our customers and in the investment community and in fact with every stakeholder we’ve got.

So our transformation is well underway and it’s being underwritten by one key ingredient and that’s our technology and services shift to full cloud services deployment that’s offering our services as a platform, that’s offering open ability to integrate applications and a host of services to meet the needs of our communication service providers, the enterprises and the communication needs when all things are connected. And this really becomes the retail focus that all of our customers [Indiscernible] to us.

The continued transformation is also underpinned by the real acknowledgment that we’ve got to better automate and fully integrate and that we’re going to offer things on software as a service and platform and infrastructure as a service model, where everything is delivered truly on-demand and really looked at on a usage based model. This contrast very much with the bespoke managed services single customer used model under which we operate today.

But I should note that that model still will play a key role as we go forward. We just have to have a continuum of solutions that go all the way from the single managed service all the way to cloud and we’re well on our way to doing that. We think -- we spoke in legacy business does provide us a real credibility in the market place and it’s a real launching pad for our future growth and in fact I can tell you equivocally, unequivocally that cloud based providers end it where we are in this position today.

The focus for our business plan over the next three to five years has three really clear identifiable strategies. First, we are focusing on the core markets and that’s our communication service providers. These are the large carriers for tier 1s and now moving into the tier 2s and the tier 3 operators.

Secondly, we are focusing on enterprises. These are the large corporate entities in campuses, many of them by the way are the customers of our carrier communication service providers but they can also be standalone customers for us. And these are the people that want to manage their mobile spend and deliver a unique set of functionality leveraging our platform and our cloud delivered services.

Third and ultimately is use of our enabling software that we have developed, think about an exchanged mentality. And think about all these things being connected in the market place and think about the big data needs that have generated from there. And think about the security needs that come from all of these items and elements communicating with each other via software. It’s helping solve their world of chaos that’s produced by this growing mobile computing environment that we think is an ultimate weapon in use of the software developed by Elephant Talk.

The critical component to our strategy is security and this comes in the form of trust and authentication of transactions. If you think about it, security and the whole issue of cyber security, it’s a horizontal threat [ph] that really runs through everything, whether it’s the device you hold in your hand, whether it is your desktop phone, whether it is your laptop and the ability to make sure it’s’ you and that the device is where it should be and we think we’ve got a secret weapon that is very very powerful through our voice biometrics as ability to better authenticate and using the proven cloud based model for our clients and we’re going to highlight that. We believe that this exemplifies the value that ValidSoft brings to Elephant Talk. And especially if we take advantage of being the one company that we are instead of two independent silos that rarely even communicate with each other over the prior six or seven years.

It’s also the reasoning that we’ve applied to ValidSoft and this logic that has had an [Indiscernible] as President of Elephant Talk. This is an additional assignment to its current duties. And it makes sense to us to synergistically operationally come together because we are one company. And we maximize the collective value by putting the best people who have got the domain experience into the positions that really matter, not only for preservation of our current customer setting growth of that current customer set they are carrying us forward into these future plans that I have laid out.

We hold on just a second folks, -- my screen went black on me, I apologize. So it’s all of this together that say that we can do a better job in working with ValidSoft and Elephant Talk. So this really brings us to a rearticulation of the direction that we are going to take and the synergies that we are continuing to extract. So as you well know we had an offer to purchase ValidSoft and it was presented and it was not able to be closed. So we are certainly going to continue to look and when an offer is presented, it can’t be closed and one that makes sense for the enhancement of our shareholder value, we will move forward at that point in time. But for now, we’re going to leverage these assets in every operational manner possible and we believe that this is the best way to enhance the value of our company and all the interest that we serve today.

There’s really just too much opportunity for us to wait and not to be operational mindset of seeking synergies of the good people that we’ve got inside the company. So we are going to march forward with the best people, going to use the right tools that use this cloud based operations and we’re going to bring the best available software and technology whether its acquired outside or developed in-house for the market place to really realize the value that we could bring to it. We think ValidSoft has a very very important role in this and we think that its inherent value really exceeds the contemplated sales price from the earlier transaction. We are taking every step to capture this value with Elephant Talk.

