0001144204-12-019020.txt : 20120330 0001144204-12-019020.hdr.sgml : 20120330 20120330170600 ACCESSION NUMBER: 0001144204-12-019020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20111231 FILED AS OF DATE: 20120330 DATE AS OF CHANGE: 20120330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELEPHANT TALK COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001084384 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 954557538 STATE OF INCORPORATION: CA FISCAL YEAR END: 0610 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-35360 FILM NUMBER: 12730212 BUSINESS ADDRESS: STREET 1: 19103 CENTRE ROSE BLVD. CITY: LUTZ STATE: FL ZIP: 33558 BUSINESS PHONE: 813-926-8920 MAIL ADDRESS: STREET 1: 19103 CENTRE ROSE BLVD. CITY: LUTZ STATE: FL ZIP: 33558 FORMER COMPANY: FORMER CONFORMED NAME: ELEPHANT TALK COMMUNICATIONS INC DATE OF NAME CHANGE: 20020118 FORMER COMPANY: FORMER CONFORMED NAME: STARUNI CORP DATE OF NAME CHANGE: 20000202 10-K 1 v304852_10k.htm FORM 10-K

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________________ to ____________________

 

000-30061

(Commission file No.)

 

ELEPHANT TALK COMMUNICATIONS CORP.

(Exact name of small business issuer as specified in its charter)

 

DELAWARE   95-4557538
(State or other jurisdiction of   (I.R.S. employer identification no.)
incorporation or organization)    

 

19103 Centre Rose Boulevard

 Lutz, FL 33558

 United States

(Address of principal executive offices)

 

+ 1 813 926 8920  

(Issuer's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Common Stock, $0.00001 par value per share

(Title of class)

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨

 

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 £

 

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.  £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer ¨   Accelerated filer x
Non-accelerated filer ¨   Smaller reporting company ¨
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $188 million based on the closing sale price of the Company’s common stock on such date of U.S. $3.21 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 9, 2012 there were 113,807,071 shares of common stock outstanding.

 

Documents incorporated by reference: None.

 

 
 

 

Elephant Talk Communications Corp.

 

Form 10-K

For the fiscal year ended December 31, 2011

 

TABLE OF CONTENTS

 

Note on Forward-Looking Statement  
     
PART I  
     
Item 1. Description of Business. 3
Item 1A. Risk Factors. 16
Item 1B. Unresolved Staff Comments. 24
Item 2. Description of Property. 24
Item 3. Legal Proceedings. 25
Item 4. Mine Safety Disclosure. 26
     
PART II    
     
Item 5. Market for Common Equity and Related Stockholder Matters. 26
Item 6. Selected Financial Data. 28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
Item 7A. Quantative and Qualitative Disclosures about Market Risk. 43
Item 8. Financial Statements. 43
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 67
Item 9A. Controls and Procedures. 67
Item 9B. Other Information. 68
     
PART III    
     
Item 10. Directors, Executive Officers and Control Persons. 68
Item 11. Executive Compensation. 73
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. 74
Item 13. Certain Relationships and Related Transactions, and Director Independence. 75
Item 14. Principal Accountant Fees and Services. 75
     
PART IV    
     
Item 15. Exhibits, Financial Statement Schedules. 76

  

 
 

 

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:

 

·risks and uncertainties associated with the integration of the assets and operations we have acquired and may acquire in the future;

 

·our possible inability to raise or generate additional funds that will be necessary to continue and expand our operations;

 

·our potential lack of revenue growth;

 

·our potential inability to add new products and services that will be necessary to generate increased sales;

 

·our potential lack of cash flows;

 

·our potential loss of key personnel;

 

·the availability of qualified personnel;

 

·international, national regional and local economic political changes;

 

·general economic and market conditions;

 

·increases in operating expenses associated with the growth of our operations;

 

·the possibility of telecommunications rate changes and technological changes;

 

·the potential for increased competition; and

 

·other unanticipated factors.

 

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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ITEM 1.  DESCRIPTION OF BUSINESS

 

Business

 

Converged telecommunication services – full vendor MVNE (Mobile Virtual Network Enabler) solutions.

 

Elephant Talk Communications Corp. also referred to as “we”, “us”, “Elephant Talk” and “the Company” is an international provider of business software and services to the telecommunications and financial services industry. The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

 

The Company is a niche player in the converged telecommunications market, providing traffic and network services as a licensed operator, and specializing in carrier grade mobile enabling platforms to provide outsourced solutions to the various players in the telecommunications’ value chain, including MNOs (Mobile Network Operators like ATT, Verizon, Sprint, Vodafone, T-Mobile, America Movil, etc), MVNOs (Mobile Virtual Network Operators like TracFone, Virgin Mobile, Simple Mobile, Lebara, LycaMobile, etc) and non-operator companies (like banks, supermarkets, and utility, car, health maintenance and insurance companies), in need of both mobile as well as specialized land-line telecommunication services. In this value chain we position ourselves as a vendor that can act as a one-stop solutions provider as a Full Mobile Virtual Network Enabler, including also customized mobile services such as our network integrated ValidSoft security and fraud prevention solutions.

 

Landline network outsourcing services

 

Through our fixed line telecom infrastructure and our centrally operated and managed company owned IN-CRM-Billing platform, we also provide traditional telecom services like Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate Services to the business

 

ValidSoft – Fraud Prevention and Security Software Solutions

 

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to credit and debit card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

 

As the banking and payment world begin to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, while also providing protection where the device itself is the channel.

  

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques.

 

Background

 

Elephant Talk Communications Corp. was formed in 2001 as a result of a merger between Staruni Corporation (USA, 1962) and Elephant Talk Limited (Hong Kong, 1994). Staruni Corporation - named Altius Corporation, Inc., until 1997 - was a web developer and Internet Service Provider since 1997 following its acquisition of Starnet Universe Internet Inc. Elephant Talk Limited (Hong Kong) began operating in 1994 as an international long distance services provider, specializing in international call termination into China. In 2006 Elephant Talk Communications Corp., decided to abandon its strategy of focusing on international calls into China.

 

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In 2000, securities of Staruni Corporation commenced trading on the OTC Bulletin Board under the symbol “SRUN”, later replaced by “ETLK” following the merger with Elephant Talk Limited (Hong Kong), and then the symbol changed to “ETAK” contemporaneously with a 2008 stock-split.

 

In January 2007, through our acquisition of Benoit Telecom (Switzerland), we established a foothold in the European telecommunications market, particularly within the market for Service Numbers (Premium Rate Services and Toll Free Services) and to a smaller extent Carrier (Pre) Select Services. Furthermore, through the human capital, IT resources and software acquired, we obtained the experience and expertise of individuals and software deeply connected to telecom and multi-media systems, telecom regulations and European markets.

 

In March 2010, we acquired ValidSoft. This acquisition was in line with our strategy to develop and market customized mobile solutions. ValidSoft provides strong authentication and transaction verification capabilities that allow organizations to quickly implement solutions which protect against the latest forms of credit and debit card fraud, on-line transaction and identity theft. This acquisition combines ValidSoft’s best in class proprietary software with our superior telecommunication platform to create the best electronic fraud prevention total solution available on the market today. Further details on the above acquisitions, other (smaller) acquisitions and incorporations can be found under “legal structure of the company”.

  

In September, 2011, Elephant Talk Communications, Inc. a California corporation, merged into Elephant Talk Communications Corp., a Delaware corporation (the "Reincorporation"). The Reincorporation was approved by the shareholders at the annual shareholder meeting on September 14, 2011. As a result of the Reincorporation, the Company is now a Delaware corporation. Elephant Talk Communications, Inc. ceased its existence as a result of the Reincorporation and Elephant Talk Communications Corp. became the surviving corporation and continued to operate the business of the Company as it existed prior to the Reincorporation.

 

The mechanism of the Reincorporation, reasons for the Reincorporation and comparison of the certificate of incorporations and bylaws of the Company and ETAK (Delaware), the surviving company, were outlined in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on July 26, 2011.

 

The main services we provide

 

Our services are designed to address in particular the following market and industry developments:

 

·The mobile phone will become the channel of choice for consumers

 

·Mobile operators and financial institutions need to reduce total cost of ownership (TCO) and operators in particular need to increase utilization of their assets

 

·Trust and security aspects are increasingly important in a networked and digitalized environment, in addition to the very large cost involved in fraud and fraud prevention

 

Three main types of value propositions are offered to the market, each building upon our converged network and access capabilities in combination with “ET Boss”, our proprietary telecommunications Operating Support System (OSS) and Business Support System (BSS) and our thought and software technology leadership in (electronic) fraud prevention, security data and privacy related to high volume transactions:

 

·Integrated Mobile Enabling Platform (Full Core Network and ET BOSS)

 

·Fraud Prevention and Security Software Solutions

 

·Landline network outsourcing services

 

Our services deliver critical benefits to our customers:

 

·Dramatically reduced TCO for back-office of operators, while improving flexibility, integration and simplicity of services the operator can offer its customers

  

·Substantial cost reductions for financial institutions not only in the direct cash lost in fraudulent transactions, but also in the large back-office and customer dissatisfaction related costs resulting from current systems and processes.

  

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Integrated Mobile Enabling Platform (Full Core Network & ET BOSS)

 

Elephant Talk is actively seeking additional MNO partners that understand the symbioses between a mobile network operator and an applications-focused enabler that brings the right services in the right format through a secure delivery platform within reach of all business customers that may require such services as part of their overall market and product strategy. We believe that over the next couple of years MNOs will proactively seek partners like our company, as it will be the preferred way to successfully expand from retail focused markets to wholesale markets, thereby more effectively using the capacity of their core antenna networks and spectrum capabilities.

 

The growing importance of converging services is an area where we see excellent possibilities to combine our decade long in-depth experience in landline services with our sophisticated mobile delivery platform. This will support both our MNO as well as our MVNO customers to bring newly bundled services into the marketplace through a single device that is capable of using landline, IP, mobile, and wireless connectivity for any voice, data and multi-media application. All this will be provisioned and managed through one single customer account and one integrated bill that is supported by any relevant payment mechanism.

 

We see opportunities in customized mobile service, combining the individual profile of a mobile customer and his or her exact location, with the “always-on” secured connectivity of a mobile network, supported by our powerful mobile delivery platforms. We believe these elements will create completely new business models for MNOs and MVNOs alike, bringing personalized, contextual and time-wise relevant services to billions of customers worldwide. One can easily think of new applications in the areas of security, protection and logistics of people, goods and services, remotely monitoring and escalating medical care, individualized and contextual marketing communications for broad ranges of goods and services, and supporting secure financial transactions.

 

Most of these new business models, driven by customized mobile services, will be created and operated by independent third party application providers that may be directly or indirectly connected to mobile service delivery platforms like our MVNE platform. In areas we see attractive opportunities to create, operate and market such services ourselves, we may actively invest in such developments or may acquire other companies that already have developed such applications.

 

Fraud Prevention and Security Software Solutions

 

ValidSoft was acquired by Elephant Talk (ET) in March 2010. ET is a telecommunications company that can service the needs of ValidSoft’s requirements to deliver its leading solutions whilst also providing a platform to enable ValidSoft to process up to 400,000 transactions per second, to “carrier grade” level (i.e. industry standards in telecommunications). Equally, ET is itself a leading provider of MVNE/MVNO software that offers ValidSoft the opportunity to service the security layer needs of this capability. Whilst the synergies between a telecommunications security solutions provider and an innovative telecommunications company may seem obvious, our growing Intellectual Property capability bears testament to this. As the convergence towards the smart phone crystallizes, the need for the security is paramount, and telecommunications is at the core of the capability. Together, ValidSoft and ET innovate, leveraging each other’s core capabilities and strengths, to be the global leaders in managing and securing the mobile cloud.

 

Landline network outsourcing services

 

Even though the majority of our investments in the past years have been in (mobile) software development, mobile related acquisitions and implementing MNOs and MVNOs, our largest revenue stream is currently still generated by our traditional telecom services like Carrier Select and Carrier Pre-Select Services, and Toll Free and Premium Rate Services. These services formed the basis and gave us decade-long experience as an outsourcing partner in the field of telecommunications services managed by our propriety Intelligent Network/Customer Provisioning Management/Billing platform. This platform has always been designed to put our customers, who purposely chose to outsource their telecommunication requirements to a specialized company like us, in control: our customers can work with our technology and our delivery platforms as if these are their own. We empower and likewise facilitate our customers to harness, to manage and to fully apply the power of some of the most powerful mobile/landline delivery systems in the world through a web-based self-care user friendly interface, without the need to initiate, install, fund, operate and support those global systems on a 24/7 basis.

 

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Products

 

We are positioning ourselves as a complete MVNE with our own integrated platforms, switches and network capabilities for back-office and customer interaction solutions. Next to providing a full Core Network,the back-office services range from provisioning and administration to Operations Support Systems (“OSS”) and Business Support Systems (“BSS”) running on our global IN/CRM/Billing platform “ET BOSS”. Our “ET BOSS” platform is designed to provide an all-in-one solution for both the traditional MNOs:

 

(i)the operators of large antenna networks and

(ii)managers of wireless spectrum granted through licenses by national governments, as well as for MVNOs.

 

MVNOs are generally fast-moving sales and marketing companies reselling refocused, re-priced, re-bundled and repackaged mobile telecom services. We partner with MNOs to bypass their legacy systems to profitably accommodate these wholesale MVNO customers with service levels and applications that satisfy the instant service flexibility, and pricing capability that MVNOs require to specifically address their niche markets. At the same time, we can offer additional market share to MNOs by marketing and contracting our own range of MVNOs that look for the very specific capabilities that our mobile service delivery platforms may offer. Bundled together with attractively priced wholesale airtime packages provided by our MNO partners, our MVNOs are positioned to run their operations effortlessly without the technical and financial burden associated with the development, maintenance and ownership of their own mobile network, while at the same time focusing on sales, marketing and distribution and the application of all elements required to be successful in these rapidly evolving consumer markets.

 

Our internally developed customer provisioning, rating and billing system ensures proper support for all of our services. We believe our network and system platforms are able to handle the high demands of national incumbents and other telecom operators on our globally interconnected network. The key component of our business strategy is the fully automated capturing and recording of any event on our global network through a standard Call Data Record, or CDR. CDRs are globally recognized and accepted by all of our suppliers and customers because of their high quality, reliability and consistency. As a result, on a real time/on-line basis, we believe our billing engine provides reliable inter-company payment overviews, and will continue to do so as we develop and implement our global network.

 

Our products offerings consist of an extensive software portfolio that we have developed to provide comprehensive customer functionalities. To maintain flexibility and allow for growth, the company has chosen to develop our own proprietary software and systems also known as ET’s Business Operating Support System (“ET BOSS”). The core modules have been designed to address all of our major business processes, and those of our partners in such a manner that the state of the art flexibility, level of integration and dynamic feature set ensures rapid and low-cost deployments. BOSS has to be designed for flexible deployment to ensure Elephant Talk’s business processes are supported by the solution with minimal operational changes and that sales partners / resellers, customers are being serviced in a way that they can optimize their business processes by using BOSS.

 

The core modules and their sub-modules include amongst others:

 

Our products focus on:

 

§Provisioning & Billing: enables our customers to rate, invoice and collect all sources of revenue through a fully integrated rating, mediation, and provisioning CRM and billing system for multi-country and multimedia use, and applications, and 2) an advanced Infitel IN platform.

§Billing; (dynamic) rating management, bill mediation, invoicing and automatic payment script generation
   
§Payment; credit card, direct debit, Paypal etc. enabled functionalities
   
§Provisioning; switches, HLR, porting
   
§Revenue Collection Assurance; end-user credit management, credit control, fraud management, routing analysis
   
§Control; dashboard overview, reporting, quality analysis, quality control

 

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§Switching & Network: In order to reduce the investments required for our MVNOs, as well as increase our flexibility and depth of mobile service offerings to MVNOs and MNOs, we operate as a full MVNE; meaning that we procure, integrate and operate the relevant mobile components, including core network, application platform, subscriber management and MVNO billing and provisioning.

 

§Content & Specialized Applications:

§Sales & Marketing; prospect management, sales management, analysis tools
   
§Self-Care; mobile, carrier(pre)select, premium rate & toll free services

 

Infitel Suite - IN Platform

 

In order to achieve real time session control, rating and charging, telecom value added applications as well as improved enrichment of data generated in and passing through our networks, we have acquired the carrier grade next generation IN (Intelligent Network) platform “Infitel”, including the source code and trademark. We own and develop this platform, thereby ensuring the flexibility and integration we strive for in and between all our software and network components.

 

Our ET Boss software enables mobile carriers to outsource their entire back office to Elephant Talk. By outsourcing operations the mobile carriers can reduce the number of vendor software, employees, and consultants. ET Boss reduces the number of software modules / vendors from over twenty to one. Additionally, ET Boss enables mobile virtual network operators (MVNOs) to control their pricing and product offerings with the touch of a keypad from a Windows interface. This compares with the current situation often experienced by virtual operators whereby it can take up to six month to effect a change in their product offerings.

 

With the support of our back office system combined with our integrated “ET BOSS” system, we believe our B2B customers have all the necessary tools to create their own virtual telecom business environment; thereby enabling our customers to recognize and serve their own clients, employees, partners or affiliates through any device, at any place and at any time. Our vision is that access to our global network will revolve around our central data and information base, which will allow our customers to provide their clients with worldwide access authorization to our services through a familiar interface and/or workplace, preferred format and language.

 

ValidSoft - Fraud Prevention and Security Software Solutions

 

ValidSoft is a thought and technology leader in the market of telecommunications-based authentication and transaction verification solutions for financial services and government organizations. As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel. The Company’s primary products are discussed below.

 

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organisations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques.

 

The ValidSoft platform is also built on privacy, an underlying principle in all our solutions. ValidSoft was the first security company in the world to be awarded a prestigious European Privacy Seal; EuroPriSe. It has now been awarded two seals, one in March 2010 for the VALid-POS card-present fraud detection solution and in September 2011 for VALid-4F, the four-factor authentication and transaction verification solution that incorporates both biometric voice verification and Proximity Correlation Logic; knowing where someone is or isn’t. The second Seal confirms the company’s ability to maintain the highest privacy standards in its work with citizens’ information when contracted by financial services organizations and government departments. In March 2011, ValidSoft was also awarded a registered data controller with the UK Information Commissioner’s Office.

 

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VALid®

VALid® is a telecommunications based multifactor authentication and transaction verification platform that provides protection across multiple electronic banking channels, including Internet, M-banking, IVR /contact-centre, mobile payments and Card-not-Present transactions.

 

Using patented voice-based Out-of-Band authentication and transaction verification, the VALid® platform combines visible and invisible protection against multiple threats, including Pseudo Device Theft, e.g. SIM Swap and Call-forward Unconditional (CFU) fraud, Man-in-the-Middle and Man-in-the-Browser (MitM/MitB) plus traditional fraud vectors such as Phishing, key-loggers, screen scrapers etc. The solution can also extend to three and four factors through our proprietary biometric voice verification plug-in, VALid-SVP™, and Proximity Correlation Logic; knowing where someone is or isn’t.

 

All of this protection is available for traditional Internet banking as well as M-banking, where usability is as critical as security. Real-time voice based authentication and transaction verification is the only usable and secure method of protecting M-banking transactions and therefore, the same solution as used for Online Banking, with all the same visible and invisible protection, including Pseudo Device Theft, is provided for M-banking, but configured specifically for mobile banking usage. This means no keying of OTPs into the phone, and even a completely hands-free model using speech recognition if required. Additionally biometric voice verification can also be layered for even greater security.

 

Whichever electronic channel requires protection, the fully configurable behaviour, customisable down to the transaction level, is designed to be driven by transactional risk and provided in a fully integrated fashion on a single, pluggable platform.

 

VALid-POS®

For card-issuers the world over, one of the greatest challenges faced is cross-border fraud committed at ATMs and Point-of-Sale (POS) devices. Whilst the actual fraud losses are significant, of equal if not greater concern, is the resultant impact caused by high decline rates. False-positives (declining legitimate transactions) are a major problem and can account for as much as 90% of cross-border card-present declines. This results in lost interchange fee revenue, high costs of fraud case management and inconvenienced customers.

 

VALid-POS® is a telecommunications based security solution aimed specifically at card-present fraud detection and resolution. It is primarily aimed at cross-border fraud, but can also operate domestically using different techniques depending on the country of issue. In cross-border mode, VALid-POS® can not only detect potentially fraudulent transactions in real-time but critically, can also identify legitimate transactions with an extremely high degree of accuracy, potentially reducing false-positive rates to single digits. Reducing false positive volumes is the cost-effective way to increasing fraud discovery, reducing operational costs and providing cardholders with a vastly improved customer experience when transacting abroad.

 

Using patent-pending Proximity Correlation Logic; determining the proximity of a card-present transaction to the cardholder’s mobile phone, VALid-POS is invisible to the cardholder, operates sub-second, does not use traditional Location Based Service technologies such as GPS or Lat/Long resolution and has been awarded a European Privacy Seal for compliance with EU data protection law.

 

The same Seal also covers the patent-pending domestic-based Anonymous Correlation System, a neural solution based on ATM, POS terminal and mobile network correlations.

 

VALid-SVP™

VALid-SVP™, the VALid Speaker Verification Platform, is ValidSoft’s proprietary voice biometrics solution, based on a completely modular and pluggable architecture, which allows organisations to easily integrate voice verification into the broader VALid® authentication platform. VALid-SVP™ is a leading-edge voice biometrics engine that supports text-dependent, text-independent and conversational voice verification (biometric plus knowledge) models.

 

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It includes a full enrolment module, incorporates liveness, replay attack, synthesis attack and Pseudo Device Theft detection, and operates on any channel the VALid platform supports, including Internet, mobile, IVR and contact-centre.

 

VALid-4F™

VALid-4F™ is the four-factor implementation of VALid® and was the world’s first commercially available four-factor authentication solution utilizing a single integrated platform. Four-factor authentication comprises the traditional factors of “something you know”, “something you have” and “something you are” with the additional dimension of “somewhere you are”, or more importantly, “somewhere you aren’t”.

 

Valid-4F™, apart from having a fully integrated proximity engine based on ValidSoft’s patent-pending Proximity Correlation Logic, also boasts its own biometric Voice Verification engine; VALid-SVP™, providing the highest level of user authentication available through its use of text dependent, text-independent and conversational voice verification. Coupled with its Out-of-Band authentication and transaction-verification model, including invisible Pseudo Device Theft detection, VALid-4F™ can provides all four authentication factors utilising a single consumer device, the mobile phone.

 

VALid-4F™ was also awarded a European Privacy Seal during 2011, attesting to its compliance with EU data protection law for both its use of biometric voice verification and proximity correlation logic.

 

Industry Developments

 

A number of relevant factors in the converging telecommunications industry, combined with consumers and businesses increasing adoption of mobile and wireless based applications, drive our investments and services, are as follow:

 

We believe the mobile phone will become the channel of choice for consumers

 

We believe that the mobile phone will ultimately be the (handheld) device chosen by consumers and businesses to best bring personalized, contextual and time-wise relevant services such as:

 

·mobile banking
·telemedicine
·location based services
·use of near field communications for cashless payments, couponing, cashless tickets, vending machine payments, grocery store payments
·credit card applications
·communities; social, entertainment and loyalty
·customer profiling and data mining to support one-on-one marketing
·security and trust sensitive applications; the mobile phone as authenticator.