It’s also worth noting that whether ValidSoft is sold or not the same strategy is going to remain in place, because Elephant Talk would be a channel partner of ValidSoft. The value will remain same for our customers and our stakeholders by the actions we are taking. With that, I do have a great pleasure in welcoming Pat Carol as our President. It’s during this time that I’ve been at Elephant Talk that I’ve got to know Pat and I’m very pleased that we share very much a same strategic vision of what the future can hold. Now, he too understands the power of Elephant Talk and the customers and the communication service provider of marketplace and everything that comes out of mobile payments and the authentication capabilities. And he also understands that working as one is really going to be a dramatic departure from the six prior years and really open up what we think is real value to our bottom line.

With significant sales opportunities that are being worked by one convert sales and sales [Indiscernible] we also have a human resources available to capture those opportunities, getting the right people in the best position is our job number one at this point. Pat’s also got a very deep understanding in the sales process and how to build the sales team. And that’s going to be critical for all of our stakeholders as we go forward and realize our mutual ambitions.

The disappointment Pat is focussed on creating value for one company, Elephant Talk as opposed to the former rigid, very rigid silos that existed with Elephant Talk and ValidSoft being viewed and treated entirely separately. Pat will now have the full Elephant Talk back office support for sales and marketing, development, operations and customer delivery at his disposal. The companies will remain separate legal entities with ValidSoft being as it is today wholly on subsidiary of Elephant Talk.

All of these areas of our progression communication service providers to enterprises and to all things connected, all being authenticated in security protected by the focus of our primary customers, the carriers who today are making their own announcements of their progress in the market. These are the ones who are asking us to help them march into the future with mobile cloud services delivery with enterprise customer solutions, and with internet of things or all things connected solutions. It is this strategy that defines our strategy and naturally carries us forward from our roots in dealing with the communications service provider of market place.

Realizing these strategies for us, it recognizes the substantial problems and pain points that our customers are experiencing. And by addressing each of these problems and opportunities with our strengthened team, our technology and our value added it represents a really large and growing opportunity for Elephant Talk.

So I’d like to stop now and I’m going to yield to Gary Brandt who is our Chief Restructuring Officer who came in with me about six months ago, and Gary’s going to provide an update on our details of our restructuring and the results for the first quarter. Gary, over to you please sir.

Gary Brandt

Thanks, Hal. And thank you and Valter, many of my comments will be forward-looking in nature and I further caution you to apprise yourself of the rest of our business. We are in the midst of a three pronged restructuring strategy including actions that we deemed critically necessary to improve our business. In Phase I, we focused on quickly cutting cost to stop emerging cash. This included reducing headcount and closing unnecessary offices. Ideally, the sale of ValidSoft would have closed and provided important liquidity but we had to take a step back, given that the [Indiscernible] was unable to close the transaction as contemplated.

Our senior lender had been very patient and supportive as we seek additional sources of working capital.

In Phase II we are re-examining everything again, focusing on what resources we need to produce the greatest results including benchmarking against industry leading revenue productivity measurements and finding opportunities to integrate our unique security technology within our mobility application.

In Phase III, we expect to grow again and we're broadly engaged the market with the portfolio of services, a professional salesforce and bolster our good employee throughout the organization. We are currently in Phase II of our plan. In November of 2015, we had 264 employees. Last March, we had 303.

As of March 31, 2016 we have reduced our headcount by 69 people for the restructuring process to 195. And as we have previously disclosed, revenue per employee is a key metric, we are monitoring closely internally.

At the end of the third quarter, 2015, revenue per employees was 47,000. At the end of 2016 first quarter revenue per employee was approximately 67,000. We remain on-track that by the end of the second quarter 2016, our revenue per employee will increase to approximately 90,000. On that basis we will have improved to just six calendar month our revenue per employee ratio by 70%.

During Phase II we are focused on more than doubling this productivity to further workforce rationalization, organic revenue growth including new services and potential acquisition of complementary and accretive businesses.

These steps will have a dramatic impact on the company and set the stage for accretive growth. Workforce reduction expenses, primarily related to employee severances and asset write-offs totaled $0.6 million for the first quarter of 2016. For the six months period from November 30th to March 31, 2016, actually five months or four months, the workforce reduction expenses totaled $1.9 million.

These restructuring activity yield pro forma cumulative operational expense saving of $4.5 million on an annualized basis taking in account just the payroll and the consultant fees alone for the full time equivalent.

The expected results of these restructuring will have us cash flow neutral operating position during the end of the second quarter of 2016. By the end of the third quarter 2016, we expect to be in modest operating cash generated position, positioning us for material organic growth from the yields of having implemented a major upgrade for sales, marketing, product development and management team capability. All will never wavering from the understanding that we must protect and grow our existing account and continue to provide excellent service.

Turning our attention to the first quarter results for the period ended March 31. Revenue for the first quarter 2016 totaled $3.3 million compared with $5.0 million for the same period year prior.

The decrease was mainly attributable to $1.6 million decrease in revenue due to the termination of the Iusacell contract in 2015. Other decreases in mobile, security revenue and negative currency impact.

Cost of service for 2016 first quarter totaled $1.1 million compared with $1.9 million for the same period of the prior year. General and Administrative expenses for the first quarter 2016 totaled $3.5 million compared with $3.0 million for the same period the prior year.

Total amount for workforce reduction severances was $638,000. Excluding these restructuring charges, the general and administrative expense decreased by 4% year-over-year.

This doesn't tell the whole story related to savings generated through restructuring as there been a further reduction of $0.7 million in capitalized expense which obviously flow through the operating expenses.

The real measure is that excluding severance costs we have reduced overall quarterly management personnel expense by $1.2 million between Q1, 2015 and Q1, 2016 from $4.7 million to $3.5 million.

And based upon April result, second quarter is on-track to be at least $0.5 million lower than Q1, 2016. Other SG&A including rent and travel among others line item is down 27% year-over-year from $1.5 million to $1.1 million.

Net loss for the first quarter of 2016 totaled $4.3 million compared with $2.1 million for the same period the year prior mainly attributable to the absence of the Iusacell revenue in 2016 and the impact of the restructuring charges in the first quarter of 2016.

During the first quarter 2016, the Company consummated a private placement of approximately $2.2 million for working capital purposes. Total raised to date under this private placement offering totaled $3.5 million.

I'd now like to turn the call back to Hal. Hal?

Hal Turner

Gary, thank you very much. So, ladies and gentlemen, now we'll move to the conclusion. I'd like to point out that this progression that we are taking the company through is fundamental change we believe is moving the company from a legacy telco company into software and services company.

And think about salesforce as a model for what we're doing. We believe that as we continue to move to the software and software delivery of these services versus just plan infrastructure and doing in through a platform and this will hopefully ensure that we're viewed with the higher multiples that certainly come from the software environment and that we are able to truly come forward with a fine tuned service offering with each customer based upon this cloud.

This is a dramatic shift of the current Elephant Talk from a consulting and built to a spec model into the solution based software services company. But it’s one worth taking and it is well underway quite frankly. The shift will move rapidly, the closer we align our ourselves to ValidSoft operating a business model with the success that they have already in the point a full cloud model for both sales and operational performance.

In the short amount of time, we've accomplished a lot. The expected results of our restructuring will be greater revenue per employee reflecting the proved productivity. And while we are essentially approaching cash neutral now, we certainly expect that the last half of this year is going to be modestly accretive and that it will in fact position us to grow.

Our financially improved efficiency and platform is also going to allow us to add additional subscriber based revenues both organically and through consolidation. We will deploy a full cloud based version of this platform services with our proven MNO capabilities.

It's going to include this full automation and integration of the security enhanced software and it will be a platform as a service. We are all very sympathetic to the fact that many of our shareholders have been with us for a long time waiting on for in their mind when will value be reflected in our share price.

We're very appreciative, sticking by our side and working with us. We've been diligently and very hard to achieve the successes for all of our stakeholders that are required and are deserved.

I'd like to leave everyone with last thought before we move into the Q&A, that is in order to move towards this growth, the areas that we've outlined we know that we've got to protect to grow our existing revenues while maintaining these service levels. That is our job number one.

Organizational from top to bottom we're positioning ourselves just to do that as well as now to grow from a sale side. With the input of ValidSoft staff and PaaS leadership we believe we're in and even stronger position to realize this.

We believe that based upon management's current strategic moves, our collective successes that we will be reflected very differently in the marketplace and the markets till the coming weeks, months and years.