Mobile operators need to reduce total cost of ownership (TCO) and increase utilization of their assets

 

Mobile Network Operators typically have twenty or more vendors for their software to handle Network Management, Provisioning, Customer Relationship Management (CRM), Billing, Fulfillment, and Distribution. This has resulted in legacy systems that are expensive to maintain and difficult to adapt to changing market conditions. In addition, MNOs are looking for new ways to attract traffic over their networks, since the traditional mass marketing of voice and messaging focused on end-users (“retail”) shows little or no growth. MNOs are required to shift their organization from a mass marketing oriented retail focus to a wholesale focus; thereby allowing other organizations such as MVNOs to serve smaller and specifically targeted end-user groups with specialized and converged solutions in order to increase traffic (e.g. voice, text, data or media) over the operators networks.

 

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Trust and security aspects are increasingly important in a networked and digitalized environment

 

The open nature of the Internet as well as exponential digitalization and globalization of society has resulted in increased (international) fraud, attention for privacy intrusions and national security concerns.

  

MVNO telecommunication markets

 

By Informa1  

Western Europe and North America, both expected to grow in terms of MVNO subscription numbers, are not expected to see a radical shift in terms of market structure. The global MVNO market will reach 186 million subscriptions by the end of 2015 with North America and Western Europe still accounting for the vast majority. These two regions will remain the largest MVNO markets in terms of the number of subscriptions and players and will also continue to top the ranks in terms of MVNO penetration.

 

By Ovum2

Global mobile virtual network operator connections are forecast to reach 85.6 million by 2015, and revenues are expected to be $9.5 billion. Over the next five years, new MVNO markets are expected to open up in South and Central America, Asia-Pacific, and in the Middle East. However, there are still regulatory and market challenges to overcome before these markets can offer an environment that can sustain MVNO activity. Therefore, we expect the bulk of MVNO connections and revenue growth from 2010–15 will come from established MVNO markets in Western Europe, Asia-Pacific, and North America.

 

Established MVNO markets will drive growth

   

In Western Europe, the fastest-growing MVNO markets are Germany, France, Italy, Spain, and the Netherlands. Germany and the Netherlands have been the largest MVNO markets (in terms of the number of MVNOs) for many years, and this is not expected to change over the forecast period, especially as both markets are regarded as good testing grounds for MVNOs looking to trial new business models.

 

Emerging markets warming to MVNOs

 

While currently there are very few MVNOs in emerging markets, more markets are expected to introduce MVNOs over the forecast period. MVNOs are expected to move into markets in Brazil and Chile in South and Central America; Turkey in the Middle East; and India, Pakistan, and Vietnam in Asia-Pacific. Markets such as Brazil and India present an attractive opportunity for MVNOs, but there are still a number of obstacles impacting MVNO development in these markets including a lack of cooperation from mobile network operators (MNOs) and a lack of regulation to facilitate new MVNO entrants. Therefore, we expect the majority of new MVNO markets to remain relatively small and have minimal impact on global MVNO connections and revenues.

 

MVNO revenues to remain steady

 

Global revenues are forecast to remain steady over the next five years. Currently, Western Europe and the US account for over 84% of global MVNO revenues, and by 2015 we forecast that this figure will fall marginally to 80%. MVNO markets in South and Central America and the Middle East are expected to make up a greater share of global MVNO revenues over the forecast period. In 2009, South and Central America and the Middle East contributed approximately 1% to global MVNO revenues, and we forecast that this will increase to 6% by 2015.

 

MVNOs have explored numerous segments

 

MVNOs have been in operation for over a decade, and in this time it has become clear which business models have been successful and which have been failures. “Tried and tested” MVNO business models include targeting low-spending customers by offering no-frills domestic and international mobile services, and targeting businesses and households by offering mobile and fixed service bundles. MVNOs have also had success in other niche segments, such as focusing on the wealthy, charities, or offering gender-specific services. All of these models have proven lucrative for MVNOs and have presented them with good opportunities in most markets. However, while targeting the right segment is extremely important for MVNOs, their success is also dependent on market conditions, competition, and execution.

 

 

 

 

 

 

 

 

1 Extract Global MVNO Forecast to 2015, © 2011 Informa Telecom & Media, Publication Date 22 March 2011

2 Reference Code: OVUM052659, Publication Date: 31 August 2010  

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Electronic and card fraud market

  

The solutions from Validsoft are targeted to combat electronic fraud and false positives across card, internet and telephone channels.  Card fraud in the US is estimated to cost financial services around $100 billion per annum (card present and card not present) and $250 billion per annum globally with the telephone channel and other fraud methods accounting for additional fraud and associated cost of $80 billion per annum.  The total cost is around $330 billion per annum[3] . Through the ValidSoft technology the extent of this endemic problem can be reduced through tackling the direct impact of fraud, reducing operating costs and improving the customer experience. These solutions also provide an environment which allows banks and other institutions to automate manual process safely and securely.

  

ValidSoft provides strong authentication and transaction verification capabilities, which allow organizations to quickly implement solutions that protect against the latest forms of credit and debit card fraud, on-line transaction and identity theft. ValidSoft’s advanced proprietary software combined with what we believe is a superior telecommunication platform creates a leading electronic fraud prevention total solution. 

 

We believe the ValidSoft solution can have large cost reduction potential for financial institutions around the world that have losses associated with fraud losses, false positives and administration in connection with credit and debit card fraud. ValidSoft has successfully completed trials with four major commercial banks and has entered into a strategic partnering agreement with Adeptra in late 2011for its solutions relating to SIM Swap fraud protection, card fraud prevention and strong authentication. Adeptra has an enviable commercial relationship with the largest worldwide issuing banks. ValidSoft was recently awarded its second European Privacy Seal from EuroPrise[4] , underscoring the prudent set-up of its systems as to privacy matters.

 

The essence of the ValidSoft product suite is in providing:

 

§Card-Present fraud prevention and resolution

Card Skimming is one of the fastest growing fraud threats. In the US alone, this type of fraud in 2008 was reported as costing the Financial Services Industry over fifty billion $US, and a leading research company is predicting that the cost of plastic card fraud will rise three-fold over the next 3 to 5 years. VALid-POS combines the functionality of VALid’s real-time Out-of-Band transaction verification capability with proximity based mathematical models that assists Issuing Banks in determining whether the genuine customer is conducting the card-based transaction.  Where in doubt, VALid® can contact the customer and resolve the potential threat in real-time.

 

§Card-not-Present fraud prevention and resolution

Card-not-Present fraud, i.e. fraud associated with online retailing, is a significant problem worldwide. The vast majority of this type of fraud involves the use of card details that have been fraudulently obtained through methods such as skimming, data hacking or through unsolicited emails or telephone calls. The card details are then used to make fraudulent card-not-present transactions, most commonly via the Internet. As the number of Internet retailers has grown, fraudsters have increasingly targeted the online shopping environment. In the US alone, this type of fraud in 2008 was reported as costing the Financial Services Industry over fifty five billion $US, and a leading research company is predicting that the cost of card-not-present fraud will rise three-fold over the next 3 to 5 years. VALid-POS combines the functionality of VALid’s real-time Out-of-Band transaction verification capability with proximity based mathematical models that assists retail providers in determining whether the genuine customer is conducting the online transaction. Where in doubt, VALid® can contact the customer and resolve the potential threat in real-time.

 

 

 

 

 

 

3 Javelin Research; Gartner Research; Nilson Report (2010).

 

4 EuroPriSe is an initiative led by the Unabhaengiges Landeszentrum fuer Datenschutz (“ULD”, Independent Centre for Privacy Protection), Germany. EuroPriSe was funded with 1.3 million Euro by the European Commission's eTEN program. The EuroPriSe project consortium led by ULD included partners from eight European countries: the data protection authorities from Madrid (Agencia deProteccion de Datos de la Communidad de Madrid, APDCM), and France (Commission Nationale de l'Informatique et de Libertes, CNIL), the Austrian Academy of Science, London Metropolitan University from the UK, Borking Consultancy from the Netherlands, Ernst and Young AB from Sweden, TUeV Informationstechnik GmbH from Germany, and VaF s.r.o. from Slovakia.   http://www.european-privacy-seal.eu/

 

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§Online Banking fraud prevention

Online banking fraud is a significant threat to the take-up of online banking worldwide. Fears concerning the safety of this type of banking transactions prevent banks from realizing the massive cost savings provided by self-service online banking. Globally less than 50% of internet users bank online and security fears remain the primary inhibitor of take-up. VALid’s real-time Out-of-Band strong mutual authentication and real-time transaction verification enables the bank to apply a real-time dynamic rules engine to identify anomalies and to contact the customer and verify the transaction in real-time.

 

§Strong Mutual Authentication (multi-channel)

The need for the customer to know that the bank is genuine is just as important as the need for the bank to know that it is transacting with the genuine customer - this is essential in terms of fostering consumer confidence, the lack of which is the single most significant deterrent in terms of the adoption of online commerce. This is termed “Mutual Authentication” and VALid® has one of the most intuitive and strongest forms of Mutual Authentication available.

 

§Transaction Verification (Out-of-Band – OOB)

Even if both parties to a transaction are genuine there is no guarantee that the transaction will not be corrupted. A “Man-in-the-Middle” or “Man-in-the-Browser” attack will succeed no matter how strong the authentication process. Therefore banks need Transaction Verification. Most banks monitor transactions to identify anomalies. When an exception is detected, banks for the most part rely on a manual process of contacting the customer by phone to verify the legitimacy of the transaction – this is expensive and also prone to security risk itself as the customer is forced to reveal security credentials to unknown third parties. VALid® addresses this issue since it has the ability to verify the integrity of transactions in real-time and in a totally automated manner over a separate telecommunications channel. Real-time OOB Transaction Verification is regarded by Gartner as the only effective way to protect the integrity of a transaction carried out on the Internet.

 

§Identity Verification

In mass market and extranet situations, service providers are struggling to find a solution that does not require the distribution of hardware devices yet provides strong authentication and transaction verification in a cost effective and convenient manner. It is likely that going forward service providers will be expected to comply with increasing regulation in this area. ValidSoft, through its telephony based architecture enables service providers to implement the strongest form of mutual authentication and transaction verification available. Designed specifically for mass markets and extranet situations, VALid® combines ease-of-use, cost effectiveness and strong security, from challenge response up to and including conversational voice biometrics, to ensure that service providers can verify to non-repudiation level if required, the verification of identity of both internal employees, external contractors and customers who may have access to sensitive material and also conduct transactions electronically.

 

§Non-Repudiation – PKI (Digital Certificates)

Long regarded as a form of Non-Repudiation is now vulnerable to Man-in-the-Browser attacks. This means that PKI can no longer guarantee the integrity of transactions and therefore can be challenged in a Court of Law where PKI is presented as a case for Non-Repudiation. VALid® has been designed to address the issue of Non-Repudiation through its multi-layered approach, which includes elements such as: Transaction Verification; Transaction Data Signing (cryptographically linking a One Time Passcode to the underlying transaction); Voice Biometrics (or OOB challenge/response); Customer Authorization (Voice Recording) and Geometric Transaction Analysis, to achieve the highest level of non-repudiation capability, presented to the customer in an intuitive and easy-to-use manner.

 

§Business Enabling

Financial institutions cannot leverage the full power and cost effectiveness of the Internet as a Business Enabling/Self-Service medium because of security concerns. Certain transactions requiring branch or telephone banking, or the completion of paper-based forms with signatures (e.g. Address change), are considered too high risk for Internet deployment, and as a consequence these transactions continue to be processed manually resulting in high cost, inefficiencies, poor quality data and customer inconvenience. VALid®, through the combination of OOB Strong Mutual Authentication and Transaction Verification, provides the capability to securely automate today’s manual processes resulting in: dramatic cost savings; customer empowerment; increasing the consistency, accuracy, timeliness and security of transactions; and creating competitive advantage through market differentiation.

 

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Competition

 

We experience intense competition in each of the market segments in which we operate.

 

Mobile Services

 

We face competition from other vendors, from other MVNE’s, as well as from the traditional MNOs. An average MNO may have a few dozen technology suppliers: each may deliver a part of the overall network, switching, control and administrative systems comprising a mobile carrier’s infrastructure to service millions of retail customers. Likewise, many companies are aiming to become a vendor/partner of a MNO in order to assist the MNO to better service their wholesale business towards MVNOs. Some companies try to achieve this by selling various core components as a more traditional vendor: stand-alone switching systems, billing systems, CRM systems, Intelligent Network systems, etc. Examples of our competition in this market are companies like Highdeal, Comverse, Geneva, Amdocs and Artilium. In such cases the MNO often contracts with a system integrator like Cap Gemini or Atos Origin to help them to integrate all these components into effectively working systems. Recently, more and more of these system integrators not only position themselves anymore as onetime integrators, but they are also looking to assume the role as an on-going service providers, keeping (part of) the system up and running on behalf of the MNO: examples are Cap Gemini, Atos Origin, EDS, Accenture, and IBM. Likewise, various vendors themselves assumed such roles of managing and operating the systems they supplied. As such, we also face competition from traditional telecom infrastructure companies like Nokia-Siemens, Ericsson, Huawei, ZTE and Alcatel-Lucent.

 

As a consequence of these purchasing and outsourcing policies, many MNOs have over the years assembled large teams, sometimes as large as a dozen or more vendors/integrators/service providers, whereby each of them delivers a crucial part of the overall required capabilities. Not only have such larger teams, usually involving hundreds of full time consultants, been requiring very intense vendor management attention from the MNO to coordinate them, the result was often a very complex operational structure and work environment for both the MNO as well as the MVNO to work with. Instead of bringing superior, flexible services at affordable cost levels that were supposed to improve the position of the MNO to easily go after MVNO business, the MNO is often struck with a whole range of hard to manage, inflexible and expensive (and sometimes even incompatible) platforms, that actually undermine the capability of the MNO to successfully and profitably compete for MVNO business. Existing MVNOs threaten to migrate to another network provider, while new prospect are lost to other MNOs that do provide more flexible and affordable service.

 

Being positioned for many years as an outsourcing partner for other businesses that require telecoms as a part of their overall service offering, we believe we can assist MNOs to simplify and streamline these outsourced system requirements. One of the key elements in our offering in landline telecommunications has always been that all network, switching, control and administrative elements would function within one system, and that our B2B customer would be able to self-manage such system through an easy to use web based interface. In designing its MVNE platform, our company has kept the same philosophy in place. As a result, a MNO would only require one managed service provider to fully offer any possible service requirement any type of MVNO may have. We therefore believe that we not only eliminate an intense and costly vendor management role, but at the same time offer flexible, superior service levels at a much lower operational cost.

 

Other companies that have positioned themselves as a MVNE platform provider, aiming to assume the same role of a one stop solution provider to MNOs, and as such are direct competitors of us, include Aspider, primarily active in the Netherlands, Vistream/Materna, primarily active in Germany, Effortel, primarily active in Belgium and Italy, Transatel, primarily active in France, Telcordia, primarily active in North America, Virtel, primarily active in Australia and the combination Artilium/Atos Origin, active throughout Europe. However, none of them cover the same depth and width of platform capabilities as Elephant Talk provides. On top of that, on the supplier/vendor side we believe we compete favorably with all the earlier mentioned telecom system vendors and integrators. Even though we believe our company has a very good offering at a competitive pricing level, many of our competitors may develop a comparable, fully integrated MVNE platform in the near future. As many of these competitors are much larger companies than ours, with much higher profiles, it may very well be that these competitors will successfully sell their higher priced, less capable solutions than comparable Elephant Talk systems.

 

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Although we believe we will continue to create excellent opportunities for MNOs to increase the addressable market they can service profitably, many MNOs may still prefer to compete directly with us, not only for the business of larger MVNOs, but also in servicing the many smaller MVNOs. This situation may become more likely if new technologies make it easier for the MNOs to service both larger and smaller non-retail customers directly on a lower cost basis. Also, other MVNEs may create strong competition, especially if such new MVNEs will be created by competing MNOs as a consequence of our success in profitably cooperating with other MNOs that already have a successful MVNE relationship with us.

 

Traditional Telecom Services

 

In all segments where we offer traditional telecom services like carrier (pre) select/dial around/2-stage dialing services, premium rate and toll free services, we encounter heavy competition. Our stiffest competition comes from each of the incumbent telecom operators such as BT, France Telecom, KPN, Telefonica, Telecom Italia and Telekom Austria. The strongest price competition usually comes from smaller, locally established and/or regional players, although newer Pan-European carriers like Colt Telecom position themselves as aggressively priced competition.

 

Fraud Prevention and Security Software Services

 

ValidSoft’s anti-fraud and authentication solutions face competition from market players such as Authentify, Strikeforce, Finsphere, Tricipher for Out-of-Band authentication (OBB), RSA, VASCO and others for Tokens, and Verisign and others for Digital Certificates and Voice Vault and Nuance for voice-biometric authentication.

 

However, ValidSoft’s solutions, which can combine with Elephant Talk’s telecommunications expertise and infrastructure, result in state-of-the-art (and currently one-of-a-kind) complete solutions for multi-factor authentication solutions, with an emphasis on debit- and credit-card fraud prevention.

 

More specifically, ValidSoft’s patented VALid® solution combines strong authentication and transaction verification to counter not only traditional fraud vectors but also the latest in, for example, session-hijacking (Man-in-the-Middle, Man-in-the-Browser). Traditional authentication solutions, including hardware tokens, are vulnerable to these types of threats.

 

In addition, VALid-POS®, provides a sophisticated third-factor solution, using the international mobile telecommunications network, to determine whether a financial transaction is being attempted in the same approximate geographic region as a consumer’s mobile telephone. ValidSoft, unlike its competitors, does not use privacy-intrusive (and relatively time-consuming) latitude-longitude or GPS services.  The Proximity Correlation Logic at the heart of VALid-POS can also be used on other electronic channels such as Internet banking and M-banking.

 

VALid-SVP (‘Speaker Verification Platform’) is ValidSoft’s voice-biometric solution, adding an additional authentication factor. ValidSoft’s voice biometrics capability supports text-dependent, text-independent and conversational biometrics and all are capable of being deployed in a single platform and are accessible through a single API.

 

The combination of ValidSoft’s modules can employ up to four factors: VALid-4F®. This includes voice biometrics as well as VALid-POS for card-present transactions, both cross-border and domestic.

 

In addition, ValidSoft has developed a SIM-Swap detection solution, to secure the OOB mobile channel: VALid-SSD®. SIM Swap fraud is a first-transaction, spear-phishing fraud vector that is usually a one-hit, high-value fraud loss transaction. This supplements the strategic platform that can incorporate the other anti-fraud technologies that can be activated as and when required – again through a standard API set.

 

ValidSoft, by using customers’ existing telephony and mobile devices, ensures complete interoperability between multiple banks, while capable of providing the necessary branding through the use of the individual banks’ voice scripts.

 

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Managing conventional ‘two-factor’ authentication systems that use physical tokens carries significant business overheads, such as the end user token distribution process (including retrieval and replacement), synchronization issues and time sequencing problems – all of which contribute to considerably greater costs. ValidSoft’s solutions do not suffer these issues and provide financial institutions – and government sector bodies – with the added benefit of a significantly lower ‘Total Cost of Ownership’ whilst dramatically improving security levels.

 

Intellectual Property, Patents, Copyrights

 

Intellectual Property

Since the acquisition of ValidSoft by Elephant Talk in March 2010, considerable resources have been invested in developing and increasing ValidSoft’s product and intellectual property portfolio.

 

In terms of products, since March 2010, ValidSoft has considerably grown its product portfolio, the key elements of which include:

 

1.VALid® a patented two-factor authentication solution.

 

2.VALid-POS® a patent-pending solution for so-called ‘false-positive’ prevention, using proximity correlation logic.

 

3.VALid-SSD® a patent-pending solution for ‘SIM-Swap’ detection.

 

4.VALid-CFU™ a patent-pending solution for ‘Call-Forward Unconditional’ detection.

 

5.VALid-SVP™ the Speaker Verification Platform, a proprietary voice-biometric solution.

 

6.VALid-4F® the combination of the above technologies, resulting in a highly secure 4-Factor authentication solution.

 

Only VALid® and VALid-POS® were marketable products at the time of the acquisition, items 3 to 6 inclusive are therefore products, developed since March 2010, which are ready for market.

 

Patents

As indicated above, ValidSoft’s products and technology are further protected by patent law. Indeed, at the time of the March 2010 acquisition, ValidSoft owned one UK patent (for VALid®) and had filed one patent application (for VALid-POS®).

 

Since then, ValidSoft has invested in research and development capabilities resulting in a significant expansion in its patent portfolio. Specifically, ValidSoft has since the acquisition made three new patent applications. These, if granted, will give ValidSoft a twenty year monopoly over the core technology used in its VALid-SSD®, VALid-CFU™ products. The third application is for a new security mechanism for high-security wireless networks (Dual-SSID authentication).

 

Our focus on protecting our intellectual property in the growth markets is an indicator of our strategic business focus going forward. The growth markets (South America, Asia Pacific) will be increasingly important to ValidSoft as the demographics are highly suited to our solutions and there is significant business potential

 

Copyright

All ValidSoft’s products are software-based technology solutions. As such, the proprietary source code used in each of the (above) products is protected by copyright and will be licensed or delivered as part of a wider service to clients.

As is common in the security software market, ValidSoft does use open standards (e.g. SSL) and in some case components of open source software. Naturally, ValidSoft does not claim ownership in such open standards or open source code; however most of ValidSoft’s software is based on proprietary (and therefore copyright-protected) code.

 

Data Protection and Privacy Compliance

 

In March 2010, ValidSoft was awarded the European Privacy Seal for the product VALid-POS®, which was deemed fully compliant with EU data protection and privacy law.

 

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The ValidSoft platform is also built on privacy, an underlying principle in all our solutions. ValidSoft is the first security software company in the world to have been awarded this seal.The granting of the European Privacy Seal to VALid-POS®, the most recognised and stringent certification available in Europe, provides the legal compliance mechanism that enables mobile network data to be legally and securely exchanged between the entities involved in providing the VALid-POS® service; namely the Mobile Network Operators, the Banks and VALid-POS® itself.

 

European data protection law is the most stringent in the world and in fact forms the basis for similar legislation in many other regions. ValidSoft has commenced a legal assessment of data protection and privacy laws in other regions and countries, initially including the US, Australia and Hong Kong, where the solution has also been assessed as fully compliant.

 

Second Privacy Seal Awarded - The second European Privacy Seal is awarded for VALid-4F™ in September 2011, the four-factor authentication and transaction verification solution that incorporates both biometric voice verification and Proximity Correlation Logic; knowing where someone is or isn’t. The second Seal confirms the company’s ability to maintain the highest privacy standards in its work with citizens’ information when contracted by financial services organizations and government departments.