Our thanks is offered to each of you for your support and you interest in Elephant Talk and we look forward to briefing you in our next call following our close of Q2, 2016.

With that, my remarks are concluded. Gary, Eric and I are now available for questions. Operator, over to you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Lisa Thompson with Zacks Investment Company.

Lisa Thompson

Good morning.

Hal Turner

Good morning, Lisa. How are you?

Lisa Thompson

Well. Let's go into the numbers. First off I noticed that your gross margin went up a little bit. Is that sustainable? Is that continuing to improve this year?

Hal Turner

It is sustainable and it is improving for a number of reasons. One is the actual number of people that are calculated into the gross margin. And secondly is our view of pricing where we can get higher margins for value added products versus some of the more commoditized things. But I will turn to Gary and let him drill into that a bit for you. Gary, if you would please.

Gary Brandt

Hi, Lisa.

Lisa Thompson

Hi.

Gary Brandt

Some of the numbers and the movement will be you know because of some of the transitional changes that are going on in terms of the change in the capitalization, but generally speak Hal is correct, it margins from the both the gross margin all way through the contribution margin should be improving from this point forward.

Lisa Thompson

Okay. And then just to go down on the SG&A line again. Even at 2.9 when you take up the extraordinary things kind of like a high number more than I was expecting? Where is that going for the rest of year? You think that operating expense is still pretty high?

Gary Brandt

So, the pro forma numbers, the number to be looking at, the absolute breakeven for our current revenues and we do expect to grow our revenues, but from this phase the absolute breakeven is right around at 150 to 160 as a full employee. That's where we will be through the second quarter. And from there we'll continue to take some harder looks at the organization with regards to driving improved margins going forward, which you're absolutely right, the first goal in the first phase was to stop the emerging [ph] we're at that point. Now we continue to right size or properly size the organization to drive sustainable improves margins.

Lisa Thompson

So what's your going forward cash burn right now, monthly?

Gary Brandt

The second quarter we're finishing up the reduction relative to hitting the breakeven as we originally put forward. That's the first priority. We're not letting down our guard on that goal. From there as Hal and I both said, is we'll continue now to integrate the two organizations, find revenue growth opportunities because that's the best way to grow your margin, but we will continue to look at areas where we can make further cut relative to making sure that we don't take a step backwards as regards to margin and cash flow performance.

Lisa Thompson

Okay. And on ValidSoft what is the current status?

Gary Brandt

Our goal was to release. Our goal and we won't be specify till we get there, is to get to somewhere in the neighbourhood of $200,000 of revenue per employee. That is a sustainable organization in our sector.

Lisa Thompson

Right.

Hal Turner

At 90,000 stores of revenue per employee, it’s a huge improvement, but that's not why we came, that's not what we would declare a success. We need to more than double that, $200,000 a revenue per employee.

Lisa Thompson

Right. That's pretty standard SAS number?

Hal Turner

Yes.

Lisa Thompson

Okay. So on ValidSoft what's the current up to-date status? Is it you've got to move on, looks for new buyers or are you guys at a Mexican stand-off on the price?

Gary Brandt

Well, maybe it's Mexican. I'm not sure what kind of stand-off. But it's not the price. It's the buyer did not have the liquidity or the cash to close the transaction. They have further advance. We are still trading at advance. We are still in communication. They do not have preference. They do not have any exclusivity relative to transaction. We have spoken to others and we are in continued discussions with others.

But it is not appropriate for us to leave the asset on hold while others makeup their mind. Whether we sold the company or not we were always going to have a license back on the technology that has been mutually created over the past several years. And Hal was right combining security with mobility is a very, very powerful marketing plan.

Lisa Thompson

Okay, great. Thank you. That's all my questions.

Hal Turner

Thanks, Lisa.

Operator

[Operator Instructions] And we'll go next to Gerry [Indiscernible]

Unidentified Analyst

Good morning. I have a question, you mentioned your revenue salesforce, could you elaborate on that towards how many people you have outselling and what kind of market they are calling in?

Hal Turner

Yes. We have two sales executives who are in the marketplace selling to the large communication service providers, the carriers, and they are geographically disbursed and basically covering the large bid and the large transactions that come about. That's very, very focused environment. And then we have an enterprise sales organization that is led through our ValidSoft team. And they have a team of four people that are again working with channel partners and this is very much a channel partner model.

We're bringing those two pieces together, our direct force and the channel partner force. We intend to add additional capability in Q3 and Q4 as we do two things, one mostly as we turn operationally accretive and we'll be able to afford it. And secondly as we have the full cloud services capability for the converged product line available. So, that's the salesforce.

Unidentified Analyst

Have you open up any new accounts?

Hal Turner

Yes. If you look in the press announcement, the release, he had noted several things regarding both ValidSoft and Elephant Talk and we continue to see new deals coming about and with, for example, a recent show that was held in Chicago called ITW which is effectively the international carrier grouping through my channel partner contacts that will be coming on board as a channel partners with us.

We saw about 160 meetings over a four-day period all of which resulted in some level of interest either for the retail services that we're referring to through ValidSoft and/or the mobile network enabling capabilities through the cloud-based offering of Elephant Talk, so we're very encouraged about the demand and sales and very eager to get after it.

Unidentified Analyst

And I just wanted to if you have any projections underneath these new accounts that they are working with?

Hal Turner

No. The projections for us will be seen at least in the near terms through the improvement of the revenue per employee model, although we will announce categorically categories if you will of sales and successes. Also remember that in a channel partner model that it’s a two-stage sales process. When you sell the channel partner then you work with the channel partner to sell their end user retail and/or carrier customer. So it’s a process that looks at penetration in growth within that relationship over a period of time.

That by the way is the beauty of our recurring revenue model and that's what ultimately will sustain our capability for some pretty dramatic growth we think in the future, but I don't have a specific number for you. Gary, would you like layer on to that please.

Gary Brandt

Yes. The other comment and this is an important message relative to the integration of the security with the mobility. We've done a very good job of securing very significant customers with regards to mobility. Everyone of these large customers, these carrier customers is looking for a continued evolution of that business. One, in terms of cloud-based services to become a fleet of swiftness there as the competitors out there in the marketplace, but more importantly, every one of them is faced with security challenges. And by us bringing the best in breed in terms of security and working with our sales engineers who have that intimate relationship with those carrier customers. That’s where we are going to benefit and as Hal said, leverage the platform we already have in terms of growing.

But from a metrics point of view, the recurring revenue are established, the plans, the restructuring plans we have in place. We can see a pretty clear path to getting $200,000 of revenue per employee and that will be a combination of not just headcount reduction but that will be a combination of revenue growth organically and potentially accretive acquisition.

Unidentified Analyst

Okay. I don’t know if you remember, you mentioned your profit margins, they were always pretty good.

Gary Brandt

Yeah. That was what Lisa referred to in her previous question is the gross margin did improve somewhat in the first quarter and again, we pay very close attention to the margin line. So, yeah, we expect continued strength there.

Operator

We will take our next question from Stephen Parker [ph] with Dawson James.

Unidentified Analyst

Yeah. I wanted to talk about the cash, what you have versus what you need. Lisa asked the question about the cash burn but I didn’t hear an answer in terms of the number on a monthly basis. But more importantly, as far as the additional sources of capital you said annualized and very patient but I know you’ve been working on something. It is months now. Where is that at in terms of securing the additional capital and when does the corporate announce is such that you have to go to the market to try and raise capital in another way?

Hal Turner

So, Steven, thank you. By the way, we only mentioned our senior lender. We continue with negotiations that are well underway with term sheets that have been executed and we are moving toward close and we are feeling rather secure in our ability to not only continue but to recapitalize the business. And as Gary and I and the whole team but particularly, Gary and the financial team have looked at it. We have a long-term financial game plan that will have many elements to it.

So, as we have said, we have begun to nudge on crossing the border to operational breakeven already toward the end of April. By the end of the second quarter we will be there, meaning that operationally, we will not be burning any more cash and we would expect to be accretive as we go into Q3 and Q4. And we expect that it is through our capital initiatives that we will be able to address and deal with the accumulated working capital deficit that does include our senior lender as well as certain vendors and payments that have been accumulated over the last six to nine months. That’s my view. I’d like to turn to Gary to see if he has additional perspective he would like to add?