 

At ValidSoft, we believe in the concept of ‘privacy by design’, as described by Gartner, privacy and data protection should be embedded throughout the entire life cycle of technologies, from the early design stage to their deployment, use and ultimate disposal (European Commission: A digital agenda for Europe, 26/8/2010). Our second EuroPriSe seal confirms that our products embody that approach right across the private and public sectors.

 

Government Regulation

 

We operate in a heavily regulated industry. As a multinational telecommunications company or provider of services to carriers and operators, we are directly and indirectly 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. Certain European, 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.

 

Employees

 

As of December 31, 2011 we employed 120 people and retained on a long term basis, the services of 53 independent contractors. We consider relations with our employees and contractors to be good. Each of our current employees and contractors has entered into confidentiality and non-competition agreements with us. There are no collective bargaining contracts covering any of our employees.

 

ITEM 1A.  RISK FACTORS

 

Risks Related to Our Company

  

The substantial and continuing losses, and significant ongoing operating expenses incurred in the past few years, may require us to change our business plan.

 

We have incurred net losses of $25,310,735 and $92,483,360 for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, we had an accumulated deficit of $180,128,371.

 

Our losses are the result of our continued investment in engineering, software development and build up of integration skills and intellectual property of our mobile platform and our fraud prevetion solutions as well as increase in international market development efforts. In 2011 these investments saw the beginning of a revenue ramp-up whereby the revenue contribution (Revenues minus Cost of Service) in 2011 increased more than 70% in comparison with the previous year. This was partly due to a large customer base with monthly recurring revenues coming on to our platform at the end of the 4th quarter 2011. However, this has not yet resulted in positive cash flow and accordingly, management may consider financing as needed.

 

During 2011 the company received gross proceeds of $26,808,067 from exercised warrants and employee options. In 2012 up till 5 March the company received another $590,740 of gross proceed from exercised warrants and employee options.

 

Although the Company has previously been able to raise capital as needed, such capital may not continue to be available at all, or if available, on reasonable terms as required. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to the Company or existing shareholders. If we are unable to secure additional capital, as circumstances require, or do not succeed in meeting our sales objectives we may be required to change our operations.

 

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Recent economic events and, in particular, the “credit crisis” may have an adverse effect in the markets in which we operate.

 

Much of our business is consumer driven, and to the extent there is a decline in consumer spending, we could experience a reduction in the demand for our services and a decrease in our revenues, net income and an increase in bad debts arising from non-payment of our trade receivables. Although we have seen a slow-down in our existing revenues, it is too early to predict what effect the current “credit crisis” may have on us and we will need to carefully monitor our operating costs as the effects of the current economic issues become known.

 

We currently derive a large part of our revenue from the business activity landline outsourced services.

 

Although our revenue mix is changing and our mobile and security services are improving operating margins, the landline based premium rate services are currently still comprise the largest revenue for the company, although with low margins. If significant changes occur in market conditions pertaining to this type of service it could have an adverse impact on our business, results of operations and financial condition.

 

We have recently shifted our business strategy, and we may not prove successful in our new focus

 

In 2006 we began to expand our focus from the market of landline telecommunication services to mobile and security services, including substantial increases of investment in software engineering, systems integration and mobile components. Even though we have built experience in serving these new customers since 2008, we have limited large scale experience in these areas, therefore we may not be able to enter and compete in these markets, or achieve profitability.

 

We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.

 

Our operations are subject to a broad range of complex and evolving laws and regulations. Because of our coverage in many countries, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be adversely affected.

 

The Company has identified material weaknesses in internal control over financial reporting

 

The Company received an adverse opinion on the effectiveness of its internal control over financial reporting as of December 31, 2011 because of material weaknesses identified in management’s assessment of the effectiveness of such internal control as of that date related to US GAAP and SEC reporting expertise following budget contraints and limited resources. These material weaknesses, if not remediated, create an increased risk of misstatement of the Company’s financial results, which, if material, may require future restatement thereof. A failure to implement improved internal controls, or difficulties encountered in their implementation or execution, could cause the Company future delays in its reporting obligations and could have a negative effect on the Company and the trading price of the Company’s common stock. See “Item 9A. Controls and Procedures,” for more information on the status of the Company’s internal control over financial reporting

 

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 our software solutions 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 result in customer dissatisfaction, customer loss or both, which could materially and adversely affect our reputation and business.

 

Our systems are an integral part of our customers’ business operations. It is critical for our customers, that our systems provide a continued and uninterrupted performance. Customers may be dissatisfied by any system failure that interrupts our ability to provide services to them. Sustained or repeated system failures would reduce the attractiveness of our services significantly and could result in decreased demand for our services.

 

We face the following risks to our networks, infrastructure and software applications:

 

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•our territory can have significant weather events which physically damage access lines;

 

•power surges and outages, computer viruses or hacking, earthquakes, terrorism attacks, vandalism 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 broaden our solutions offerings as well as to increase the volume of voice, data and media 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 acquired ValidSoft and we may pursue additional acquisitions in the future to further our strategic objectives. Acquisitions of businesses and customer lists involve operational risks, including the possibility that an acquisition may not ultimately provide the benefits originally anticipated by management. Moreover, we may not 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 integrating technologies and solutions, in migrating customer bases 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. Therefore, successful integration may not occur in light of these factors.

 

Uncertainties and risks associated with international markets could adversely impact our international operations.

 

We have significant international operations in Europe and to a lesser extent in the Middle East and the Far East. 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 most of our business is conducted outside the United States, fluctuations in foreign currency exchange rates versus the United States Dollar could adversely affect our (reported) results of operations.

  

Currently all of our net revenue is derived from sales and operations outside the United States whereas 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, where the Euro is the predominant currency. Considering the fact that most income and expenses are not subject to relevant exchange rate differences, it is only at a reporting level that the translation needs to be made to the reporting unit of USD. 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 distorting effect (either negative or positive) on the reported results of operations, not necessarily being the result of operations in real terms. 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, USD/GBP and USD/BHD.

 

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We historically have not engaged in hedging transactions since we primarily operate in same currency countries, currently being the EUR. However, the operations of affiliates and subsidiaries in non-US countries have been funded with investments and other advances denominated in foreign currencies and more recently in USD. 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 accumulate other comprehensive loss within the shareholders’ deficit section of our consolidated balance sheets. Although we have not engaged in hedging so far we continue to assess on a regular basis the possible need for hedging.

 

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.

 

The market for telecommunications (traffic) services is significantly influenced by the marketing and pricing decisions of the larger long distance, Internet access, broadband, DSL and mobile business participants. Prices in the land-line and mobile communication industries have continued to decline in recent years, and as competition continues to increase, we believe that prices are likely to continue decreasing. 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 traffic services 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 the principal or incumbent carriers of a country and 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 in the traffic services 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 services related to communications software and information systems, outsourced solutions and value added (communication) services, including our ValidSoft fraud prevention and resolution products are highly competitive and fragmented, and we expect competition to continue to increase. We compete with telecom solution providers, independent software and service providers and the in-house IT and network departments of communications companies as well as firms that provide IT services (including consulting, systems integration and managed services), software vendors that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular communications services (such as Internet, land-line and mobile services, cable, satellite and service bureaus) and companies that offer software systems in combination with the sale of network equipment. Also, in this more fragmented market, larger players exist with associated advantages described earlier which we need to compete against.

 

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 development & engineering, critical systems and network infrastructure to maintain or improve our service quality levels, purchase and utilize other system and solutions, and train and manage our employee base. 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, sales and marketing and administrative resources.

 

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.

 

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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. Foreign taxing authorities may not agree with our interpretations or reach different 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, technical sales 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, communication engineers, project managers, sales consultants, employees and operational employees. The competition for qualified technical sales, technical, and managerial personnel in the communications and software 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. Volatility in the stock market and other factors could diminish the company’s use, and the value, of the company’s equity awards as incentives to employees, putting the company at a competitive disadvantage or forcing the company to use more cash compensation.

 

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 internationally. We rely on a combination of patents, 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. The technology licensed by us may not continue to provide competitive features and functionality. Licenses for technology currently used by us or other technology that we may seek to license in the future may not be available to us on commercially reasonable terms or at all.

 

Our revenue, earnings and profitability are affected by the length of our sales cycle as well length of strategic mobile partnership cycle, and longer cycles could adversely affect our results of operations and financial condition.

 

Our business is directly affected by the length of our sales cycle and strategic mobile partnership cycles with mobile operators (MNOs). Both our telecommunications traffic services as well as our communications information systems, outsourced solutions and value added (communication) services, including our ValidSoft security solutions are relatively complex and their purchase generally involves a significant commitment of capital, with attendant delays frequently associated with large capital expenditures and procurement procedures within an organization. The purchase of these types of products typically also requires coordination and agreement across many departments within a potential customer’s and MNO’s organization. Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic slowdown in the communications industry, which may recur in the current economic climate, our typical sales cycle lengthens, which means that the average time between our initial contact with a prospective customer or MNO and the signing of a sales contract or MNO increases. The lengthening of our sales and strategic mobile partnership cycle could reduce growth in our revenue in the future. In addition, the lengthening of our sales and strategic mobile partnership cycle contributes to an increased cost of sales, thereby reducing our profitability.

 

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We are dependent on a significant customer for our Premium Rate Services business and the loss of this customer could have an adverse effect on our business, results of operations and financial condition.

  

In 2011 the Company had a customer in the Netherlands, which accounted for Premium Rate Services revenue of $18,670,810 or (58% of the total revenue). For the same period in 2010, this same Dutch customer accounted for $22,439,478 or (60% of the total revenue). If this significant customer discontinues its relationship with us for any reason, or reduces or postpones current or expected revenues, it could have an adverse impact on our business, results of operations and financial condition although this impact is smaller than the revenue shows because of the low margin contribution of this particular (landline PRS) business. Loss of this customer, may result in adverse effect on our business, results of operation and financial conditions.

 

 

Product defects or software errors could adversely affect our business.

 

Design defects or software errors may cause delays in product introductions and project implementations, damage customer satisfaction and may have a material adverse effect on our business, results of operations and financial condition. Our software products are highly complex and may, from time to time, contain design defects or software errors that may be difficult to detect and correct. Because our products are generally used by our customers to perform critical business functions, design defects, software errors, misuse of our products, incorrect data from external sources or other potential problems within or outside of our control may arise during implementation or from the use of our products, and may result in financial or other damages to our customers, for which we may be held responsible. Although we have license agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. In addition, as a result of business and other considerations, we may undertake to compensate our customers for damages caused to them arising from the use of our products, even if our liability is limited by a license or other agreement. Claims and liabilities arising from customer problems could also damage our reputation, adversely affecting our business, results of operations and the financial condition.

 

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. As a multinational telecommunications company or provider of services to carriers and operators, we are directly and indirectly 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. Certain European, 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.

 

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. 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.

 

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 mobile and security solutions may not be adequate in amount or timing to offset the declines in margin from our traditional land-line telecommunications services.

 

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We experience intense domestic and international competition in our telecommunications traffic and fraud prevention business which may adversely affect our results of operations and financial condition

 

Both the land-line and mobile traffic business 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, Mobile Network Operators, cable television companies, who would offer voice, broadband, Internet access and television, and electric power utilities who would offer voice and broadband Internet access. As competition intensifies as a result of deregulatory, market or technological developments, our results of operations and financial condition could be adversely affected, since the traffic business still constitutes a sizeable portion of our total business.

 

Deterioration in our relationships with facilities-based carriers could have a material adverse effect upon our telecommunications traffic business.

 

In our telecommunication traffic business, we primarily connect our customers’ telephone calls and data/Internet needs through access agreements with facilities-based Mobile Network Operators and land-line 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 market for communications information systems as well as security and fraud prevention services is highly competitive and fragmented, and we expect competition to continue to increase.

 

We compete with independent software and service providers and with the in-house IT and network departments of  communications companies. Our main competitors include firms that provide IT services (including consulting, systems integration and managed services), software vendors that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular communications services (such as Internet, wireline and wireless services, cable, satellite and service bureaus) and network equipment providers that offer software systems in combination with the sale of network equipment. We also compete with companies that provide digital commerce software and solutions.

 

We believe that our ability to compete depends on a number of factors, including: 

 

• the development by others of software products that are competitive with our products and services, 

• the price at which others offer competitive software and services, 

• the ability to make use of the networks of mobile network operators, 

• the technological changes of telecommunication operators affecting our ability to run services over their networks, 

• the ability of competitors to deliver projects at a level of quality that rivals our own, 

• the responsiveness of our competitors to customer needs, and 

• the ability of our competitors to hire, retain and motivate key personnel.

 

A number of our competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong name recognition. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties 

 

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 mobile, 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 land-line services, such as mobile, broadband, Internet and VOIP services, are a substantial competitive threat to our legacy land-line traffic business. If we do not continue to invest and exploit our contemplated plan of development of our communications information systems, outsourced solutions and value added (communication) services to meet changing market conditions, or 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 mobile services.

 

Risks Related to Our Capital Stock

 

We could issue additional common stock, which might dilute the book value of our capital stock.

 

Our board of directors has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares of common stock. Any such stock issuance could be made at a price that reflects a discount or a premium to the then-current trading price of our common stock. In addition, in order to raise future capital, we may need to issue securities that are convertible into or exchangeable for a significant amount of our common stock. These issuances, if any, would dilute your percentage ownership interest in the company, thereby having the effect of reducing your influence on matters on which shareholders vote. You may incur additional dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to purchase shares of our common stock. As a result, any such issuances or exercises would dilute your interest in the company and the per share book value of the common stock that you owned, either of which could negatively affect the trading price of our common stock and the value of your investment.

 

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Our board of directors has the power to designate a series of preferred stock without shareholder approval that could contain conversion or voting rights that adversely affect our common shareholders.

 

Our Articles of Incorporation authorize the issuance of capital stock including 50,000,000 undesignated preferred shares, and empowers our board of directors to prescribe by resolution and without shareholder approval a class or series of such preferred shares, including the number of shares in the class or series and the voting powers, designations, rights, preferences, restrictions and the relative rights in each such class or series thereof. The creation and issuance of any such preferred shares could dilute your voting and ownership interest in the company, the value of your investment, the trading price of our stock and any cash (or other form of consideration) that you would otherwise receive upon the liquidation of the company.

 

If we issue additional shares of common stock in connection with subsequent financings, this could have a dilutive effect on your voting rights.

 

We are authorized to issue 300,000,000 shares of capital stock, including 250,000,000 shares of common stock and 50,000,000 shares of preferred stock, of which 113,807,071 were issued and outstanding as of March 9, 2012.

 

Furthermore, should we decide to finance the company through the issuance of additional common stock, convertible debt or preferred stock, this may have a dilutive effect on your voting rights, the value of your investment and the trading price of the common stock. If we issue more than 20% of our outstanding common stock in any equity-based financing, we are required to call a special meeting of our shareholders to authorize the issuance of such additional shares before undertaking the issuance. As a result, we cannot assure you that our shareholders would authorize such issuance and the company could be required to seek necessary capital in an alternative manner, which may not be available on commercially reasonable terms, if at all. If the company is unable to adequately fund itself, through its operations or equity/debt financing, this would have a material adverse affect on the company as a going concern.

 

As a “thinly-traded” stock, large sales can place downward pressure on our stock price.

 

Our stock experiences periods when it could be considered “thinly traded”. Financing transactions resulting in a large number of newly issued shares that become readily tradable, or other events that cause current shareholders to sell shares, could place further downward pressure on the trading price of our stock. In addition, the lack of a robust resale market may require a shareholder who desires to sell a large number of shares to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock.

 

Shares eligible for future sale may adversely affect the market for our common stock.

 

As of December 31, 2011 there are 7,868,989 options and warrants to purchase 50,865,247 shares of our common stock outstanding. If and when these securities are exercised into shares of our common stock, the number of our shares of common stock outstanding will increase. A significant portion of shares underlying the outstanding warrants are free-trading shares pursuant to certain registration statement and post-effective amendment to such registration statement filed with the SEC.Such increase in our outstanding share, and any sales of such shares, could have a material adverse effect on the market for our common stock and the market price of our common stock.

 

Most of the outstanding warrants which have been registered in 2010 (FORM S-1 filing date November 22, 2010 and the POST EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 filing date September 1, 2011) are still outstanding and are still likely to be exercised in due course.

 

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In addition, from time to time, certain of our shareholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, which we refer to in this prospectus as the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated shareholders (or shareholders whose shares are aggregated) may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale and (ii) non-affiliated shareholders may sell without such limitations, provided we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one year holding period without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.

 

Excercising of the warrants will dilute your interest in the Company.

 

The Company has issued warrants to purchase shares of the Company’s common stock in connection with private placement financings. The exercise of such warrants will significantly dilute your interest in the Company and could have a material adverse effect on the trading price of our common stock and the value of your investment.

 

Because our executive officers, directors, their affiliates and certain principal shareholders own a large percentage of our voting stock, other shareholders’ voting power may be limited.

 

As of December 31, 2011 Steven van der Velden, Martin Zuurbier, Johan Dejager, Phil Hickman, Rijkman Groenink, Jacques Kerrest, Pat Carroll, Mark Nije and Alex Vermeulen, our directors and executive officers, their affiliates and certain principal shareholders , beneficially owned or controlled approximately 37% of our outstanding common stock. In particular, as of December 31, 2011, Rising Water Capital AG, an entity affiliated with the certain of the aforementioned individuals, beneficially owned 23% of our common stock and QAT II Investments SA, another entity affiliated with certain of our officers and directors, beneficially owned 5.3% of our outstanding stock and hold 20,893,081 warrants that at various conditions can be converted into common stock. QAT Investments SA, another entity affiliated with certain of our officers and directors, is the owner of 51.3% of Rising Water Capital. If those shareholders act together, they will have the ability to have a substantial influence on matters submitted to our shareholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. As a result, our other shareholders may have little or no influence over matters submitted for shareholder approval. In addition, the ownership of such shareholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our common stock. These shareholders may make decisions that are adverse to your interests.

  

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 shareholders for the foreseeable future.

 

ITEM 1 B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Our offices in The Netherlands are located at Schiphol Boulevard 249, 1118 BH Schiphol. The office monthly rental is $14,220 and is subject to renting until June 2015. In addition the Company rents office space at Wattstraat 52, 1171 TR, Sassenheim, The Netherlands for a monthly rental of $1,801.

 

                Elephant Talk Communications S.L.U. is currently renting office space at Paratge Bujonis, 17220 Sant Feliu de Guixols, (Girona) Spain, on a quarter-to-quarter rent, at a monthly rent of $5,594. In Guangzhou, China, we rent office space for a monthly rental of $7,863.

 

                ValidSoft Limited Ireland is currently leasing office space at Donegal Suite, Castle Buildings, Tara Street, Tullamore, Co. Offaly, Ireland on a rent at a monthly rent of $18,063. ValidSoft (U.K.) Ltd rents office space at 9 Devonshire Square, London, United Kingdom on a renewable 12 month rent for a monthly rental of $16,574.

 

                We also rent space for our telecom switches, servers and IT platforms at data centers (“co-locations”) at an aggregate monthly rent of $46,254. The various co-location spaces include: Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Paris, Vienna, Bahrain and other locations where our telecommunications equipment are located..

 

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We believe the facilities currently under rent are adequate for our present activities and that additional facilities are available on competitive market terms to provide for such future expansion of our operations as may be warranted.

 

ITEM 3.   LEGAL PROCEEDINGS

 

(a) Manu Ohri Litigation

 

In March 2009, Manu Ohri (Ohri), the Company’s former Chief Financial Officer from 2002 to 2006, commenced a lawsuit against the Company in the California Orange County Superior Court entitled Manu Ohri v. Elephant Talk Communications, Inc., Case No. 30-20009-00120609. Ohri alleged that the Company breached a 2006 written employment contract, a 2007 oral consulting contract, and otherwise owed him the reasonable value of consulting services rendered. The Company denied Ohri's allegations and commenced a cross-complaint against Ohri to, among other things, invalidate his alleged 2006 employment contract and stock bonus, and to recover the stock bonus or its fair market value.

 

The Company and Ohri, without any admissions of fault or liability, agreed byDecember 31, 2011 to compromise, resolve and extinguish all of their respective claims in consideration for mutual general releases and Ohri's conveyance of 300,000 shares of common stock to the Company. The lawsuit was dismissed in its entirety with prejudice without any final determination by the court on the merits of the parties’ respective claims.

 

(b) Chong Hing Bank Litigation

 

In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

 

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

 

·The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;
·The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and
·The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

 

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

 

(c) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.

 

As previously described in our 2004 Annual Report we and New Times Navigation Limited mutually agreed to terminate this purchase agreement. We returned the received shares of New Times Navigation Limited to the concerned shareholders and received back 90,100 of our common stock out of the 204,000 issued by us for the purchase. In addition we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.

 

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We are 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 113,900 common shares (valued at $381,565) and also to have them return the remaining 18 unsecured convertible promissory notes representing a total amount of $1,740,000 and rescind the purchase agreement. The case is currently pending.

 

PART II

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND PURCHASES OF EQUITY SECURITIES

 

As of December 5, 2011 our common stock is listed for quotation on the NYSE AMEX under the symbol “ETAK”.  The following table sets forth the high and low closing price per share as per closing of each trading day as quoted on the NYSE AMEX and published on the internet by www.nasdaq.com for each quarter from January 1, 2010 through December 31, 2011. These quotations reflect prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not reasonably represent actual transactions.

 

   Common Stock 
Quarter Ended  High   Low 
           
December 31, 2011  $3.38   $2.35 
September 30, 2011  $4.00   $2.60 
June 30, 2011  $3.38   $2.14 
March 31, 2011  $3.20   $2.22 
December 31, 2010  $3.50   $2.15 
September 30, 2010  $2.60   $1.50 
June 30, 2010  $2.05   $1.50 
March 31, 2010  $1.75   $1.20 

 

At December 31, 2011, we had approximately 4,258 record holders of our common stock.

 

Dividends

 

We have not declared any cash dividends since inception and do not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors and will depend on our earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit our ability to pay dividend on our common stock other than those generally imposed by applicable state law.

 

26
 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Plan category  Number of
Securities
Authorized		   Number of
option rights
granted but
not yet
exercised		   Number of
issued Shares
for this Plan,
including
exercised
options		   Number of
securities
(shares)
remaining for
future issuance		   Weighted-average exercise
price of outstanding
options,
warrants and rights		 
                          
Securities Authorized for Issuance under Equity Compensation Plans Approved by Security Holders                         
2006 Non-Qualified Stock and Option Compensation Plan (1)   1,000,000    75,000    276,577    689,490   $2.25 
2008 Long-Term Incentive Compensation Plan (2)(3)(4)   23,000,000    7,793,989    510,095    22,164,905   $1.78 
Equity compensation plans not approved by security holders   —    —    —    —      
Total   24,000,000    7,868,989    786,672    22,854,395      

 

(1)S-8 Filed July 21, 2006
(2)S-8 Filed July 11, 2008
(3)The shareholders approved the increase of the total number of shares of available to be issued under the 2008 Long-Term Incentive Compensation Plan from 5,000,000 to 23,000,000. 8-K filed September 20, 20-11
(4)S-8 Filed October 6, 2011 registration of the shares available for grant from 5,000,000 to 23,000,000

 

Recent Sales of Unregistered Securities

 

Shares issued in 2011

 

On October 26, 2011 the company issued 122,857 shares in lieu of cash compensation to certain directors and executive officers. No proceeds were received. 

 

The above-referenced securities were offered and sold pursuant to exemptions from registration provided by the Securities Act.

 

Shares issued (or cancelled) in 2012

 

On January 6, 2012 the company cancelled 300,000 shares from their register relating to the return of 300,000 shares as a result of the dismissal of a lawsuit against a former Chief Financial Officer. See also Note 25.

 

8% Senior Secured Convertible Notes in 2012

 

On March 29, 2012, we sold certain 8% senior secured convertible notes in the principal amount of $8.8 million to certain purchasers. See Footnote 29 to the Financial Statements.

 

Warrants issued in 2011

 

No warrants (other than replacement warrants for the remaining underlying shares after a partial excercise) were issued in the three month preceding the closing of this quarter.

 

Stock Performance Graph

 

The graph below compares the cumulative total stockholder return on ETAK common stock with the cumulative return of the NASDAQ Comp. Index (IXIC) and the NASDAQ Telecom Index (IXUT) for each of the five fiscal years ended December 31, 2011, assuming an investment of $100 at the beginning of such period.

 

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The table below shows $100 invested on December 31, 2006 in stock or index:

 

Month/Year  ETAK   NASDAQ Comp.   NASDAQ Telecom
12-2006   100.00    100.00   100.00
12-2007   77.78    109.81   109.17
12-2008   26.67    65.29   62.25
12-2009   57.78    93.95   92.27
12-2010   104.89    109.84   95.89
12-2011   117.78    107.86   83.79

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The selected consolidated financial data presented below should be read in conjunction with the Consolidated financial statements, the Notes to Consolidated Financial Statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are elsewhere included in this form 10-K.

 

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   2011   2010   2009   2008   2007 
Balance sheet data:                         
TOTAL ASSETS  $44,812,103   $38,921,932   $24,426,776   $19,456,073   $24,608,228 
Long term Liabilities   785,218    468,756    19,963,088    402,425    — 
TOTAL LIABILITIES   9,717,003    10,250,664    30,554,777    10,419,455    34,090,964 
                          
Statement of Income Data:                         
REVENUES  $32,232,981   $37,168,351   $43,650,957   $44,359,007   $47,361,028 
Cost of service   28,723,265    35,120,916    41,452,639    43,336,111    45,608,557 
   3,509,716    2,047,435    2,198,318    1,022,896    1,752,471 
                          
Selling, general and administrative expenses   16,589,649    9,620,322    7,958,933    7,569,583    5,825,884 
Non cash compensation to officers, directors and employees   6,818,905    5,588,392    1,727,870    1,266,155    5,045,502 
Depreciation and amortization of intangibles assets   5,254,708    5,312,469    3,051,461    6,633,768    2,233,454 
Intangible assets impairment charge   522,726    —    —    —    — 
Total cost and operating expenses   57,909,253    55,642,099    54,190,903    58,805,617    58,713,397 
                          
LOSS FROM OPERATIONS  $(25,676,272)  $(18,473,748)  $(10,539,946)  $(14,446,610)  $(11,352,369)
                          
OTHER INCOME (EXPENSE)                         
Interest income   106,721    239,713    160,535    42,258    101,324 
Interest expense   (201,184)   (1,802,804)   (938,627)   (499,015)   (849,212)
Other income   460,000    —    (480,000)   —    — 
Interest expense related to amortization of debt discount on promissory notes   —    (21,094,104)   (4,369,183)   —    — 
Change in fair value of warrant liabilities   —    (48,107,969)   (538,382)   —    — 
Amoritization of deferred financing costs   —    (3,238,602)   (591,710)   —    — 
Beneficial conversion feature charge   —    —    —    (1,200,000)   — 
Total other income (expense)   365,537    (74,003,766)   (6,757,367)   (1,656,757)   (747,888)
                          
LOSS BEFORE PROVISION FOR INCOME TAXES   (25,310,735)   (92,477,514)   (17,297,313)   (16,103,367)   (12,100,257)
Provision for income taxes   —    (800)   (800)   (800)   (800)
NET LOSS BEFORE NONCONTROLLING INTEREST   (25,310,735)   (92,478,314)   (17,298,113)   (16,104,167)   (12,101,057)
Net (loss) income attributable to noncontrolling interest   —    (5,046)   (1,771)   88,808    43,325 
NET LOSS  $(25,310,735)  $(92,483,360)  $(17,299,884)  $(16,015,359)  $(12,057,732)
                          
OTHER COMPREHENSIVE (LOSS) INCOME                         
Foreign currency translation gain (loss)   (624,275)   (1,655,917)   190,063    (490,239)   1,426,498 
    (624,275)   (1,655,917)   190,063    (490,239)   1,426,498 
                          
COMPREHENSIVE LOSS  $(25,935,010)  $(94,139,277)  $(17,109,821)  $(16,505,598)  $(10,631,234)
                          
Net loss per common share and equivalents - basic and diluted  $(0.24)  $(1.31)  $(0.32)  $(0.53)  $(1.27)
                          
Weighted average shares outstanding during the period - basic and diluted   104,326,066    70,670,776    53,553,354    30,263,376    9,530,637 

 

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

Any forward looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and an inability to arrange additional debt or equity financing.

 

Overview

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto and the other financial information included elsewhere in this document.

 

Application of Critical Accounting Policies and Estimates

 

Revenue Recognition and Deferred Revenue

 

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”) (formerly, Staff Accounting Bulletin (SAB) 104). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a fixed-line and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). The Company recognizes revenue from prepaid calling cards as the services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services.

 

Stock-based Compensation

 

Effective January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock Compensation”, using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally three years), which we have elected to amortize on a straight-line basis.

 

Business Combinations

 

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price includes the direct costs of the acquisition. However, beginning in fiscal 2009, acquisition-related costs will be expensed as incurred, in accordance with ASC 805 “Business Combinations”Amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

 

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Intangible Assets and Impairment of long Lived Assets

 

In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, “Property and Equipment”, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

 

Goodwill Impairment

 

On September 15, 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard in 2011 had no material impact on the Company’s financial statements.

 

 

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Impact of Accounting Pronouncements

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 increases the prominence of other comprehensive income in financial statements. Under ASU 2011-05, companies will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in equity and is applied retrospectively. For public companies, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.The Company does not expect this to have a material impact on its financial statements.

 

ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this to have a material impact on its financial statements.

 

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance on disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company does not expect this to have a material impact on its financial statements.

 

Services and Solutions

 

Elephant Talk is an international provider of business software and outsourced services to the telecommunications and financial services industry.

 

Full-MVNE/MVNO Mobile Services – wholesale services and managed services to Mobile Network Operators and Virtual Network Operators.

 

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The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

 

As of 2007 we positioned ourselves as an MVNE to MNOs and MVNOs offering a wide range of mobile enabling/enhancing services through sophisticated, proprietary technology supported by multi-country operations with a focus on business to business, outsourcing /partnering strategy. Important milestones in this respect are:

 

·On September 17, 2008 a hosting agreement was signed with T-Mobile in the Netherlands. T-Mobile is one of the three MNOs in the Netherlands. Elephant Talk will connect MVNOs in the Netherlands to its platform, making use of the mobile network of T-Mobile.

 

·In Spain, we have provided since June 2009, managed services to Vodafone Enabler.

 

·In the course of 2010 we signed a framework hosting agreement with KPN Group Belgium NV. Elephant Talk will connect MVNOs in Belgium to its platform, making use of the mobile network of KPN in Belgium. The platform will be ready for services as of Q1 2012.

 

·In 2011 the company closed a contract with Zain KSA in Saudi Arabia to provide its mobile platform which is ready for service as of 2011.

 

·In November 2011 we executed a mass migration of SIMs on to our platform in Spain. This live migration – without having to replace the SIM cards – was an unique achievement and milestone for the Company.

 

·In February 2012 we acquired out of liquidation proceedings the assets of Ensercom, a small MVNE in Germany giving us instant footprint in the German market.

  

ValidSoft – Fraud Prevention and Security Software Solutions

 

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

 

As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.

 

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques. The key operational highlights:

  

·In September 2011 ValidSoft and Adeptra (www.adeptra.nl) Form Partnership to Extend Global Fraud Detection and Customer Communications. The partnership provides financial organizations with best-in-class fraud detection and prevention functionality, as well as total control over their customer communications.

 

33
 

 

·ValidSoft was successful in a joint bid for the provision of a Self Certification project to an EU Government in the area of citizen benefit payments. The solution will evaluate the use of technology and incorporate ValidSoft’s Speaker Verification Platform, VALid-SVP™ to provide automation in the processing of citizen benefits with a view to achieving cost reduction and efficiencies.

 

·The Company launched VALid-SVP™ (Speaker Verification Platform), a voice biometric technology to improve secure authentication.

 

·ValidSoft has filed applications for three new patents in the Card Not Present fraud prevention area and the high end security area.

 

·ValidSoft successfully renewed the European Privacy Seal in regards to its anti-fraud technology software, VALid-POS®, which is designed to detect and prevent card related fraud, a global multibillion dollar problem for financial institutions.

 

·ValidSoft was awarded its Second European Privacy Seal for its VALid-4F™solution and continues to be the only Security Software Company in the world to be certified to the EuroPriSe standards. The European Privacy Seal certifies IT products and IT-based services privacy compliance with European data protection regulations.

 

Landline network outsourcing services

 

Through our fixed line telecom infrastructure and our centrally operated and managed ET Boss and Infitel platform, the Company also provides traditional landline services like Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate Services to the business market.

 

Support technology

 

Business Support and Operational Support System (“ET BOSS”) and Intelligent Network – IN – (“Infitel”)

 

Through our European and Chinese development centers, we develop in-house telecom and media related systems and software, centered related to companies’ proprietary platforms ET BOSS and IN

 

Electronic fraud prevention products: VALid-POS®, VALid®, VALid-SVP™ and VALid-4F®

 

Our subsidiary ValidSoft has given us ownership of technology and intellectual property to combat fraud relating to card, the internet, and telephone channels. ValidSoft solutions are marketed under VALid-POS®, VALid® and VALid-4F®. For its biometrics based product it trades under VALid-SVP™.

 

Telecom infrastructure & network

 

We currently operate a switch-based telecom network with national licenses and direct fixed line interconnects with the Incumbents/National Telecom Operators in seven (7) European countries, one (1) in the Middle East (Bahrain), and partnerships with telecom operators in Scandinavia, Poland and Germany, and France. To this we have added mobile access coverage in order to cater for our mobile services and solutions. Our first mobile partners are T-Mobile in the Netherlands, Vodafone Enabler in Spain, KPN in Belgium. In Saudi Arabia we partnered with Zain KSA to provide our mobile platform services.

 

Results of Operations

 

Our results of operations for the year ended December 31, 2011, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and its subsidiaries, Elephant Talk Global Holding BV and its subsidiaries and ValidSoft Ltd and its subsidiaries.

 

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Although the vast majority of our business activities are carried out in Euros, we report our financial statements in US dollars (“USD”). The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. In addition to reporting changes in our financial statements in USD as per the requirements of United States generally accepted accounting principles (“US GAAP”), we also highlight the impact of any material currency translation effect by providing a comparison between periods on a constant currency basis, where the most recent USD/Euro exchange rate is applied to previous periods. Management believes that this allows for greater insight into the trends and changes in our business for the reported periods. Also, since we carry out our business activities primarily in Euro’s we do not currently engage in hedging activities.

 

The constant currency analysis presented whithin the comparison of the year-to-year results is calculated by using the average exchange rates over the year 2011. The same exchange rates are used in the income statement 2011. The following table shows the USD equivalent of the major currencies:

 

   USD equivalent 
Euro  $1.3910 
British Pound  $1.6034 

 

Adjusted EBITDA

 

In order to provide investors additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for investors and others which allows them to better understand and evaluate our operating results.

 

A reconciliation of Adjusted EBITDA to net loss, the most directly comparable measure under U.S. GAAP, for each of the fiscal periods indicated, is as follows:

 

EBITDA Adjusted  2011   2010   2009 
             
Net loss  $(25,310,735)  $(92,483,360)  $(17,299,884)
Provision for income taxes   —    800    800 
Net loss attributable to noncontrolling interest   —    5,046    1,771 
Depreciation and amortization   5,254,708    5,312,469    3,051,461 
Intangible assets impairment charge   522,726    —    — 
Stock-based compensation   6,818,905    5,588,392    1,727,870 
Other income & expenses   (365,537)   74,003,766    6,277,367 
Adjusted EBITDA  $(13,079,933)  $(7,572,887)   (6,240,615)

 

       Constant Currency 
EBITDA Adjusted  2011   2010   2009 
             
Net loss  $(25,310,735)  $(93,041,181)  $(17,308,474)
Provision for income taxes   —    800    800 
Net loss attributable to non-controlling interest   —    5,046    1,771 
Depreciation and amortization   5,254,708    5,565,544    3,054,330 
Intangible assets impairment charge   522,726    —    — 
Stock-based compensation   6,818,905    5,588,392    1,727,870 
Other income & expenses   (365,537)   74,003,901    6,753,518 
Adjusted EBITDA  $(13,079,933)  $(7,877,498)  $(5,770,185)

 

(Note to Adjusted EBITDA: 2009 figures do not include ValidSoft and 2010 figures include ValidSoft as of 1 April 2010).

 

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Impact in constant currency of the inclusion of ValidSoft financials for the year ended December 31, 2010:

 

       Constant currency 
   2011   Validsoft Q1
2010		   2010 with Q1
Validsoft		 
                
Net loss  $(25,310,735)  $(1,352,803)  $(94,393,983)
Provision for income taxes   —    0    800 
Net loss attributable to non-controlling interest   —    0    5,046 
Depreciation and amortization   5,254,708    5,941    5,571,486 
Intangible assets impairment charge   522,726    —    — 
Stock-based compensation   6,818,905    0    5,588,392 
Other income & expenses   (365,537)   53,778    74,057,679 
Adjusted EBITDA  $(13,079,933)  $(1,293,084)  $(9,170,580)

 

Comparison of Years Ended December 31, 2011 and 2010

  

Revenue for the year ended December 31, 2011 was $32,232,981, a decrease of $4,935,370 or 13.28%, compared to $37,168,351 for the year ending December 31, 2010. The decrease in revenue was the result of the expected continued landline calling minutes related revenue decrease in our low margin legacy landline business by $7,886,899 (or 22.97%), which was partly off-set by the increase in revenues of our higher margin mobile and security solutions business of $2,951,530 (or 104.42%) compared to 2010. The increase in our higher margin mobile and security solutions business is mainly due to the increasing revenues of already existing customers  and a customer with a large consumer base with monthly recurring revenues coming on to our platform at the end of the 4th quarter 2011.

 

Revenue  2011   2010   2009 
Landline Services  $26,454,826   $34,341,725   $37,808,578 
Mobile & Security Solutions   5,778,155    2,826,625    5,842,379 
Total Revenue  $32,232,981   $37,168,350   $43,650,957 

 

Despite these total revenue declines, Revenue minus Cost of Service increased because of the higher margin in the mobile and security business.

 

   2011   2010   2009 
Revenues  $32,232,981   $37,168,351   $43,650,957 
Cost of Service   28,723,265    35,120,916    41,452,639 
   $3,509,716   $2,047,435   $2,198,318 

 

Cost of Service. Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost of leasing transmission facilities, international gateway switches for voice, and data transmission services.

 

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Cost of Service for the year ended December 31, 2011 was $28,723,265, a decrease of $6,397,651 or 18.22%, compared to $35,120,916 for the year ended December 31, 2010. The decrease in cost of service was mainly caused by the decrease in revenues in our low margin legacy landline business. Cost of service as a percent of revenue was 89.1% and 94.5% for the years ended December 31, 2011 and 2010, respectively.

 

Management expects cost of service to decline further as a percent of revenue as a greater proportion of future revenue is comprised of our mobile services and ValidSoft solutions, which have a substantially lower cost of service than our traditional landline business.

 

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expense for the years ended December 31, 2011 and 2010, were $16,589,649 and $9,620,322, respectively. SG&A expenses increased by $6,969,327, or 72.44%, in 2011 compared to 2010. This was led by an increase of 32.3% in our staffing levels on December 31, 2011 compared to December 31, 2010, largely in sales and European hires, as well as by higher marketing and selling costs. The increases in staffing levels and higher marketing and selling costs are mainly related to expected future revenues.

 

Non-cash compensation to officers, directors, consultants and employees. Non-cash compensation for the years ended December 31, 2011 and 2010 was $6,818,905 and $5,588,392, respectively. The increase is primarily attributable to higher staffing levels and the inclusion of ValidSoft.

 

Non-cash compensation is comprised of:

·the expense related to shares of restricted common stock that were issued to management in lieu of cash compensation;
·the 2006 Non-Qualified Stock and Option Compensation Plan and  the 2008 Long-Term Incentive Plan; and;
·the expense related to shares issued to consultants and others for services.

 

Depreciation and amortization. Depreciation and amortization for the years ended December 31, 2011 and 2010, was $5,254,708 and $5,312,469 respectively. Depreciation and amortization expenses decreased by $57,761 or 1.09% in 2011 compared to 2010.

 

Intangible assets impairment charge. The December 31, 2011 consolidated balance sheet includes: $12.7 million of intangible assets, net, and $13.3 million of fixed assets, net. Management updated its analysis of intangible assets and long-lived assets as of December 31, 2011. As a result of this assessment, we determined that the value of certain specific intangible assets was higher than the estimated recoverable value, and as a result, incurred an impairment charge of approximately $522,726 in 2011.In the evaluation of its intangible assets, the company estimated the undiscounted future cash flows directly associated with the asset and compared these to the asset's carrying amount. The assets impaired pertained primarily to Landline Business a specific two stage dialing product in order to make international long distance calls. The two stage dialing business is facing regulated tariffs by the European Union and competition from internet based alternatives like Skype. The impaired intangible assets consist of a brandname and business contracts. The segment where these intangible are part of is the Landline business.

.

We have acquired several companies in the last few years and our current business strategy includes continuing to make additional acquisitions in the future. These acquisitions may continue to give rise to goodwill and other intangible assets which will need to be assessed for impairment from time to time.

 

Other Income and Expenses. Interest income was $106,721 and $239,713 for the years ended December 31, 2011 and 2010. Interest income was interest received on bank balances.

 

Interest expense was $201,184 and $1,802,804 for the years ended December 31, 2011 and 2010 respectively. High levels of interest expense in 2010 were due to higher levels of debt financing and less favorable interest rates. Interest charges decreased with the automatic conversion of the QAT 2010 bridge loan and 2009 promissory notes on November 19, 2010.

 

Other income was $460,000 and $0 for the years ended December 31, 2011 and 2010 respectively. Other income was the result of the release of a FIN48 provision following a successful abatement request with the IRS for the year 2007. Following this success full abatement the company also decided to release a similar provision it had made for a potential IRS fine for the year 2008.

 

37
 

 

Non-controlling Interest. Our majority owned subsidiaries are Elephant Talk Communications PRS U.K. Limited, Elephant Talk Communications Premium Rate Services Netherlands B.V., 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 and  ET-UTS NV.

 

We incurred a non-controlling interest charge attributable to minority shareholders’ interest for the years ended December 31, 2011 and December 31, 2010 of $0 and $5,046 respectively.

 

Net Loss. Net Loss was $25,310,735 and $92,483,360 for the years ended December 31, 2011 and 2010 respectively. The improvement of $67,172,625 was primarily the result of high non-cash financing charges in 2010.

  

Other Comprehensive Income (Loss). We record foreign currency translation gains and losses as other comprehensive income or loss. Other comprehensive Income (Loss) for the years ended December 31, 2011 and 2010 was ($624,275) and ($1,655,917) respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

 

Constant currency Comparison of Years Ended December 31, 2011 and 2010

 

         Constant currency 
Revenue   2011    2010    Variance 2011 versus 2010 
Landline Services  $26,454,826   $36,031,206   $(9,576,380)
Mobile & Security Solutions   5,778,155    2,968,144    2,810,011 
Total Revenue  $32,232,981   $38,999,350   $(6,766,369)

 

Revenue - constant currency. In constant currency, the revenue decreased by $6,766,368 or 17.35% compared to 2010. The decrease in revenue was the result of the expected continued decrease in our low margin legacy landline business by $9,576,380 (or 26.58%), which was partly off-set by the increase in our higher margin mobile and security solutions business of $2,810,011 (or 94.67%) compared to 2010.

 

         Constant currency 
    2011    2010    Variance 2011 versus 2010 
Revenue  $32,232,981   $38,999,350   $(6,766,369)
Cost of service   28,723,265    36,860,331    (8,137,066)
   $3,509,716   $2,139,019   $1,370,697 

 

Cost of service– constant currency. In constant currency the cost of service decreased by $8,137,066 or 22.1% compared to the same period in 2010, primarily as a result of lower levels of revenue and the lower cost of service associated with the mobile managed services and Validsoft business. 

 

Selling, general and administrative expenses – constant currency. In constant currency, SG&A increased by $6,573,133 or 65.6%, compared to the same period in 2010. The increase in expenses was mainly attributable to increased staffing levels and the inclusion of ValidSoft into our financials as of April 1, 2010.

 

Non-cash compensation to officers, directors, consultants and employees – constant currency. Since non-cash compensation comprises United States Dollars denominated shares, options and warrants, a constant currency analysis is not applicable.

 

Depreciation and amortization – constant currency. In constant currency the depreciation and amortization expenses decreased by $310,836 or 5.6% compared to the same period in 2010.

 

Comparison of Years Ended December 31, 2010 and 2009

 

Revenue. Revenue for the year ended December 31, 2010 was $37,168,351, a decrease of $6,482,606 or 14.9%, compared to $43,650,957 for the year ending December 31, 2009. $2,008,830 of the decrease was a result of an unfavourable impact of the currency translation effect arising from a lower USD/Euro exchange rate. We had new mobile customers in 2010, especially in the higher margin managed service segment, but still experienced delays in the roll-out of other mobile customers, with the result that these new revenues could not compensate yet for the loss in wholesale revenue following the departure of an early stage mobile customer in financial disarray as well as a one-off project the company completed in 2009.

 

Cost of service. Cost of service for the year ended December 31, 2010 was $35,120,916, a decrease of $6,331,723 or 15.3%, compared to $41,452,639 for the year ended December 31, 2009. $1,913,634 of the decrease was a result of a favorable impact of the currency translation effect arising from a lower USD/Euro exchange rate. $4,418,087 of the decrease was the result of lower revenues, combined with lower cost of service associated with the mobile managed services and Validsoft business.