Gary Brandt

Hi. If you look at our balance sheet, it clearly reflects the negative working capital situation and that includes the current treatment of the long-term debt with our senior lender. That is part of a restructuring. It is not only reducing the cash burn but we have to strengthen the balance sheet. As Hal has mentioned, we do have the year past for solving our senior lender situation and providing us the necessary working capital. We are working those through. As far as the immediate operating cash burn and the result, we set on a plan at the beginning of the structuring, which contemplated the divestiture of ValidSoft. On that we put a definitive date in March to close that transaction. It didn’t close in the quarter.

Clearly that was disappointing because that would have made our jobs a heck of a lot easier but that’s not when we took on easy jobs. We knew that with the restructuring there would be twist and turn. This is a twist and turn. We’ve taken another look at that. We will still take aggressive steps to divest because that does make our job real easy with regards to monetizing that asset. But we can’t sit and wait for it. So, what we are doing is we are integrating that operation in with our existing operations so that the contemplated EBITDA positive scenario that we put in the second quarter, if you recall that expected that we would have already divested ValidSoft, which was consuming cash.

We now have to integrate that in with our business so that we don’t continue to consume cash from that side of our business. Collectively, we will see ourselves exit the second quarter in an EBITDA positive setting with ValidSoft as the core piece of our operating business at this point of time. So those are the steps we are taking. Again, these are never completely straight line but our commitment, our conviction to getting to sustainable result is there and we see that we can get there.

Unidentified Analyst

Okay. Thank you.

Operator

We will go next to Joe Peters.

Unidentified Analyst

Yes. Hi, Hal. Thank you. I appreciate you taking the call. As one of the long time suffering shareholders you alluded to earlier, I just want to let you know I appreciate the [Indiscernible] there, as it relates to some of the shortcomings of prior management, which led to the situation that we find ourselves in today. Another question I have in regards to CRI is they still funding any expenses towards ValidSoft on a either monthly or quarterly basis?

Hal Turner

Joe, first of all, thanks for your forbearance and perseverance with us. No, the deal did not consummate with the prior offer regarding ValidSoft. We have fully picked up all of the operating expenses. So, all of the numbers that you have seen us talk about and refer to including the breakeven and the anticipation of accretive cash during the latter half of year, all of that includes ValidSoft in there. And that is part of this rationalization that we have been going through to make absolutely certain that we take advantage of the people and the processes that are there, with the good people and processes that have been in and really recognize that we are one company.

It doesn’t change anything that we can or will do to extract value if that becomes the best path. But that’s the way we do it. So, bottom line is we are funding everything ourselves. There is no carve-out or additional funding. And that’s -- Gary, I believe you might want to add to that but I think that also addresses the positive that we have which did not include any additional working capital from the early part of February I believe or March.

Gary Brandt

Right. This is Gary. That particular suitor opened our eyes to potentially some other sources of capital as well, not necessarily in a divestiture mode but in terms of accessing some subsidy capital. We are exploring some of that, that maybe available to us. So, we are not leaving any road unturned in terms of finding non-dilutive capital to help us solve that puzzle. And again, reflecting backwards, I mean it was a big blow that the company faced in terms of losing they used to sell.

And yes, the actions with benefit of hindsight could have or should have been taken faster but generally speaking, there is a lot of optimism in this business. I always think of that another big customer can fill the gap and Hal and I commend, we’ve done this before. The good news is we have a recurring revenue stream. We have a happy healthy customer on the other side long-term contract and we can methodically get way out of this and generate some very good results. This is an extremely good platform for driving growth.

Unidentified Analyst

Okay. And just on another one, I know there has been some strategic partnerships that have been set up in the past that have been spoken about, some of which we haven’t heard much about lately. One of which is the Hewlett Packard, which was announced next month, will be about two years ago now. Have they added any value from a strategic partnership standpoint or is that kind of something that was more of a fluff piece that was released and not much is come from it?

Hal Turner

So, Joe, it actually was not a fluff piece. It’s real. It’s verifiable and today, we are working on an extremely large opportunity with our channel partner, Hewlett Packard through their operating channel partnership in Brazil. So there is clear demonstrable value that has come from it. However, I will tell you that as a company, we have not taken very good advantage of extending that capability into other opportunities. It’s been more anecdotal. So, part of the sales and marketing refreshment that we will be doing is to add a true channel partner, channel management’s person into our organization who will own the relationship with Hewlett Packard.