  

38
 

 

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses for the years ended December 31, 2010 and 2009, were $9,620,322 and $7,958,933, respectively. SG&A expenses increased by $1,661,389, or 20.9%, in 2010 compared to 2009. The increase in expenses was mainly attributable to increased staffing levels and the inclusion of ValidSoft into our financials as of April 1, 2010.

 

Non-cash compensation to officers, directors, consultants and employees. Non-cash compensation for the years ended December 31, 2010 and 2009 was $5,588,392 and $1,727,870, respectively. The increase was primarily attributable to higher staffing levels and the inclusion of ValidSoft.

 

Non-cash compensation was comprised of:

·         the expense related to shares of restricted common stock that were issued to management in lieu of cash compensation;

·         the 2006 Non-Qualified Stock and Option Compensation Plan and the 2008 Long-Term Incentive Plan; and

·         the expense related to shares issued to consultants for services.

 

 

Depreciation and amortization. Depreciation and amortization for the years ended December 31, 2010 and 2009, was $5,312,469 and $3,051,461 respectively. Depreciation and amortization expenses increased by $2,261,008 or 74.1% in 2010 compared to 2009. The increase of the amortization was primarily due to the amortization of the acquired intangible assets of Validsoft in 2010.

 

Intangible assets impairment charge. The December 31, 2010 consolidated balance sheet includes: $16.3 million of intangible assets, net, and $3.2 million of goodwill. Management updated itsanalysis of intangible assets and long-lived assets as of December 31, 2010 and we determined that for 2010 no asset impairment charges are necessary.

 

Other Income and Expenses. Interest income was $239,713 and $160,535 for the years ended December 31, 2010 and 2009 respectively. Interest income was interest received on bank balances.

 

Interest expense was $1,802,804 and $938,627 for the years ended December 31, 2010 and 2009 respectively. The increase in interest expenses of $864,177 compared to 2009 was related to higher levels of debt financing and less favorable interest rates. With the automatic conversion of the QAT 2010 bridge loan and 2009 promissory notes on November 19, 2010 future interest charges will be limited.

 

Other expenses were $0 and $480,000 for the years ended December 31, 2010 and 2009 respectively. We accrued in 2009 a FIN48 reserve of $480,000 for uncertain tax position, including interest and penalties.

 

In 2010 fair value expenses and amortizations related to the Convertible Notes, associated Warrants and deferred financing costs were $72,440,675 compared to $5,499,275 in 2009. The substantial increases in these expenses were primarily caused by the increase of our share price at the moments when fair value calculations for reporting purposes were required, including the fair value calculations that were necessary upon the automatic conversion of all convertible notes and loans.

 

With the conversion in 2010 of all of the outstanding convertible loans into equity there are no financial instruments left that require fair value measurements as of 2011, hence no more income statement impacts related to these types of instruments unless new financial instruments are issued that trigger liability accounting.

 

Non-controlling Interest. Our majority owned subsidiaries are Elephant Talk Communications PRS U.K. Limited, Elephant Talk Communications Premium Rate Services Netherlands B.V., 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 and ET-UTS NV.

 

We incurred a non-controlling interest charge attributable to minority shareholders’ interest for the years ended December 31, 2010 and December 31, 2009 of $5,046 and $1,771 respectively.

 

39
 

  

Net Loss. Net Loss was $92,483,360 and $17,299,884 for the years ended December 31, 2010 and 2009 respectively. The deterioration of $ 75,183,476 was primarily the result of non-cash financing charges that increased in 2010 by $66,941,400 compared to 2009. The remaining $ 8,242,076 was the result of:

·         increased depreciation and amortization of $ 2,261,008 compared to 2009;

·         increased SG&A expensees of $1,661,389 compared to 2009

·         increased, stock based compensation expenses of $ 3,860,522 compared to 2009;

·         increased interest income and expenses of $ 784,999 compared to 2009;

·         decrease of margin of $150,883 compared to 2009;

·         decrease of other expenses of $476,725 compared to 2009.

  

Comprehensive Income (Loss). Comprehensive Income (Loss) for the years ended December 31, 2010 and 2009 was ($1,655,917) and $190,063 respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

 

Liquidity and Capital Resources

 

We have an accumulated deficit of $180,128,371 as of December 31, 2011. Historically, we have relied on a combination of debt and equity financings to fund our ongoing cash requirements. 

 

In 2011 we received a total of $26,808,067 in gross proceeds from warrants and options exercised. After deduction of placement fees and associated costs the net proceeds from financing activities amounted to $25,894,241.

 

In addition, we received $ 271,915 in supplier financing for equipment purchased.

 

 

40
 

 

Following the delivery of our redundant and new version of our mobile platform in November 2011 and deployment in new countries, as well as the migration at the end of 2011 of a substantial customer base on to our network of recurring monthly revenues as well as increased revenues from our ValidSoft fraud solution management expects revenue increases and margin improvements in 2011.

 

We believe that together with our cash balance at December 31, 2011, of $6,009,576, the convertible secured loan the Company secured on March 29th 2012 for the net proceeds of US$ 5.7 million (for the coming 12 months), $1.8 million cash generated by the restored credit term with one of our recurring supplier, $590,740 cash generated by the warrants and options exercised so far in 2012 and an up to $2 million commitment from an affiliated party, the company feels that the funds available are sufficient to meet our cash needs for the next twelve months and therefore will have the ability to continue as a going concern.   In addition, the Company believes that it could continue to attract funds, through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners in the form of debt, mezzanine or permanent equity. In case cash flows from operations or financing are delayed, the company will lower its capital expenditures on new developments and markets as well as reduce the hiring of new employees and contractors.

  

Loan agreements

 

On March 29th 2012, a number of investors (“Holders”) entered into a senior secured convertible loan agreement (“Note”) in the principal amount of $8,800,000 with the Company whereby the Holders will provide the company with gross proceeds of $8,000,000, after the $800,000 Original Issue Discount. According to the terms, the Note will bear an interest rate of 8% of the principal amount and mature May 1st 2014. The monthly installment payments (constituting interest and amortization) total $ 2,273,718 for the first year and $ 7,180,000 for the second year. Of the $ 8,000,000, the amount equal to the first year installments, being $ 2,273,718, will be placed in escrow and will be applied on a monthly basis for the payment of the monthly installments. At the election of the Company the Company can decide on a monthly basis to pay the full installment amount or parts thereof in common stock of the Company at an amount equal to 90% of the average of the five lowest volume weighted average (“VWAP|”) of the common stock during the twenty (20) Trading Days immediately prior to such installment on the trading day payment date. The remaining amount of $5,726,282 has been made available to the Company immediately at closing of the transaction. In the first year, when the company elects to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow and becomes available to the Company. The Notes are convertible at the option of the Holder into our common stock at a fixed conversion price conversion price equal to 115% of the trailing 30 day closing price prior to closing of the transaction. After a period of 12 months the Note automatically converts at the Fixed Conversion Price, if the shares of the Company, for any consecutive 30 days, close at or above 150% of the Fixed Conversion Price. The Notes are secured by a first priority security interest in all of the assets of the Company. In the event the company (in partnership with Adeptra) fails to announce that it has entered into and operationalized a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the company receives certain amount of net compensation, the Holders may declare all of the then outstanding principal amount of the Note to be due and payable immediately. In addition in such event, the Holders may convert the Notes into our common stock at the lowest of (a) the fixed conversion price in effect prior to such failure, (b) 90% of the average of the 5 lowest VWAPs for the 20 days prior to that day (c) 90% of the lowest reported trade price for the common stock as reported by Bloomberg on such date. Upon occurrence thereof the Company has the option to redeem a portion or the entire outstanding amount of this Note at a redemption price of 100% thereof.

 

The Company is obligated to register the shares of Common Stock underlying the Notes pursuant to certain mandatory registration rights granted to the Holders.

 

Operating activities

 

Net cash used in operating activities for the year ended December 31, 2011 was $14,570,936 compared to $14,107,838 in 2010, an increase of $463,098. This increase is primarily attributable to working capital changes as increased account receivable of ($1,372,719) and deferred revenue of $142,309 and decreased prepaid expenses, deposits and other assets of $782,920, accrued expenses and other payables of ($1,587,264), accounts payable, proceeds from related parties and customer deposits ($140,229). The net change in working capital is an increase of $2,174,983.

 

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Investment activities

 

Net cash used in investment activities for year ended December 31, 2011 was $8,517,211 an increase of $5,329,449, (or 167.2%) compared to $3,187,762 in 2010. The increase was primarily attributable to a higher level of equipment and software purchases.

 

Financing activities

 

Net cash received by financing activities for the year ended December 31, 2011 was $25,894,241 compared to $17,899,518 for the year ended December 31, 2010. Please see footnotes 2 and 28 of Financial Statement for more information.

 

As a result of the above activities, the Company had a cash and cash equivalents balance of $6,009,576 as of December 31, 2011, a net increase in cash and cash equivalents of $3,763,879 since December 31, 2010.

 

Off- Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

  

Financing related events in 2011

 

Loan conversions, Share Offerings, Warrant and Employee Options exercises

 

Below is a summary of the results of the efforts of the company to attract funds and also improve the balance sheet position of the company. The company does not have any convertible loans and notes outstanding.

 

Financing  Number of
shares issued		   Type   Gross Proceeds 2011   Remark 
                 
Bridge SPA "A"-Warrant Exercise ($1.25)   2,783,988    Warrant   $3,347,365    Mandatory exercises 
Bridge SPA "A"-Agent Warrant Exercise ($1.25)   154,683    Warrant   $81,563    Voluntary excercises 
Bridge SPA "B"-Warrant Exercise ($2.00)   725,000    Warrant   $1,300,000    Voluntary exercises 
Bridge SPA "B"-Agent Warrant Exercise ($2.00)   65,250    Warrant   $75,000    Voluntary exercises 
2010 PIPE Warrant Exercises ($1.50)   11,666,685    Warrant   $17,500,028    Mandatory exercises 
Exercise Agent Warrants (2009 Placement) ($1.00)   96,289    Warrant   $-    Voluntary exercises 
Employee Option Exercising (2006 Plan)   276,577    Employee Option   $624,688    Voluntary exercises 
Employee Option Exercising (2008 Plan)   510,095    Employee Option   $630,549    Voluntary exercises 
                     
    16,278,567        $23,559,193      

 

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign currency exchange rate

As the vast majority of our business activities are carried out in Euros and we report our financial statements in US dollars, fluctuations in foreign currencies impact the total amount of assets and liabilities that we report for our foreign subsidiaries upon the translation of those amounts in US dollars. Since we carry out our business activities primarily in Euro’s we do not currently engage in hedging activities.

 

We do not believe that we currently have material exposure to interest rate, foreign currency exchange rate or other relevant market risks.

 

Contractual obligations

The contractual obligations are presented in the footnote 24, Commitments to the financial statements. Changes in our business needs, cancellation provisions and other factors may result in actual payments differing from these estimates.

 

ITEM 8.  FINANCIAL STATEMENTS

 

ELEPHANT TALK COMMUNICATIONS CORP.

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

AS OF December 31, 2011, 2010 and 2009

 

TABLE OF CONTENTS

 

    PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, BDO USA, LLP   44-45
     
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010   46
     
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009   47
     
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009   48
     
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009   49
     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   50-66

 

43
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Elephant Talk Communications Corporation

 

We have audited the accompanying consolidated balance sheets of Elephant Talk Communications Corporation, as of December 31, 2011 and 2010 and the related consolidated statements of income and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Elephant Talk Communication Corporation, at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elephant Talk Communications Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 30, 2012 expressed an adverse opinion thereon.

 

/s/ BDO USA, LLP

March 30, 2012

 

44
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Elephant Talk Communications Corporation

 

We have audited Elephant Talk Communications Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Elephant Talk Communications Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to maintain effective controls over its annual financial statements been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 financial statements, and this report does not affect our report dated March 15, 2012, on those financial statements.

 

In our opinion, Elephant Talk Communications Corporation did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

 

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the company after the date of management’s assessment.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Elephant Talk Communications Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated March30, 2012 expressed an unqualified opinion.

 

 

/s/ BDO USA, LLP.

Los Angeles, California

March 30, 2012

 

45
 

 

ELEPHANT TALK COMMUNICATION CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS AT DECEMBER 31, 2011 AND 2010

 

   December 31,   December 31, 
   2011   2010 
ASSETS          
           
CURRENT ASSETS          
           
Cash and cash equivalents  $6,009,576   $2,245,697 
Restricted cash   190,844    190,312 
Accounts receivable, net of an allowance for doubtful accounts of $436,546 and $119,044 at December 31, 2011 and December 31, 2010 respectively   6,441,528    5,600,562 
Prepaid expenses and other current assets   1,522,461    2,337,914 
Total Current Assets   14,164,409    10,374,485 
           
FINANCIAL INVESTMENT IN JOINT VENTURE   323,708    — 
           
NOTE RECEIVABLE   417,199    — 
           
LONG TERM DEPOSITS   651,930    610,486 
           
PROPERTY AND EQUIPMENT, NET   13,315,687    8,452,588 
           
INTANGIBLE ASSETS, NET   12,784,199    16,253,587 
           
GOODWILL   3,154,971    3,230,786 
           
TOTAL ASSETS  $44,812,103   $38,921,932 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Overdraft  $312,236   $356,738 
Accounts payable and customer deposits   4,490,455    4,703,875 
Deferred Revenue   132,467    — 
Accrued expenses and other payables   3,035,758    3,843,938 
Loans payable   960,869    877,357 
Total Current Liabilities   8,931,785    9,781,908 
           
LONG TERM LIABILITIES          
Trade note payable   271,915    — 
Loan from related party   513,303    468,756 
Total Long term Liabilities   785,218    468,756 
           
Total Liabilities   9,717,003    10,250,664 
           
STOCKHOLDERS' EQUITY          
Common stock, no par value, 250,000,000 shares authorized, 110,525,233 issued and outstanding as of December 31, 2011 compared to 88,660,848 shares issued and outstanding as of December 31, 2010   216,188,899    183,825,665 
Accumulated other comprehensive income (loss)   (1,143,295)   (519,020)
Accumulated deficit   (180,128,371)   (154,818,436)
Elephant Talk Communications Corp. Stockholders' Equity   34,917,233    28,488,209 
           
NON-CONTROLLING INTEREST   177,867    183,059 
Total Stockholders' Equity   35,095,100    28,671,268 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $44,812,103   $38,921,932 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

46
 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

 

   2011   2010   2009 
             
REVENUES  $32,232,981   $37,168,351   $43,650,957 
                
COST AND OPERATING EXPENSES               
Cost of service   28,723,265    35,120,916    41,452,639 
Selling, general and administrative expenses   16,589,649    9,620,322    7,958,933 
Non-cash compensation to officers, directors and employees   6,818,905    5,588,392    1,727,870 
Depreciation and amortization of intangibles assets   5,254,708    5,312,469    3,051,461 
Intangible assets impairment charge   522,726    —    — 
Total cost and operating expenses   57,909,253    55,642,099    54,190,903 
                
LOSS FROM OPERATIONS   (25,676,272)   (18,473,748)   (10,539,946)
                
OTHER INCOME (EXPENSE)               
Interest income   106,721    239,713    160,535 
Interest expense   (201,184)   (1,802,804)   (938,627)
Other income   460,000    —    (480,000)
Interest expense related to amortization of debt discount on promissory notes   —    (21,094,104)   (4,369,183)
Change in fair value of warrant liabilities   —    (48,107,969)   (538,382)
Amortization of deferred financing costs   —    (3,238,602)   (591,710)
Total other income (expense)   365,537    (74,003,766)   (6,757,367)
                
LOSS BEFORE PROVISION FOR INCOME TAXES   (25,310,735)   (92,477,514)   (17,297,313)
Provision for income taxes   —    (800)   (800)
NET LOSS BEFORE NONCONTROLLING INTEREST   (25,310,735)   (92,478,314)   (17,298,113)
Net (loss) income attributable to non-controlling interest   —    (5,046)   (1,771)
NET LOSS   (25,310,735)   (92,483,360)   (17,299,884)
                
OTHER COMPREHENSIVE (LOSS) INCOME               
Foreign currency translation gain (loss) net of tax   (624,275)   (1,655,917)   190,063 
    (624,275)   (1,655,917)   190,063 
                
COMPREHENSIVE LOSS  $(25,935,010)  $(94,139,277)  $(17,109,821)
                
Net loss per common share and equivalents - basic and diluted  $(0.24)  $(1.31)  $(0.32)
                
Weighted average shares outstanding during the period - basic and diluted   104,326,066    70,670,776    53,553,354 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

Description  Common Shares   Common Amount   Other compre-hensive income (loss)   Accum-mulated Deficit   Total stock-holders Equity (Deficit) 
Balance - December 31, 2008   50,433,260   $52,933,208   $946,834   $(45,035,192)  $8,844,850 
Shares issued, sold in 2008   476    500    --    --    500 
Shares issued for sign-in fee   866,316    571,074    --    --    571,074 
Shares issued for directors compensation   1,884,200    532,583    --    --    532,583 
Shares issued to consultants   307,300    205,389    --    --    205,389 
Shares returned by former CFO   (420,368)   (192,694)   --    --    (192,694)
Shares issued for management compensation   624,800    469,880    --    --    469,880 
Placement fees   --    (100,000)   --    --    (100,000)
Amortization of Stock Options expense   --    460,838    --    --    460,838 
Other comprehensive loss due to foreign exchange rate translation net of tax   --    --    190,063    --    190,063 
Net Loss   --    --    --    (17,299,884)   (17,299,884)
Balance - December 31, 2009   53,695,984   $54,880,778   $1,136,897   $(62,335,076)  $(6,317,401)
Shares issued for acquisitions   7,682,869    16,008,172    --    --    16,008,172 
Shares issued for financing   16,879,342    19,678,188    --    --    19,678,188 
Shares issued for management compensation   1,395,168    2,441,541    --    --    2,441,541 
Shares issued for note conversions   7,722,867    9,759,283    --    --    9,759,283 
Shares issued for warrant exercises   1,087,809    2,237,897    --    --    2,237,897 
Shares issued to consultants   195,876    293,371    --    --    293,371 
Shares issued for employee stock option exercises   933    --    --    --    -- 
Shares issued for sign-in fee   --    (85,974)   --    --    (85,974)
Shares to be cancelled   --    (21,629)   --    --    (21,629)
Shares to be issued   --    3,461,865    --    --    3,461,865 
Placement fees   --    (1,839,765)   --    --    (1,839,765)
Equity warrants   --    49,929,012    --    --    49,929,012 
Amortization of Stock Options expense   --    2,639,236    --    --    2,639,236 
Change in fair value of warrants   --    24,443,689    --    --    24,443,689 
Other comprehensive loss due to foreign exchange rate translation net of tax   --    --    (1,655,917)   --    (1,655,917)
Net Loss   --    --    --    (92,483,360)   (92,483,360)
Balance - December 31, 2010   88,660,848   $183,825,664   $(519,020)  $(154,818,436)  $28,488,209 
Shares issued related to Convertible Notes 2009 (to be issued in 2010)   2,210,367    --    --    --    -- 
Shares issued for warrant exercises   18,063,551    25,489,729    --    --    25,489,729 
Shares issued for employee stock option exercises   786,672    1,255,237    --    --    1,255,237 
Shares issued to consultants   303,506    737,611    --    --    737,611 
Shares issued for board & management compensation   500,287    1,343,208    --    --    1,343,208 
Shares to be issued   --    5,269    --    --    5,269 
Warrant solicitation fee   --    (1,052,897)   --    --    (1,052,897)
Amortization of Stock Options expense   --    4,697,305    --    --    4,697,305 
Expenses attributable to share issuances   --    (112,229)   --    --    (112,229)
Other comprehensive loss due to foreign exchange rate translation net of tax   --    --    (624,275)   --    (624,275)
Net Loss   --    --    --    (25,310,735)   (25,310,735)
Elimination of rounding   (2)    --    --    --    -- 
Balance - December 31, 2011   110,525,229   $216,188,897   $(1,143,295)  $(180,128,371)  $34,917,233 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

 

   2011   2010   2009 
             
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss  $(25,310,735)  $(92,483,360)  $(17,299,884)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   5,254,708    5,312,469    3,051,461 
Provision for doubtful accounts   318,443    (584,722)   220,156 
Stock based compensation   6,319,314    5,080,783    1,561,378 
Noncontrolling interest   —    5,046    1,771 
Amortization of Shares issued for Consultancy   499,591    507,609    162,501 
Change in fair value of warrant liabilities   —    48,167,991    538,382 
Amortization of deffered financing costs   —    3,238,602    — 
Interest expense relating to debt discount and conversion feature   —    21,094,104    4,960,893 
Intangible assets impairment charge   522,726    —    — 
Changes in operating assets and liabilities:               
Decrease (increase) in accounts receivable   (1,372,719)   (238,523)   (628,082)
Decrease (Increase)  in prepaid expenses, deposits and other assets   782,920    229,343    846,491 
Increase (decrease) in accounts payable, proceeds from related parties and customer deposits   (140,229)   (1,574,761)   602,179 
Increase (decrease) in deferred revenue   142,309    (131,886)   (87,853)
Increase (decrease) in accrued expenses and other payables   (1,587,264)   (2,730,533)   740,770 
Net cash used in operating activities   (14,570,936)   (14,107,838)   (5,329,837)
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Purchases of property and equipment   (7,721,307)   (3,246,057)   (3,869,149)
Restricted cash   49    42    (93)
Cash received from acquisition of subsidiary   —    58,253    — 
Payments for acquisition   (347,758)   —    — 
Loan to third party   (448,195)   —    (1,736,756)
Net cash used in investing activities   (8,517,211)   (3,187,762)   (5,605,998)
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Bank overdraft   —    13,769    27,125 
Deferred financing costs   —    (205,326)   (1,495,674)
Loan from related party QAT Bridge Loan   —    2,518,220    — 
Loan from related party Bridge SPA   —    2,885,000    — 
Proceeds from Private Placement Offering   —    14,000,000    — 
Trade note payable   271,915    —    — 
Exercise of warrants & options   26,808,067    502,621    — 
Placement & Solicitation fees   (1,185,741)   (1,814,766)   (100,000)
Proceeds from Convertible 12% secured note   —    —    5,568,000 
Proceeds from Convertible 12% secured note - related parties   —    —    6,765,015 
Loan from related party   —    —    34,736 
Net cash provided by financing activities   25,894,241    17,899,518    10,799,202 
                
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS   957,785    183,879    (62,012)
NET INCREASE IN CASH AND CASH EQUIVALENTS   3,763,879    787,797    (198,646)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD   2,245,697    1,457,900    1,656,546 
CASH AND CASH EQUIVALENTS, END OF THE PERIOD  $6,009,576   $2,245,697   $1,457,900 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:               
                
Cash paid during the period for interest  $39,560   $1,295,298   $21,965 
                
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:   2011    2010      
Shares issued to convert the notes payable and accrued interest  $—   $15,461,715   $532,583 
Cash paid during the period for income taxes  $—   $800   $800 
Increase in Share Capital due to Aquisitions and Non-cash Compensation  $—   $14,899,393    $ 
Increase of Share Capital due to Exercsie of Warrants and Conversion of Notes  $—   $9,457,044    $ 
Warrants issued to placement agents for services, treated as deferred financing costs   —    2,565,300      
Warrants and derivative liabilities for issuance of 12% Promissory Notes are considered as discount of the Promissory Notes  $—   $—   $12,333,020 
Warrants issued to placement agents for services, treated as deferred financing costs  $—   $—   $2,129,313 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Note 1. Organization

 

Elephant Talk Communications Corp. also referred to as “we”, “us”, “Elephant Talk” and “the Company” is an international provider of business software and services to the telecommunications and financial services industry. The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

 

Converged telecommunication services – full MVNE solutions.

 

The Company is a niche player in the converged telecommunications market, providing traffic and network services as a licensed operator, and specializing in carrier grade mobile enabling platforms to provide outsourced solutions to the various players in the telecommunications’ value chain, including MNOs, MVNOs and non-operator companies in need of both mobile as well as specialized land-line telecommunication services. In this chain we position ourselves as a Full Mobile Virtual Network Enabler, including also customized mobile services such as our network integrated ValidSoft security and fraud prevention solutions.

 

ValidSoft – Fraud Prevention and Security Software Solutions

 

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

 

As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.

 

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques.

 

Note 2. Financial Condition

 

The Company has an accumulated deficit of $180,128,371 as of December 31, 2011. Historically, the Company has relied on a combination of debt and equity financings to fund our ongoing cash requirements. In 2011 we received a total of $26.8 million in gross proceeds from a combination of warrant and employee option exercises.

 

We believe that together with our cash balance at December 31, 2011, of $6,009,576, the convertible secured loan the Company secured on March 29th 2012 for the net proceeds of US$ 5.7 million (for the coming 12 months), $1.8 million cash generated by the restored credit term with one of our recurring supplier, $590,740 cash generated by the warrants and options exercised so far in 2012 and an up to $2 million commitment from an affiliated party, the company feels that the funds available are sufficient to meet our cash needs for the next twelve months and therefore will have the ability to continue as a going concern.   In addition, the Company believes that it could continue to attract funds, through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners in the form of debt, mezzanine or permanent equity. In case cash flows from operations or financing are delayed, the company will lower its capital expenditures on new developments and markets as well as reduce the hiring of new employees and contractors.

 

 

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Note 3. Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements for December 31, 2011 and December 31, 2010 include the accounts of Elephant Talk Communications Corp., including:

 

·its wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Communication Austria GmbH, Elephant Talk Telekom GmbH (formerly Vocalis Austria GmbH), Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication (Europe) GmbH, Elephant Talk Communication Schweiz GmbH, Moba Consulting Partners B.V., Elephant Talk Communications France S.A.S.,its majority owned (51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V., its majority owned (51%) subsidiary Elephant Talk Communications PRS U.K. Limited, its wholly-owned 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 Guangzhou Elephant Talk Information Technology Limited., its wholly-owned Elephant Talk Caribbean B.V., its majority owned (51%) subsidiary ET-UTS N.V.;
·its wholly-owned subsidiary Elephant Talk Limited, its majority owned (60%) 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 (99%) subsidiary Elephant Talk Middle East & Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC; and
·its wholly-owned subsidiary ValidSoft Ltd and its wholly-owned subsidiaries ValidSoft (UK) Ltd & ValidSoft (Australia) Pty Ltd.

 

All intercompany balances are eliminated in consolidation.

 

Foreign Currency Translation

 

The functional currency is Euros for the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries, and Euros for its wholly-owned subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned subsidiary Elephant Talk Limited and the British Pound Sterling for its wholly-owned subsidiary ValidSoft (UK) Ltd. The financial statements of the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with Accounting Standard Codification (“ASC”) 830, Foreign Currency Matters, net gains and losses resulting from translation of foreign currency financial statements are included in the statements of shareholder’s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss). The accumulated other comprehensive income (loss) as of December 31, 2011 and December 31, 2010 was ($1,143,295) and ($519,020), respectively. The foreign currency translation gain/(loss) for the years ended December 31, 2011 and 2010 was ($624,275) and ($1,655,917), respectively.

 

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 materially from those estimates and assumptions.

 

Cash and Cash Equivalents

 

For purposes of the cash flow statements, the Company would normally consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The company has full access to the whole balance of cash and cash equivalents on a daily basis without any delay.

 

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Restricted Cash

 

Restricted cash represents cash deposited as bank guarantee for national interconnection agreements with telecom operators.

 

Accounts Receivables, net

 

The Company’s customer base consists of a geographically dispersed customer base. The Company maintains an allowance for potential credit losses on accounts receivable. 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 allowances. Allowances are recorded primarily on a specific identification basis. As of December 31, 2011 and 2010, the allowance for doubtful accounts was $436,546 and $119,044, respectively.

 

Revenue Recognition and Deferred Revenue

 

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”), (formerly, Staff Accounting Bulletin (“SAB104”). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a landline and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). For its security solutions under the ValidSoft brand name and technologies revenue represents amounts earned for consultancy services, outsourcing, maintenance and licenses (net of value added tax and inter-company revenue).

 

The Company recognizes revenue from prepaid calling cards as the services are provided.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services. Deferred revenue was $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.

 

Cost of Service

 

Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility costs of hosting network and equipment, and costs of providing resale arrangements with long distance service providers, costs of leasing transmission facilities and international gateway switches for voice and data transmission services.

 

Reporting Segments

 

ASC 280, Segment Reporting, 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. Based on these criteria the Company has determined that they operate in one reporting segment. The Company allocates its resources and assesses the performance of its sales activities based upon geographic locations of its subsidiaries.

 

Stock-based Compensation

 

Effective January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock Compensation”, (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally up to three years), which we have elected to amortize on a straight-line basis.

 

To determine the value of our stock options at grant date under our employee stock option plan, we currently use the Black-Scholes option-pricing model. The use of this model requires us to make a number of subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each assumption:

 

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Expected Life

 

The expected life represents the period that the stock option awards are expected to be outstanding. We use the simplified method for estimating the expected life of the option, by taking the average between time to vesting and the contract life of the award. Therefore, the expected term assumption was estimated for each individual grant using the simplified method as an average between time to vesting and the contractual term of the award.

 

Cumulative Volatility

 

We estimate expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using the continuously compounded return calculated by using the last 252 closing prices of the share price (= one year trading). The annual volatility is used to determine the generalized (cumulative) volatility of our common stock preceding the grant. (= annual volatility x SQRT(expected life)).

Risk-Free Interest Rate

 

We estimate the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department, or the nearest available rate, with a remaining term equal or near to the expected life of the award.

 

Expected Dividend Yield

 

We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections. We do not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.

 

Income Taxes

 

The Company accounts for income taxes under ASC 740, “Accounting for Income Taxes” (“ASC 740”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. We also assess temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting differences. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome and in assessing the need for the valuation allowance, there is no assurance that the final tax outcome and the valuation allowance will not be different than those that are reflected in our historical income tax provisions and accruals.

 

ASC 740 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.

 

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The Company has filed or is in the process of filing tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome is unknown, we believe that any adjustments that may result from tax return audits are not likely to have a material, adverse effect on our consolidated results of operations, financial condition or cash flows.

 

Comprehensive Income/(Loss)

 

Comprehensive income/(loss) includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders’ equity but are excluded from net income. For the years ended December 31, 2011 and 2010, the Company’s comprehensive income/(loss) consisted of its net loss and foreign currency translation adjustments.

  

Intangible Assets

 

In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, Property and Equipment, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

 

Property and Equipment, Internally Developed and Third Party Software

 

Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company’s internally developed software technology platform. The Company has adopted the provisions of ASC 985, Software.

 

The Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Depreciation applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Once a new functionality or improvement is released for operational use, the asset is moved from the property and equipment category “projects under construction” to a property and equipment asset subject to depreciation in accordance with the principle described in the previous sentence.

 

Recently Issued Accounting Pronouncements

  

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance on disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company does not expect this to have a material impact on its financial statements.

 

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Note 4. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets recorded at $1,522,461 as of December 31, 2011, compared with $2,337,914 as of December 31, 2010. 

 

Note 5. Financial Investment in Joint Venture

 

On December 31, 2011 the company recorded an amount of $323,708 as financial investment for acquiring one third (33.33%) ownership of a company. This financial investment is related to the purchase, from a Dutch liquidator, of various assets and liabilities from a bankrupt Dutch company together with two other parties. In order to formalize the structure, the three parties’ set-up a new company called Elephant Security I. The investment was recorded at cost and is accounted for using the equity method.

 

Note 6. Note receivable

 

As of December 31, 2011 the company recorded $417,199 of notes receivable, compared to $0 as of December 31, 2010. Notes receivable as of December 31, 2011 represent a loan of $378,354 to Morodo Ltd, from the U.K and $38,845 to Elephant Security I from the Netherlands. The loans to both companies are interim loans prior to the intended acquisition.

 

Note 7. Long-term Deposit

 

Long-term earnest deposits to various telecom carriers during the course of its operations and a deposit towards the French Tax Authorities for the total amount of $651,930 as at December 31, 2011 compared with $610,486 as of December 31, 2010. The deposits are refundable at the termination of the business relationship with the carriers.

 

Note 8. Property & Equipment

 

·Intelligent Network (IN) platform

 

·CRM software

 

·Mediation, Rating & Pricing engine

 

·Operations and Business Support software

 

·Network management tools

 

Property and equipment at December 31, 2011 and December 31, 2010 consist of:

 

   Average
Estimated
Useful		   December 31,   December 31, 
   Lifetime   2011   2010 
Furniture and fixtures   5    290,058    215,905 
Computer, communication and network equipment   3 - 10    15,247,060    9,724,189 
Software   5    4,752,070    4,187,523 
Automobiles   5    98,416    125,241 
Construction in progress        2,516,476    1,984,674 
Total property and equipment        22,904,080    16,237,531 
                
Less: accumulated depreciation        (9,588,393)   (7,784,943)
Total property and equipment, Net       $13,315,687   $8,452,588 

 

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Construction in progress consists of software projects in development that have not yet been completed. Total depreciation expense for the year ended December 31, 2011 totaled $2,231,799 compared to $2,260,489 and 2,246,669 for the same period 2010 and 2009, respectively.

 

Note 9. Intangible Assets - Customer Contracts, Licenses and Interconnects

 

Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as ValidSoft Intellectual Property, including but not limited to software source codes, applications, customer list & pipeline, registration & licenses, patents and trademark/brands.

 

Intangible assets as of December 31, 2011 and 2010 consisted of the following:

 

    Estimated   December 31,   December 31,  
    Useful Lives   2011   2010  
Customer Contracts, Licenses , Interconnect & Technology   5-10   $ 11,480,653   $ 11,615,700  
ValidSoft IP & Technology   1-10     15,428,182     15,639,154  
Total intangible assets         26,908,835     27,254,854  
                   
Less: Accumulated Amortization and impairment charges         (9,735,102 )    (8,684,964 ) 
Less: Accumulated Amortization ValidSoft IP & Technology         (4,389,533 )    (2,316,303 ) 
Total intangible assets, Net       $ 12,784,199   $ 16,253,587  

 

Total amortization expense for the year ended December 31, 2011 totaled $3,022,909 compared to $3,051,980 and $804,792 for the same period 2010 and 2009, respectively. In 2011 an impairment charge was recorded for ($522,726) in the Profit & Loss and ($486,575) in the balance sheet. The assets impaired pertained primarily to the acquired two-stage dialing business, which is part of the landline business. In 2010 and 2009 the company did not record any impairment.

 

    December 31,   December 31,  
Goodwill   2011   2010  
Goodwill at acquisition of ValidSoft Ltd   $ 3,433,833   $ 3,433,833  
End of period exchange rate translation     (278,862 )    (203,047 ) 
Total   $ 3,154,971   $ 3,230,786  

 

Estimated future amortization expense related to our intangible assets is:

 

   2012   2013   2014   2015   2016   2017
thereafter		 
Interconnect licenses and contracts  $584,079   $553,511   $475,418   $104,990   $4,382   $0 
ValidSoft IP & Technology   2,253,379    2,253,379    2,253,379    2,102,949    2,052,805    787,556 
   $2,837,458   $2,806,890   $2,728,798   $2,207,939   $2,057,187   $787,556 

 

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Intangible Assets Impairment charge

 

The Company assessed the carrying value of its intangible assets as of December 31, 2011. As a result of this assessment, the Company determined that the value of certain specific intangible assets was higher than the estimated recoverable value and therefore an impairment charge of $522,726 was recorded during 2011. In the evaluation of its Intangible Assets, the Company estimated the discounted future cash flows directly associated with the asset and compared these to the asset’s carrying amount.

 

Note 10. Acquisition of ValidSoft Ltd

 

On March 17, 2010 we issued 10,235,739 shares and 3,829,487 warrants as purchase price consideration following the completion of the acquisition of ValidSoft of which 2,558,937 shares and 957,373 warrants are contingent upon meeting specific targets following a stepped earn-out agreement.  Based upon a number material contracts not having been concluded yet as of the date of this report, the Company does not expect that the targets set forth in the earn-out agreement, will be met at this point in time. Consequently, the total value for the consideration is $16,033,688 comprising the fair market value for the non-contingent shares of $12,129,352 and non-contingent warrants of $3,904,336. The contingent consideration is held in escrow. The Company will continue to monitor the progress made and determine quarterly to what extent the stepped targets are likely to be met. 

 

Consideration paid  Total 
Consideration		   Non-
Contingent
Consideration		   Contingent
Consideration		 
Number of shares   10,235,739    7,676,805    2,558,934 
Fair value (share price at 17 March 2010)  $1.58   $12,129,352    - 
Numer of warrants   3,829,487    2,872,114    957,373 
Fair Value (black-scholes)       $3,904,336      
Total Consideration Paid       $16,033,688      

 

Following the valuation of ValidSoft, we allocated the above purchase price to the identifiable assets and liabilities of ValidSoft.

 

A summary of the assets acquired and liabilities assumed for ValidSoft are:

 

Estimated fair values:     
Assets acquired  $16,677,323 
Liabilities assumed   4,077,467 
      
Net assets acquired   12,599,856 
Consideration paid inclusive of contingent consideration valued at zero   16,033,688 
      
Goodwill  $3,433,832 

 

The operating results of ValidSoft have been consolidated with those of the Company starting April 1, 2010.

 

Note 11. Overdraft

 

In 2004, Elephant Talk Ltd, a subsidiary of the Company executed a credit facility with a bank in Hong Kong pursuant to which Elephant Talk Ltd. borrowed funds. As of December 31, 2011, the overdraft balance, including accrued interest totaled, $312,236 compared to $278,637 as of December 31, 2010. 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. The Company has not guaranteed the credit facility or is otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd. Further detail can be found in Note 25, Litigation. As of December 31, 2011, Moba Consulting Partners B.V., a subsidiary of the Company, had an overdraft of $0 compared to $78,101 as of December 31, 2010 on one of the company’s bank accounts.

 

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Note 12. Deferred Revenue

 

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 $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.

 

Note 13. Accrued Expenses

 

   December 31, 2011   December 31, 2010 
Accrued selling, general & administrative expenses  $1,477,463   $1,494,218 
Accrued cost of sales and network   562,240    380,236 
Accrued taxes   294,689    791,128 
Accrued interest payable   701,366    653,146 
Other   --    525,210 
Total accrued expenses  $3,035,758   $3,843,938 

  

Note 14. Loans Payable

 

Loans payable at December 31, 2011 and 2010 are summarized as follows:

 

    December 31
2011		    

December 31

2010

  
Installment loan payable due December 24, 2006, secured by personal guarantees of two shareholders, a former director, and a third party   $ 319,765     $ 319,182  
Installment loan payable, bank, monthly principal and interest payments of $2,798 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 30, 2008, due December 24, 2011, secured by personal guarantees of three shareholders and a former director     254,224       190,716  
Installment loan payable, bank, monthly principal and interest payments of $1,729 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 24, 2008, due June 28, 2009, secured by personal guarantees of three shareholders and a former director     103,704       84,799  
Term loan payable, bank, monthly payments of interest at bank’s prime rate, 7.0% at December 31, 2007     283,177       282,660  
Total   $ 960,870     $ 877,357  

 

In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467.

 

The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

 

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

 

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

·The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

 

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·The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and
·The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

 

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

 

Note 15. Trade note payable

 

The company entered into an arrangement with a vendor for the supply of telecommunication equipment whereby extended credit terms were agreed over and above normal credit terms. The extended credit terms stipulate a repayment of the outstanding purchase price consideration over a period of 24 months starting October 2011. The trade note payable amount relates to the portion of this outstanding price consideration due after one year.

 

Note 16. Loan from related party

 

The Company’s 51% owned subsidiary ET-UTS N.V. has received $513,303 in interest bearing (8% per annum) unsecured loans from United Telecommunication Services N.V., the 49% shareholder in the subsidiary. No maturity date has been fixed.

 

Note 17. Convertible Notes/Loans

 

12% Secured Convertible Promissory Note 2009

 

During 2011 and following the completion of administrative processing, the company issued the remaining 2,210,367 shares due to holders of the Secured Convertible Promissory Note 2009 that were automatically converted in November 2010.

 

Note 18.  Related Party Transactions

 

During 2011 Quercus Management Group (‘QMG’) an entity affiliated with certain officers and directors of the Company received for providing throughout the full year office space, back office support and car travel expenses invoices for the total amount of € 28,363 ($36,725).

 

During 2011 the company issued 89,433 shares to QAT II Investments, SA (“QAT II”) an entity affiliated with certain officers and directors of the Company as a result of the cashless exercise of 167,400 warrants issued in 2010 as part of their activities in raising funds under the “2010 Bridge SPA”. Although the transaction did not result in any cash proceed, the transaction can be valued at $209,250 as the exercise price of the warrants has been $1.25.

 

Note 19. Stockholders’ equity

 

(A) Common Stock

 

The Company is presently authorized to issue 250,000,000 shares common stock. The Company had 110,525,229 shares of common shares issued and outstanding as of December 31, 2011, an increase of 21,864,381 shares since December 31, 2010, largely due to the shares issued in connection with the mandatory exercise of warrants (18,063,551), shares issued as consideration for management and board compensation (500,287), conversion of 12% secured convertible promissory notes (2,210,367), shares issued to employees as a result of exercised employee stock options (786,672), shares issued to consultants or other suppliers for services/goods delivered (279,718) and shares delivered to an employee who was entitled to receive salary for the period he was working for ValidSoft and before ValidSoft was acquired by Elephant Talk. The employee agreed in settling this backpay in shares.

 

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The following table summarizes the shares issued for the year ended December 31, 2011:

 

Computation of Full Dilution - December 31, 2011 

Number of shares

issued

 
     
December 31, 2010 Total number of shares issued   88,660,848 
      
Shares issued to consultants   279,718 
Shares issued for management compensation   500,287 
Shares issued for warrant exercises   18,063,551 
Shares issued for acquisitions   - 
Shares issued for financing   - 
Shares issued for note conversions   2,210,367 
Shares issued for employee stock option exercises   786,672 
Shares issued for settlement with employee   23,788 
Elimination of rounding   (2)
December 31, 2011 Total number of shares issued   110,525,229 

 

Reconciliation with stock transfer agent records:

 

The number of 110,525,229 excludes the 245,900 unreturned and the 2,558,938 escrowed contingent shares (see below). The shares issued and outstanding as per December 31, 2011 according to the stock transfer agent’s records are 113,330,067, include 2,558,938 contingent shares for the ValidSoft acquisition and include 245,900 shares which were cancelled by the Company prior to 2006. However, the 245,900 shares were not returned to the stock transfer agent and never cancelled on the Company’s records. These shares have been blocked for trading by the Stock Transfer Agent. Finally, in the above table we included the elimination of a rounding difference of two shares between the Company’s shares issued and the stock transfer agent’s records.

 

(B) Class B Preferred Stock

 

The Company’s Articles of Incorporation (“Articles”) authorize the issuance of 50,000,000 shares of $ 0.00001 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 2010 or 2011 the Company did not issue any shares of Preferred Stock.

 

Note 20. Basic and diluted net loss per share

 

Net loss per share is calculated in accordance with ASC 260, Earnings per Share, (formerly SFAS No.128). 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.

 

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Note 21. Non-Qualified Stock and Option Compensation Plan and Long Term Incentive Plan

 

2006 Non-Qualified Stock and Option Compensation Plan

 

Under this plan there are, as of December 31, 2011, 75,000 stock options outstanding. There are remaining 600,000 shares and 14,490 stock options available for grant.

 

Options granted generally vest over a 3 year period. Options generally expire 2 years from the date of vesting.

 

Common stock purchase options and warrants consisted of the following as of December 31, 2011:

 

   Number of
shares		   Average
Exercise
Price		   Initial
Black
Scholes
Value		 
Options:               
Outstanding as of December 31, 2010   307,742   $2.25   $398,608 
Granted in 2011   81,422   $2.65   $25,371 
Exercised/Shares delivered or to be delivered   301,100   $2.32   $359,390 
Cancelled/Forfeited/Returned to reserve   13,064   $2.25   $11,147 
Outstanding as of December 31, 2011   75,000   $2.25   $53,441 

 

Most options were granted with an exercise price of $2.25, the share closing price as of September 26, 2007. All options have vested already. During 2011, with approval of the board/compensation committee, we granted 81,422 options to some of our employees offering them to make use of a special tax friendly saving scheme. These options were issued with an exercise price of $2.65.

 

The remaining options will expire in 2013 with various expiration dates.

 

The ‘cancelled/forfeited/returned to reserve’ options during 2011 of 13,064 were all granted in 2008 and were returned in connection with the cashless exercise of 18,000 initial options which resulted in the delivery of 4,936 shares.

 

Following is a summary of the status of options outstanding at December 31, 2011:

 

    Options outstanding     Options exercisable  
Range of Exercise Prices   Total
Options
Outstanding		     Weighted
Average
Remaining
Contractual 
Life 
(Years)		     Weighted
Average
Exercise
Price		     Options
Exercisable		     Weighted
Average
Exercise
Price		  
$  2.25  -  $  2.65     75,000       1.73 years     $ 2.25       75,000     $ 2.25  

 

At December 31, 2011, the total compensation cost related to unvested stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2006 stock award plan, but not yet recognized was $0.

 

2008 Long-Term Incentive Plan

 

The 2008 plan was adopted on January 15, 2008, and approved by our shareholders on the same date as our annual meeting. This incentive plan authorizes awards of up to 5,000,000 shares of common stock, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of common stock underlying the awards to be granted remained the same after the 25 to one reverse stock-split that was effectuated on June 11, 2008.

 

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On October 6, 2011 the company filed, after approval of the shareholders, an “Amended and Restated 2008 Long-Term Incentive Compensation Plan” which basically provided in the increase of the existing 5,000,000 shares of common stock into 23,000,000 shares of common stock in order to cover future grants under this Plan.