We expect to have more relationships like that. There are long list of usual suspect companies that would make sense. You would know them all as brand names and we will certainly go after them. But bottom line, Hewlett Packard has been a good relationship. There is a existing opportunity that we are competing well for, one of these long-term big bids but it’s sourced directly from Hewlett Packard.

Operator

We will go next to Nick [Indiscernible].

Unidentified Analyst

Yes. Hello. How are you?

Hal Turner

Hi, Nick. We are doing well. Thank you. I hope you are.

Unidentified Analyst

I’m doing well too. I’m a private investor. I have been hanging around here for definitely a few years and more. I have to say that these calls from last year and the year before are quite different now. So they are much encouraging and much more solid than they used to be those. Like Joe was saying, there is a lot of press release, kind of fluff things that would come out and just trying to boost I guess stock price but they don’t last.

But it sounds pretty solid. I just wanted to encourage you guys. I’m encouraged from what I hear. I mean you’ve got a lot of people that are just sticking around and they want to move, they want to see this company do well. I mean that’s why there are sticking around just like I’m. And I guess my only question is, is there a possibility of -- obviously talking ValidSoft’s staying together -- and because it seems like such a great fit. It seems like the secret weapon or the -- the way things are moving in the future with cloud based stuff and the Internet of Things, it just seems so positive that if you could remain together, can company survive with it together?

Hal Turner

So, Nick, I want to take your last point first and then I want to go back to your first comment. The answer is certainly, that is a real opportunity for us to operationally bring the companies together, realized that there is cross synergy that is absolutely evident and really forms low-hanging fruit. The determinant of that will be the success we have in continuing to move to cash flow breakeven and accretive cash in the last half of the year, as well as the restructure of the finances and the new financial game plan, which really consumes Gary and me and others literally full time.

So, we will do what’s best for the stakeholders. We will examine any offers that might be forthcoming and as Gary mentioned, there is some activity with some other interested parties and we will continue to look at that and make our determination. But as you have alluded, ValidSoft just maybe more valuable inside, as we look at the repositioning and the deleveraging of the company and the extraction of value and what it can mean long-term for profitability and the multiples that are gained. And that gets me back to the first point and we appreciate your encouragement.

And Gary has already noted that we didn’t come here because it was an easy job. It would have been a very easy thing for us to spend a month this and say okay, let’s go find some debt financing and let’s get the right group in and we will take care of it that way. That was never our intention and is not our intention. And we take very seriously, the obligation we have to the shareholders who have borne the brunt of this company for the several years that they have but now, we see the light of day and we see the opportunity to create value and to give some return going forward. So, we didn’t take the easy pathway, we are not going to take the easy way out and we intend absolutely to execute on this operational turnaround, refurbishing of our balance sheet and our capital gain plan and doing smart things with pieces that are already before us such as ValidSoft and Elephant Talk working together. So I appreciate your comments, let me give the last word to Gary on this.

Gary Brandt

Hal, thanks. And yes, this question and the comment I’m going to make maybe it even goes back to Joe’s question before. And looking at the ValidSoft and the security portfolio, it can be a tremendous door opener with enterprise accounts. So, we do like that aspect of that part of our business because it does open up the enterprise side of our business quite nicely. However, you won’t see how and I with a three to five year timeline waiting for a market to develop. If we don’t see revenue opportunities or we don’t view the ValidSoft as being accretive in the short term in terms of our business, then it’s not wise to hold on to that asset indefinitely and wait, right. So, we’ll figure out ways that we can access the technology and you know sign, co-licensing and co-marketing type relationships, but still divested to somebody but that might have a longer time price to see that through.

You are absolutely right though in everything you read in the marketplace with [Indiscernible] service, with increasing focus on mobility application, they all need security. The ValidSoft portfolio of device Trust in Voice Biometric is absolutely in the right place. We just have to convert now and we think that’s possible, but we are not going to sit there and put our press release that’s telling you that there is all this marky names unless they come with corresponding incremental revenue.

Hal Turner

Gary, thank you. And so Nick, Joe, Steve, Lisa and others we appreciate your insights and your questions and operator that concludes it for us today.

Operator

That does conclude today’s conference. We thank you for your participation.

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