 

As of December 31, 2011, a total of 7,793,989 stock options are outstanding under the Plan and 325,000 shares of restricted common stock together with 507,300 shares of common stock had been granted under this plan. Options granted generally begin vesting over a three-year period after grant date although options have been granted with a shorter period than three years. Options granted in the beginning expire two years from the date of vesting but the latest in 2010 issued options remain exercisable for nine years from the date of vesting. It is expected that future options will be awarded with the nine-year exercise period after first vesting.

 

Common stock purchase options and warrants consisted of the following as of December 31, 2011:

 

   Number
of
shares		   Average
Exercise
Price		   Initial Fair 
Market 
Value		 
Options:               
Outstanding as of December 31, 2010   4,083,100   $1.35   $5,002,238 
Granted in 2011   4,644,883   $2.52   $6,312,781 
Exercised/Shares delivered or to be delivered   510,095   $1.14   $626,179 
Cancelled/Forfeited/Returned to reserve   423,899   $1.62   $493,361 
Outstanding as of December 31, 2011   7,793,989   $1.78   $10,195,479 

 

The options granted in 2011 were granted with an average exercise price of $2.52. The initial fair market value of the options granted using the Black-Sholes options model for these options has been valued at $6,312,781 at their initial grant-date.

 

Following is a summary of the status of options outstanding at December 31, 2011:

 

2008 Plan  Options outstanding   Options exercisable 
Range of
Exercise
Prices		  Total
Options
Outstanding		   Weighted
Average
Remaining
Contractual
Life (Years)		   Weighted
Average
Remaining
Expected
Life 
(Years)		   Weighted
Average
Exercise
Price		   Options
Exercisable		   Weighted
Average
Exercise
Price		 
$0.60 - $3.39   7,793,989    8.06    6.93   $1.777    1,284,547   $1.12 

 

The weighted average assumptions used for the options granted in 2011 using the Black-Scholes options model are: cumulative volatility of 152%, expected option life 5.60 years (using the simplified method) and a Risk Free Interest Rate of 1.899%. The expected dividend yield is zero.

 

At December 31, 2011 the not yet recognized expense portion of stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2008 stock award plan, was approximately $3,109,478. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate has been adjusted from 4.21% to 6.50% and the corresponding profit and loss effect has been accounted for in 2011.

 

Stock-Based Compensation Expense

 

Under the provisions of ASC 718, the Company recorded for the year ended December 31, 2011, $6,818,905 in stock-based compensation expense for management shares, Non-Qualified Stock and Option Compensation Plan and shares issued for consultancy and employee compensation. For the comparable period in 2010 the expensing was $5,588,392. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123(R).

 

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Note 22.  Income taxes

 

Income tax expense (benefit) for the year ended December 31, 2011 and 2010 is summarized as follows:

 

   December 31,
2011		   December 31,
2010		 
Current:          
Federal  $(8,605,649)  $(7,894,958)
State   (1,518,644)   (1,393,228)
Deferred Taxes   10,124,293    9,288,986 
           
Income tax expense  $—   $800 

 

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, 2011:

 

   2011   2010 
Tax expense (credit) at statutory rate-federal   (34)%   (34)%
State tax expense net of federal tax   (6)%   (6)%
Foreign income tax rate difference   10.2%   12.8%
Change in valuation allowance   29.8%   27.2%
Tax expense at actual rate   —    — 

 

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2011 are as follows:

 

Deferred tax assets:  2011   2010 
Deferred Tax Asset  $44,347,310   $34,223,016 
Total gross deferred tax assets   44,347,310    34,223,016 
Less:  Valuation allowance   (44,347,310)   (34,223,016)
Net deferred tax assets  $—   $— 

 

At December 31, 2011, the Company had accumulated deficit carry forwards of approximately $110,866,274. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $10,124,293.

 

At December 31, 2010, the Company had accumulated deficit carry forwards of approximately $85,555,541. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $9,288,986.

 

A valuation allowance of approximately $44.3 million and $34.2 million at December 31, 2011 and 2010, respectively, has been recorded against deferred tax assets as the Company was unable to conclude that it is more likely than not that such deferred tax assets will be realized.

 

As of December 31, 2011, we had net federal operating loss carry forwards and state operating loss carry forwards of approximately $44.3 million. The net federal operating loss carry forwards begin to expire in 2018 and the net state operating loss carry forwards begin to expire in 2012. The net operating loss carry forwards for foreign countries amounts to approximately $69.0 million. In all foreign countries various periods of expiration dates are applicable.

 

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Section 382 of the Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur in the stock ownership of a company.  In the event we have a change in ownership, utilization of the carry forward could be restricted.”

 

In June 2006, the FASB issued ASC Topic 740-10 “Uncertain Tax Positions” (ASC 740-10) which clarifies the accounting for uncertainty in income taxes. ASC 740-10 requires that companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for years beginning after December 15, 2006. We adopted ASC 740-10 on January 1, 2007 with no impact to our consolidated financial statements. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open for tax examination. 

 

Note 23.  Non-controlling Interest

 

The Company had non-controlling interests in several of its subsidiaries. The balance of the non-controlling interests as of December 31, 2011 and December 31, 2010 were as follows: 

 

       Non-controlling interest Balance at 
Subsidiary  Non-controlling
Interest %		   December 31, 2011   December 31, 2010 
             
ETC PRS UK   49%  $9,500   $9,723 
ETC PRS Netherlands   49%   126,894    129,870 
ET Bahrain WLL   1%   4,382    6,385 
ET ME&A FZ LLC   49.46%   37,091    37,081 
                
Total       $177,867   $183,059 

 

Note 24.  Commitments 

 

Commitments of the Company relating to co-location, network and office rents, regulatory and interconnection fees are as follows:

  

Year  Office   Co-location   Interconnect   Service/Support   Network   Total 
2012  $683,643   $513,616   $2,332,157   $141,525   $392,907   $4,063,849 
2013   440,479    253,751    1,532,507    0    199,151    2,425,887 
2014   440,479    253,751    64,572    0    197,379    956,181 
2015   241,591    0    51,612    0    182,709    475,912 
2016  $241,591   $0   $12,732   $0   $116,211    370,535 
                            $8,292,364 

 

As of December 31, 2011 the commitments of the Company relating to purchase orders are valued at cost of $372,287.

 

Note 25.  Litigation

 

(a) Manu Ohri Litigation

 

In March 2009, Manu Ohri (Ohri), the Company’s former Chief Financial Officer from 2002 to 2006, commenced a lawsuit against the Company in the California Orange County Superior Court entitled Manu Ohri v. Elephant Talk Communications, Inc., Case No. 30-20009-00120609. Ohri alleged that the Company breached a 2006 written employment contract, a 2007 oral consulting contract, and otherwise owed him the reasonable value of consulting services rendered. The Company denied Ohri's allegations and commenced a cross-complaint against Ohri to, among other things, invalidate his alleged 2006 employment contract and stock bonus, and to recover the stock bonus or its fair market value.

 

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The Company and Ohri, without any admissions of fault or liability, agreed in December 2011 to compromise, resolve and extinguish all of their respective claims in consideration for mutual general releases and Ohri's conveyance of 300,000 shares of common stock to the Company. The lawsuit was dismissed in its entirety with prejudice without any final determination by the court on the merits of the parties’ respective claims.

 

(b) Chong Hing Bank Litigation


In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

 

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

 

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

 

·The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

 

·The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and

 

·The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

 

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

 

(c) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.

 

As previously described in our 2004 Annual Report we and New Times Navigation Limited mutually agreed to terminate this purchase agreement. We returned the received shares of New Times Navigation Limited to the concerned shareholders and received back 90,100 of our common stock out of the 204,000 issued by us for the purchase. In addition we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.

 

We are 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 113,900 common shares (valued at $381,565) and also to have them return the remaining 18 unsecured convertible promissory notes representing a total amount of $1,740,000 and rescind the purchase agreement. The case is currently pending.

 

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Note 26. Geographic Information

   

Twelve months ended December 31, 2011

 

   EUROPE                 
                       Far East             
   Netherlands   Spain   Switzerland   Others   Total   Hong Kong /   Middle East   The Americas   TOTAL 
                                     
Revenues from unaffiliated customers:  $22,128,044    1,344,860    7,909,544    712,527   $32,094,975   $-   $20,507   $117,499   $32,232,981 
                                              
Identifiable assets  $5,928,797   $1,224,428   $15,732,596   $16,333,398   $39,219,219   $302,429    244,529    5,045,926   $44,812,103 
                                              

 

Twelve months ended December 31, 2010

 

   EUROPE                 
                       Far East             
                       Hong Kong /             
   Netherlands   Spain   Switzerland   Others   Total   China   Middle East   The Americas   TOTAL 
                                     
Revenues from unaffiliated customers:  $27,623,380    1,752,470    6,653,139    461,742   $36,490,732   $-   $622,813   $54,806   $37,168,351 
                                              
Identifiable assets  $6,469,979   $1,202,064   $11,012,075   $18,379,628   $37,063,745   $223,329    552,100    1,082,758   $38,921,932 
                                              

 

Note 27. Concentrations

 

For the year ended December 31, 2011, the Company had a customer in the Netherlands, which accounted for revenue of $18,670,810. For the same periods in 2010, this same customer accounted for $22,439,478.

 

Note 28. Loans and Convertible Notes (Private Placement 2009)

 

Automatic Conversion of 2009 12% Convertible Promissory Notes

 

On November 19, 2010, the twenty day average closing price of the common stock of Elephant Talk Communications Corp. (the “Company”) exceeded $3.18.  As a result and pursuant to their terms, all outstanding 12% convertible promissory notes (the “Notes”) issued in connection with the Company’s 2009 private placement offering of units consisting of Notes and warrants to purchase shares of the Company’s common stock, no par value (the “Units”), plus all interest due the holder of the Note, automatically converted into common stock at the previously established conversion price of one (1) share of common stock per each $1.35 in principal plus interest due.  The Units are more fully described in the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on August 6, 2009, August 24, 2009, September 10, 2009, October 5, 2009 and November 10, 2009 and in the Company’s quarterly filings on Form 10-Q and annual report for the year ended December 31, 2010 filed with the Commission on March 31, 2010.

 

As per the closing of 2011 all shares falling under the Private Placement 2009 have been issued and including previous years resulted in a total number of 9,933,234 issued shares of common stock in connection with the conversion of all of the Notes including accumulated and unpaid interest paid for in shares.

  

Note 29. Subsequent Events

 

The Company’s management evaluated subsequent events through March 30, 2011, the date the financial statements were issued and filed with the Securities and Exchange Commission.

 

On January 1st, 2012 the subsidiaries ET Caribbean BV, Moba Consulting Partners BV and Elephant Talk Global Holding BV were merged into the surviving entity Elephant Talk Europe Holding BV.

 

Loan agreements

 

On March 29th 2012, a number of investors (“Holders”) entered into a senior secured convertible loan agreement (“Note”) in the principal amount of $8,800,000 with the Company whereby the Holders will provide the company with gross proceeds of $8,000,000, after the $800,000 Original Issue Discount. According to the terms, the Note will bear an interest rate of 8% of the principal amount and mature May 1st 2014. The monthly installment payments (constituting interest and amortization) total $ 2,273,718 for the first year and $ 7,180,000 for the second year. Of the $ 8,000,000, the amount equal to the first year installments, being $ 2,273,718, will be placed in escrow and will be applied on a monthly basis for the payment of the monthly installments. At the election of the Company the Company can decide on a monthly basis to pay the full installment amount or parts thereof in common stock of the Company at an amount equal to 90% of the average of the five lowest volume weighted average (“VWAP|”) of the common stock during the twenty (20) Trading Days immediately prior to such installment on the trading day payment date. The remaining amount of $ 5,726,282 has been made available to the Company immediately at closing of the transaction. In the first year, when the company elects to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow and becomes available to the Company. The Notes are convertible at the option of the Holder into our common stock at a fixed conversion price conversion price equal to 115% of the trailing 30 day closing price prior to closing of the transaction. After a period of 12 months the Note automatically converts at the Fixed Conversion Price, if the shares of the Company, for any consecutive 30 days, close at or above 150% of the Fixed Conversion Price. The Notes are secured by a first priority security interest in all of the assets of the Company. In the event the company (in partnership with Adeptra) fails to announce that it has entered into and operationalized a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the company receives certain amount of net compensation, the Holders may declare all of the then outstanding principal amount of the Note to be due and payable immediately. In addition in such event, the Holders may convert the Notes into our common stock at the lowest of (a) the fixed conversion price in effect prior to such failure, (b) 90% of the average of the 5 lowest VWAPs for the 20 days prior to that day (c) 90% of the lowest reported trade price for the common stock as reported by Bloomberg on such date. Upon occurrence thereof the Company has the option to redeem a portion or the entire outstanding amount of this Note at a redemption price of 100% thereof.

 

The Company is obligated to register the shares of Common Stock underlying the Notes pursuant to certain mandatory registration rights granted to the Holders.

  

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Item 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”)  is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Disclosure Controls.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Evaluation of Disclosure Controls and Procedures. As of December 31, 2011, the end of the fiscal year covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of December 31, 2011. Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under “Management’s annual report on internal control over financial reporting”.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, pursuant to Rule 13a-15(c) of the Securities Exchange Act. This system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

 

A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Management uses the framework in Internal Control - Integrated Framework , issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission, for evaluating the effectiveness of the Company’s internal control over financial reporting. The COSO framework summarizes each of the components of a company’s internal control system, including the: (i) control environment, (ii) risk assessment, (iii) information and communication, and (iv) monitoring (collectively, the “entity-level controls”), as well as a company’s control activities (“process-level controls”). In addition to utilizing substantial internal resources, management also engaged outside consulting firms to assist in various aspects of its evaluation and compliance efforts.

 

In fiscal 2011, management completed its documentation and evaluation of the design of the Company’s internal control over financial reporting. Management then commenced testing to evaluate the operating effectiveness of controls in the following areas: (a) entity level, (b) legal, (c) income taxes, (d) treasury, (e) long lived assets, (f) financial reporting and close, (g) revenue, (h) payroll, (i) accounts payable, and (j) information technology. Based on this evaluation and testing, management concluded that there were material weaknesses in the design and operating effectiveness of certain accounting and financial reporting processes, as described more fully below. Due to these material weaknesses, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2011.

 

A "material weakness" is defined as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is defined as a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial information reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

 

Material Weakness in Accounting and Financial Reporting.

The Company did not maintain effective controls over its annual financial statement reporting process which resulted in two significant adjustments encountered during our audit. These adjustments were in the areas of stockholders equity and intangible assets and occurred as a direct result of our inability to staff our accounting department with experienced US GAAP and SEC reporting personnel due to budgetary constraints. A material weakness in financial reporting impacts the Company’s ability to timely report financial information in conformity with U.S. generally accepted accounting principles (“GAAP”), which could affect all significant financial statement accounts and disclosures.

 

BDO USA, LLP issued its attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

During fiscal year 2011, the Company did not make any additional change in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financials reporting except described below.

 

During the third and fourth quarters of 2011, the Company did take certain steps to improve its internal control over financial reporting, as described below.

 

(i) In August 2011,we engaged a SOX consultant to help document and test our internal controls

 

(ii) We also hired a a third party CPA firm, which provides us advice in the field of US GAAP and SEC reporting rules.

 

 

Although the Company implemented a significant number of remediation initiatives in fiscal 2011 and is continuing to improve the Company’s internal control over financial reporting in fiscal 2012, there can be no assurance that the Company will eliminate the aforementioned material weaknesses in fiscal 2012.

 

Inherent Limitations

 

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems' objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

 

Our directors and executive officers and their ages as of March 9, 2012 are as follows:

 

Name   Age   Position   Director since
Steven van der Velden   55   Chairman of the Board President, Chief Executive Officer and Director   2006
Martin Zuurbier   52   Chief Technical Officer and Director   2007
Johan Dejager   52   Director   2006
Phil Hickman (1)(2)(3)   61   Director   2010
Rijkman Groenink (1)(2)(3)   62   Director   2011
Jacques Kerrest (1)(2)(3)     65   Director   2011
Charles Levine (1)(2)(3)   58   Director   2011
Mark Nije   49   Chief Financial Officer   n/a
Pat Carroll   53   Chief Executive Officer – ValidSoft subsidiary   n/a
Alex Vermeulen   57   General Counsel   n/a

  

(1) Member of Audit and Finance Committee.

(2) Member of Nominating and Corporate Governance Committee.

(3) Member of Compensation Committee

 

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Background

 

The following is a brief summary of the background of each Director of the Company:

  

Steven van der Velden has been a director since October 24, 2006 and our 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.

 

Martin Zuurbier has been responsible for Operations and 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 us 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 Provisioning 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.

 

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).

 

Phil Hickman was appointed as director on 29 March 2010. Mr. Hickman manages his own consultancy and advisory business in the fields of corporate strategy and organization, offshore banking, business process outsourcing (BPO), payment & cash management solutions, internet and telephony security, sales and marketing. Mr. Hickman is Chairman of ValidSoft, a member of the Elephant Talk Communications Group, and he is also a Director of Alfa Bank Holdings, the largest privately-owned bank in Russia and part of the Alfa Group.  He also acts as an advisor with the Bank in Russia, Ukraine, Belarus and Kazakhstan. Mr Hickman is also Chairman of Earthport plc, a publicly quoted company in the UK engaged in the Payments industry. Mr. Hickman spent 32 years in HSBC Bank plc and has been responsible for developing and implementing many areas of change and innovation both in the UK and around the world. Before leaving HSBC, Mr. Hickman was Head of Strategy & Planning HSBC Commercial Bank.

 

Rijkman Groenink, was appointed as director on April 1, 2011. Mr. Groenink’s career spans nearly 35 years at ABN Amro, starting in 1974 at Amro, prior to its merger with ABN. He served for more than seven years as Chairman of the Managing Board of ABN Amro Holding NV. Under Groenink’s leadership the bank has been streamlined to focus on its core activities, while bolstering its operations through successful acquisitions, such as Banco Sudameris de Brazil, Delbrück & Co. and Bethmann Maffei in Germany, Michigan National, and the acquisition of Banca Antonveneta. Mr. Groenink was elected European Banker of the Year 2005. In November 2007 he left as Chair at ABN Amro, following the acquisition of the bank by a consortium of banks, comprising of RBS, Fortis and Santander. He is currently a partner at Atlas N.V., an investment vehicle. Mr. Groenink received a law doctorate from the University of Utrecht, a Diploma in Business Administration from Manchester Business School, and a diploma Honoris Causa M.B.A. in International Business from the MIB School of Management in Trieste, Italy. Mr. Groenink received a royal knighthood, when he was appointed Officer in the Order of Oranje-Nassau by Her Majesty Queen Beatrix in 2006.

 

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Jacques D. Kerrest was appointed on July 14, 2011, effective August 1, 2011, as a Director. From October 2010 to June 2011, Mr. Kerrest served as a member of the board of directors and Chairman of the Audit Committee of CKX, Inc. (NASDAQ:CKXE) a company which is engaged in the ownership, development and commercialization of entertainment content and later sold to a private equity firm. From August 2008 to 2010, Mr. Kerrest served as the Chief Financial Officer and Chief Operating Officer of ActivIdentity Corp. (NASDAQ: ACTI), a Fremont California based security software company. From September 2004 until March 2008, Mr. Kerrest served as the Chief Financial Officer of Virgin Media, Inc. (NASDAQ: VMED), a communications company. From June 2003 to August 2004, Mr. Kerrest was the Managing Director and Chief Financial Officer of Equant, N.V., a global enterprise communications infrastructure company. From August 1997 to May 2003, Mr. Kerrest was the Senior Vice President and Chief Financial Officer of Harte-Hanks, Inc., a worldwide direct and targeted marketing company. From August 1995 to July 1997, Mr. Kerrest served as the Chief Financial Officer of Chancellor Broadcasting Company, a radio broadcasting company.

 

Charles Levine was appointed on October 27, 2011as a Director. Mr. Levine holds an MBA in marketing, management strategy and finance from the Kellogg School of Management – Northwestern University. He was chosen CEO of the Year 2001 by Frost & Sullivan. Mr. Levine resides in Glen Ellen, CA. He served as Senior Vice President of Octtel and as CEO of Cad Forms.Since his retirement as President of Sprint PCS in 2002, Mr. Levine has been an independent Corporate Director for both public and private companies.

 

Mr. Levine began his career as a brand assistant at Procter and Gamble, rising to the position of brand manager. At General Electric Company, Mr. Levine served in product management and marketing, from which he was recruited to join AT&T. At AT&T, he was responsible for AT&T telecom equipment focused on small business customers, generating $2 billion in profitable revenue. He serves as Chairman of the Board of Sierra Wireless and is a Director of Openwave.

 

Observer of the Board

 

Yves R. van Sante has been a director from October 24, 2006 till August 1, 2011. From that date he serves as an observer of the Board..  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 our company, 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. van 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.

 

Executive Officers

 

Mark Nije was general manager Europe since January 1 2007, a function he held since the end of 2004 within the acquired Benoit Telecom Group. Mr. Nije was appointed Chief Financial Officer on December 15, 2008. Mr. Nije has experience in finance, 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 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, Erasmus University, the Netherlands, and a Bachelor of Science Degree in Building Construction Management from the University of Reading, United Kingdom.

 

Mr. Nije is a cousin of the wife of Mr. van der Velden. Other than the aforesaid, there are no family relationships between any director or executive officer.

 

Patrick Carroll is Founder and CEO of ValidSoft Limited, the company that was acquired in 2010 by Elephant Talk Communications. ValidSoft is a software engineering company that develops advanced security software solutions to help global institutions counter the most sophisticated Card and electronic fraud consistent with leading independent research thinking.  Prior to founding ValidSoft, Mr. Carroll was employed as Head of Electronic Trading Technology in Europe for Goldman Sachs International where responsibilities included technical strategy related to Electronic Trading, Client Connectivity and Straight Through Processing (STP).   Mr. Carroll has extensive Financial Services & technical experience (over 25 years) and has previously worked in a senior capacity with J.P Morgan, Credit Suisse Financial Products and Bankers Trust Company.

 

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Alexander Vermeulen has been General Counsel of the company since 2007. Mr. Vermeulen worked for twenty years as manager with ING, one of Europe’s leading financial groups. He served amongst others as General Manager for the Caribbean area and General Manager Postbank Insurances, a leading direct writer in the Dutch market. In Italy he was responsible for all the life insurance activities of ING and was director of various ING entities, amongst which the funds investment company. In 2003 Mr. Vermeulen started his own consultancy company in Italy, initially with advisory services in the life insurance market and broadening later on to other sectors. In 2006 Mr. Vermeulen started working for Elephant Talk as consultant. In 2007 he joined Elephant Talk full time as General Counsel. Mr. Vermeulen holds a Masters degree in Law from Leiden University, the Netherlands.

 

There are no arrangement between our directors and any other person pursuant to which our directors were nominated or elected for their positions other than the following:

 

Officer and Director Qualifications

 

We have not formally established any specific, minimum qualifications that must be met by each of our officers or directors or specific qualities or skills that are necessary for one or more of our officers or members of the board of directors to possess. However, we generally evaluate the following qualities: educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and ability to represent the best interests of our shareholders.

 

Our officers and board of directors are composed of a diverse group of leaders.  In their prior positions they have gained experience in core management skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership development. Most of our officers and directors also have experience serving on boards of directors and board committees of other public companies and private companies, and have an understanding of corporate governance practices and trends, which provides an understanding of different business processes, challenges, and strategies.

 

We, along with our officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other experiences of our officers and board members described below, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals of consummating a business transaction.

 

Steven van der Velden

 

Mr. van der Velden is well qualified to serve on our board because of his 30 years of experience in management of which 20 years in telecommunications. In addition, Mr. Van der Velden was selected because he is our Chief Executive Officer.

 

Martin Zuurbier

 

Mr. Zuurbier is well qualified to serve on our board because of his experience in telecommunication markets and technologies and because he is our Chief Technology Officer.

 

Johan Dejager

 

Mr. Dejager is well qualified to serve on our board because of his experience in private equity and as representative of our larger shareholder QAT Investments.

 

Phil Hickman

 

Mr. Hickman is well qualified to serve on our board because of his experience in banking and because he is independent.

 

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Rijkman Groenink

 

Mr. Groenink is well qualified to serve on our board because of his experience as executive chairman in international banking and corporate finance and because he is independent.

 

Jacques D. Kerrest

 

Mr Kerrest is well qualified to serve on our board because of his experience as executive, especially in the finance area, in international IT and telecommunications companies and because he is independent

 

Charles Levine

 

Mr. Levine is well qualified to serve on our Board because of his experience as executive in mobile and communications companies and because he is independent.

 

Committee Membership, Meetings and Attendance

 

During the fiscal year ended December 31, 2011, there were:

 

·4 meetings of the Board of Directors;

 

·4 meetings of the Audit Committee;

 

·3 meetings of the Compensation Committee; and

 

·1 meeting of the Nominating Committee.

 

Each director attended or participated in at least 3/4 of the meetings of the Board of Directors and his respective committees held during our fiscal year ended December 31, 2011 and during his term of service.

 

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 Jacques D. Kerrest(Chairman), Rijkman Groenink, Phil Hickman and Charles Levine. They are involved in discussions with management and our independent registered public accounting firm with respect to financial reporting and our internal accounting controls. All members are considered independent as defined in the listing standards applicable to the Company. The board of directors has determined that Mr. Kerrest 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 shareholder 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, 2011 with the Board of Directors.

 

The Board of Directors reviewed and discussed with representatives of BDO USA, LLP, 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 BDO USA, LLP, required by PCAOB rule 3526, and has discussed with BDO USA, LLP their independence.

 

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Compensation Committee

 

Our Compensation Committee was formed on January 15, 2008 and consists of Phil Hickman (Chairman), Rijkman Groenink, Jacques D. Kerrest and Charles Levine.. Our Compensation Committee will overview stock awards 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.

 

In 2011 this Committee reviewed the Board and Management compensation, including bonus awards upon the realization of defined targets. Stock options were granted to staff and consultants. A company wide bonus stock plan has been implemented by the Committee. An appraisal system has been introduced and a sales commission structure is under study.

 

Nominating and Corporate Governance Committee

 

Our Nominating and Corporate Governance Committee was formed on January 15, 2008 and consists of Rijkman Groenink (Chairman), Phil Hickman, Jacques D. Kerrest and Charles Levine. 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 shareholders; (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 shareholder or otherwise.In 2011 there were 3 new directors appointed trough this committee

 

Corporate  Governance Guidelines

 

Our board of directors has adopted Corporate Governance Guidelines to which adherence is full commitment. The Corporate Governance Guidelines 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 these Guidelines 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 2011, Forms 3, 4 and 5 and in 2012 Form 5’s and 13 G were mostly timely filed with the SEC by such reporting persons except for the following:

 

QAT Investments did not file timely, and has not filed, on Form 4 or Form 5, a report pertaining to the acquisition of convertible notes and warrants by QAT Investments and the issuance of warrants to QMG in connection with the Offering.

 

ITEM 11 .   EXECUTIVE COMPENSATION

 

 Information concerning this item is contained in the Company’s Definitive Proxy Statement, to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 2012 Annual Meeting of Stockholders and is incorporated herein by reference. 

 

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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.

 

Beneficial Ownership of Principal Shareholders, Officers and Directors

 

The following table sets forth, based on 113,807,071 shares of common stock outstanding as of March 9, 2012, certain information as to the stock ownership of each person known by us to own beneficially five (5%) percent or more of the outstanding common stock, of each of the our 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, warrants or other securities 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, warrants or other securities 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, Corp., Schiphol Blvd 249, 1118 BH Schiphol, The Netherlands.

 

 

Name of Beneficial Holder  Number of Shares of Common Stock Owned*   Percent of Class as of 6 March 2012 
Rising Water Capital AG    32,084,518(2)   26.86%
CMV Invest II CVA   8,689,660(3)   7.27%
Patrick Carroll   234,388    (1)
Q.A.T. Investments SA    17,479,899(5)   15.27%
Q.A.T. II Investments SA   26,951,436(6)   20.04%
Phil Hickman   321,578(8)   (1)
Rijkman Groenink   37,042    (1)
Martin Zuurbier   702,732(7)   (1)
Johan Dejager   3,319,612(10)   2.90%
Jacques Kerrest   9,737    (1)
Mark Nije   745,816(9)   (1)
Charles Levine   3,958    (1)
Alex Vermeulen   292,132(11)   (1)
Steven van der Velden   8,689,660(12)   7.27%
All Officers and Directors as a Group   14,356,655    12.23%

  

*Calculated in accordance with Rule 13d-(3)(d)(1) under the Securities Exchange Act of 1934.

 

(1)Less than one percent

 

(2)Includes warrants to purchase 5,915,487 shares of our common stock

 

(3)Includes warrants to purchase 5,213, 796 shares of our common stock

 

(4)Includes shares owned directly by RWC. QAT holds a 51.3% ownership interest in RWC.

  

(5)Includes warrants to purchase 892,930 shares of our common stock

 

(6)Includes warrants to purchase 20,893,081 shares of our common stock

 

(7)Mr. Zuurbier, Director and CTO, owns 100% of Interact W.L.L. and therefore has voting and dispositive power of the shares of common stock held by this entity.

 

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(8)Mr. Hickman, Director, owns 100% of PGH Business Solutions Ltd. and therefore has voting and dispositive power of the shares of common stock held by this entity. Includes warrants to purchase 42,373 shares of our common stock

 

(9)Mr. Nije, CFO, owns 100% of LMI Europe B.V. and therefore has voting and dispositive power of the shares of common stock held by this entity.

 

(10)Includes warrants to purchase 1,328,576 shares of our common stock.

 

(11)Mr. Vermeulen, General Counsel, owns 100% of Scere Company Italy SRL and therefore has voting and dispositive power of the shares of common stock held by this entity.

 

(12)Consists of shares owned by CMV Invest II CVA.  Mr. Van der Velden owns 40.75% of CMV Invest II CVA.  The number here excludes shares directly owned by RWC, QAT Invetment SA, QAT Investments II SA and CMV Invest CVA. Mr. Van der Velden has certain percentage of ownership of the below entities. However, he does not control the right to vote or dispose of such shares.  

 

·RWC:  34% through Interfield Consultancy Ltd. which is 100% by Mr. Van der Velden
·QAT Investments SA : 30.79%
·QAT Investments II SA: 24,17%
·CMV Invest CVA: 27.25%

  

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

 

In fiscal year 2011 no related transactions with amounts exceeding $ 120,000 occurred or were proposed

 

All future transactions between us and our officers, directors or five percent shareholders, 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.

 

Director Independence

 

Our board of directors has determined that Rijkman Groenink, Phil Hickman, Jacques Kerrest and Charles Levine are indepenedent, for NYSE Amex Stock Market purposes. Except Charles Leveine these gentlemen were all re-elected in the General Shareholders Meeting of September 14, 2011. Mr, Levine was appointed in the Board on October 27, 2011. All the gentlemen are members of the the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

 

In addition, Rijkman Groenink, Phil Hickman, Jacques Kerrest and Charles Levine, qualifiy as “independent” under special standards established by the U.S. Securities and Exchange Commission (“SEC”) for members of audit committees. The Audit Committee includes four independent members. Mr. Kerrest is determined by the board of directors 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.” Shareholders should understand that this designation is a disclosure requirement of the SEC related to Mr. Kerrest’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon Mr. Kerrest any duties, obligations or liability that are greater than are generally imposed on him as a member of the Audit Committee and the board of directors, 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 of directors. Our board of directors also determined that Mr. Kerrest has sufficient knowledge in reading and understanding financial statements to serve on the Audit Committee.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The aggregate fees billed by BDO USA (“BDO”) for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2011 and 2010 and the review of the financial statements included in our Current Reports on Form 10-Q during the 2011 and 2010 fiscal years totaled $273,000 and $299,800. The above amounts include interim procedures as audit fees as well as attendance at audit committee meetings.

 

Tax Fees. The aggregate fees billed by BDO for professional services rendered for tax compliance, for the years ended December 31, 2011 and 2010 were $0 and $0 respectively.

 

All Other Fees. The aggregate fees billed by BDO for products and services, other than the services described in the paragraphs captions “Audit Fees”, and “Tax Fees” above for the year ended December 31, 2011 and 2010 totaled $0 and $0.

 

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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 BDO in 2011 and 2010 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 BDO.

 

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)
     
3.3   Amended and Restated Articles of Incorporation, filed with the State of California on June 10, 2008. (3)
     
3.4   Agreement and Plan of Merger between Elephant Talk Communication Corp, a Delaware corporation and Elephant Talk Communications, Inc., a California corporation, Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed on July 26, 2011. (24)
     
3.5   Certificate of Merger (24)
     
3.6   Certificate of Incorporation of Elephant Talk Communication Corp., a Delaware corporation, incorporated by reference to Appendix B to the Company's Definitive Proxy Statement filed on July 26, 2011. (24)
     
3.7   Bylaws of Elephant Talk Communication Corp., a Delaware corporation, incorporated by reference to Appendix C to the Company's Definitive Proxy Statement filed on July 26, 2011. (24)
     
10.1   Stock Purchase Agreement dated June 30, 2005, by and among the Company and Rising Water Capital, A.G. (4)
     
10.2   Convertible Promissory Note dated December 15, 2005, by the Company, in favor of Rising Water Capital, A.G. (5)
     
10.3   Equity Transfer Agreement, dated January 4, 2006, by and among Zhongrun Chuangtou Technology Co.  Ltd. and Guangdong Guangxiang Network Information Co., Ltd (6)
     
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. (6)
     
10.5   Convertible Promissory Note dated May 26, 2006, by the Company, in favor of Rising Water Capital, A.G. (7)
     
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. (8)
     
10.7   Form of Common Stock Purchase Agreement, dated August 31, 2007, by and among the Company and certain investors. (9)
     
10.8   Settlement Agreement, entered by and between the Company and Rising Water Capital AG. (10)
     
10.9   Loan Agreement by and between the Company and QAT II Investments dated January 27, 2009(11)
     
10.10   Loan Agreement by and between the Company and QAT II Investments dated February 15, 2009(12)
     
10.11   Loan Agreement by and between the Company and QAT II Investments dated February 23, 2009(12)
     
10.12   Loan Agreement by and between the Company and QAT II Investments dated March 31, 2009(12)
     
10.13   Security Agreement, entered into by and between the Company and QAT II Investments (12)

 

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10.14   Loan Agreement by and between the Company and QAT II Investments dated May 27, 2009(13)
     
10.15   Contract for the Supply of Operation and Technical Services through a Comprehensive Technological Platform between Vizzavi Espana S.L. and the Company(14)
     
10.16   Collaboration Agreement by and between ValidSoft Limited and the Company(15)
     
10.17   Loan Agreement by and between the Company and QAT II Investments dated July 1, 2009(16)
     
10.18   Amendments to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, and May 27, 2009 by and between QAT II Investments and the Company(16)
     
10.19   Side Agreement by and between ValidSoft Limited and the Company(17)
     
10.20   Extension Agreement by and between ValidSoft Limited and the Company(17)
     
10.21   Amendment to Loan Agreements dated January 27, 2009, February 15, 2009, March 4, 2009, March 31, 2009, May 4, 2009, May 27, 2009, July 1, 2009 and July 8, 2009 by and between QAT II Investments and the Company(18)
     
10.22   Letter Agreement by and between ValidSoft Limited and the Company(19)
     
10.23   Heads of Terms Agreement by and between ValidSoft Limited and the Company(20)
     
10.24   Loan Agreement by and between the Company and QAT II Investments dated February 3, 2010(21)
     
10.25   Loan Agreement by and between the Company and QAT II Investments dated February 24, 2009(22)

 

10.26   Sale and Purchase Agreement, dated March 17, 2010, by and among the Company. and the shareholders of ValidSoft Limited other than Enterprise Ireland (23)
     
10.27   Sale and Purchase Agreement, dated March 17, 2010, by and the Company and Enterprise Ireland (23)
     
10.28   Securities Purchase Agreement by and among the Company and certain purchasers dated March 29, 2012;
     
10.29   Form of Secured Convertible Note issued to certain purchasers dated March 29, 2012
     
10.30   Security Agreement by and among the Company and its subsidiaries and certain purchasers dated March 29, 2012
     
10.31   Form of Escrow Agreement by and among the Company, certain purchasers and Wells Fargo Bank, National Association dated March 29, 2012;
     
10.32   Subsidiary Guaranty by and among the company and its subsidiaries and certain purchasers dated March 29, 2012
     
10.33   Registration Rights Agreement by and among the Company and certain purchasers dated March 29, 2012;
     
14.1   Code of Ethics (1)
     
21.1   Subsidiaries of the Registrant (*)
     
23.1   Consent public accounting firm BDO USA, LLP (*)
     
31.1   Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)(**)
     
31.2   Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)(**)
     
32.1   Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)
     
32.2   Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)

 

 

*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.

  

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(3)Filed as an Exhibit to our Current Report on Form 8-K on June 12, 2008.

  

(4)Filed as an Exhibit to our Current Report on Form 8-K on July 7, 2005.

  

(5)Filed as an Exhibit to our Current Report on Form 8-K on December 16, 2005.

  

(6)Filed as an Exhibit to our Current Report on Form 8-K on January 13, 2006.

 

(7)Filed as an Exhibit to our Current Report on Form 8-K on June 5, 2006.

 

(8)Filed as an Exhibit to our Current Report on Form 8-K on December 1, 2006.

 

(9)Filed as an Exhibit to our Current Report on Form 8-K on November 19, 2007.

 

(10)Filed as an Exhibit to our Current Report on Form 8-K on June 12, 2008.

 

(11)Filed as an Exhibit to our Current Report on Form 8-K on February 2, 2009.

 

(12)Filed as an Exhibit to our Current Report on Form 8-K on April 9, 2009.

 

(13)Filed as an Exhibit to our Current Report on Form 8-K on June 1, 2009.

 

(14)Filed as an Exhibit to our Current Report on Form 8-K on June 4, 2009 and amended by a Current Report on Form 8-K filed September 17, 2009.

 

(15)Filed as an Exhibit to our Current Report on Form 8-K on June 24, 2009.

 

(16)Filed as an Exhibit to our Current Report on Form 8-K on July 2, 2009.

 

(17)Filed as an Exhibit to our Current Report on Form 8-K on July 8, 2009.

 

(18)Filed as an Exhibit to our Current Report on Form 8-K on July 21, 2009.

 

(19)Filed as an Exhibit to our Current Report on Form 8-K on August 6, 2009.

 

(20)Filed as an Exhibit to our Current Report on Form 8-K on November 6, 2009.

 

(21)Filed as an Exhibit to our Current Report on Form 8-K on February 18, 2010.

 

(22)Filed as an Exhibit to our Current Report on Form 8-K on February 26, 2010.

 

(23)Filed as an Exhibit to our Current Report on Form 8-K on March 23, 2010.

 

(24) Filed as an Exhibit to our Current Report on Form 8-K on October 4, 2011.

 

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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 CORP.		  
       
Date: March 30, 2012 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

(Principal Executive Officer)

   March 30, 2012
Steven van der Velden        
         
/s/ Mark Nije   Chief Financial Officer   March 30, 2012
Mark Nije        
         
/s/ Johan Dejager   Director   March 30, 2012
Johan Dejager        
         
/s/ Rijkman Groenink   Director   March 30, 2012
Rijkman Groenink        
         
/s/ Phil Hickman   Director   March 30, 2012
Phil Hickman        
         
/s/ Jacques Kerrest   Director   March 30, 2012
Jacques Kerrest        
         
/s/ Charles Levine   Director   March 30, 2012
Charles Levine        
         
/s/ Martin Zuurbier   Operations, Chief Technical Officer, Director.   March 30, 2012
Martin Zuurbier        

 

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 EX-10.28 2 v304852_ex10-28.htm EXHIBIT 10.28

 

 

SECURITIES PURCHASE AGREEMENT

 

Dated as of March 29, 2012

 

by and among

 

Elephant Talk Communications Corp.

 

and

 

THE PURCHASERS LISTED ON EXHIBIT A

 

 
 

 

SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE AGREEMENT dated as of March 29, 2012 (this “Agreement”) is by and among Elephant Talk Communications Corp, a Delaware corporation (the “Company”) and each of the purchasers whose names are set forth on Exhibit A attached hereto (each a “Purchaser” and collectively, the “Purchasers”).

 

WHEREAS:

 

A.           The Company has authorized the issuance of senior secured convertible notes of the Company designated as “8% Senior Secured Convertible Notes”, in individual principal amounts corresponding with the amount set forth opposite each Purchase’s name on Exhibit A and in an aggregate principal amount of $8,800,000 in substantially the form attached hereto as Exhibit B (the “Notes”) which Notes shall be convertible into the Company's common stock, par value $0.00001 per share (the “Common Stock”), in accordance with the terms of the Notes (as converted, collectively, the “Conversion Shares”).

 

B.           Interest and principal payments on the Notes are payable in cash or shares of Common Stock as provided therein at the sole discretion of the Company (any such shares referred to herein as, the “Stock Payment Shares”).

 

C.           The Company and the Purchasers will enter into a registration rights agreement in substantially the form attached hereto as Exhibit C (together with all attachments and exhibits thereto, as each may be amended or modified from time to time, the “Registration Rights Agreement”) pursuant to which the Company will agree to register the Conversion Shares and Stock Payment Shares on Form S-3 with the Securities and Exchange Commission (the “SEC”).

 

D.           The Notes will be secured by a first priority perfected security interest in all of the assets of the Company and each of the Company’s current and future subsidiaries as evidenced by a security agreement in substantially the form attached hereto as Exhibit D and the subsidiary guarantees in the form provided to the Company (together with all attachments and exhibits thereto, as each may be amended or modified from time to time, the “Security Documents”)

 

F.           Each Purchaser wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i) that aggregate amount of Notes set forth opposite such Purchaser’ name on Exhibit A hereto:

 

G.           The Notes, the Conversion Shares and the Stock Payment Shares, are collectively referred to herein as the “Securities”.

 

NOW, THEREFORE, in consideration of the foregoing premises and in reliance on the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

 

 
 

 

Article 1

 

PURCHASE AND SALE OF SECURITIES

 

1.1.        Purchase and Sale of Securities.

 

(a)          Purchase and Sale of Securities.   Subject to the satisfaction (or waiver) of the conditions set forth herein, the Company shall issue and sell to each Purchaser, and each Purchaser severally, but not jointly, agrees to purchase from the Company on the Closing Date (as defined below) the number of Notes as is set forth opposite such Purchaser’s name in Exhibit A . The aggregate purchase price for the Notes shall be $8,000,000.

 

(b)          Company and the Purchasers are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act, including Rule 506 of Regulation D.

 

1.2.        Purchase Price and Closing. (a) Subject to the terms and conditions of this Agreement, the Company agrees to issue and sell to each Purchaser and, in consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, each Purchaser, severally but not jointly, agrees to purchase the Notes and Warrants set forth opposite such Purchaser’s name on Exhibit A for the amount to be paid by such Purchaser for the Notes and Warrants as specified on Exhibit A (as to each Purchaser, the “Purchase Price”). At the Closing (as defined below), each Purchaser shall deliver (i) $5,726,282 of the Purchase Price by wire transfer of immediately available funds to the Company less expenses to be reimbursed by the Company pursuant to Section 7.1 and (ii) $2,273,718 of the Purchase Price (the “Escrow Amount”) to Wells Fargo Bank, National Association, as escrow agent (the “Escrow Agent”) pursuant to the terms of that certain escrow agreement of even date herewith (the “Escrow Agreement”) in the form annexed hereto as Exhibit E. The Purchase Price shall be allocated to the Notes and the Warrants based on their relative fair-market values, as determined by the Purchasers

 

(b)          The Closing under this Agreement (the “Closing”) shall take place on the date hereof or such other date as the parties may mutually agree (the “Closing Date”), provided, that all of the conditions set forth in Article 4 hereof have been fulfilled or waived in accordance herewith. The Closing shall take place at the offices of Kleinberg, Kaplan, Wolff & Cohen, P.C., 551 Fifth Avenue, 18th Floor, New York, New York 10176 at 10:00 a.m. Eastern Standard Time, or at such other time and place as the parties may agree. Subject to the terms and conditions of this Agreement, at the Closing the Purchasers shall purchase and the Company shall issue and deliver or cause to be delivered to each Purchaser the Notes for the applicable amounts set forth opposite the name of such Purchaser on Exhibit A hereto.

 

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Article 2

 

REPRESENTATIONS AND WARRANTIES

 

2.1.        Representations and Warranties of the Company. Except as otherwise disclosed or incorporated by reference and readily apparent in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the "Form 10-K"), any quarterly or current report, or proxy statement filed by the Company with the SEC pursuant to the reporting requirements of the 1934 Act subsequent to the filing of the Form 10-K and prior to the date of this Agreement (in each case, including any supplements or amendments thereto) (the “Reports”), the Company hereby represents and warrants to the Purchasers, as of the date of this Agreement and as of the Closing Date as follows:

 

(a)          Organization, Good Standing and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. The Company and each such Subsidiary (as defined below) is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect (as defined below). For the purposes of this Agreement, “Material Adverse Effect” means any material adverse effect on the business, operations, properties, prospects, or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole and/or any condition, circumstance, or situation that would prohibit in any material respect the ability of the Company to perform any of its obligations under this Agreement or any of the Transaction Documents (as defined below) in any material respect.

 

(b)          Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Notes, the Security Documents, the Registration Rights Agreement, the Escrow Agreement and each other agreement, instrument and certificate executed and delivered by the Company or a Subsidiary thereof in connection with the foregoing (including the Security Documents, as such term is defined in the Security Documents) (collectively, the “Transaction Documents”) and to issue and sell the Securities in accordance with the terms hereof. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required, provided however that the Company must obtain any stockholder approval as may be required by the NYSE Amex. When executed and delivered by the Company, each of the Transaction Documents shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

 

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(c)          Capitalization. The authorized capital stock and the issued and outstanding shares of capital stock of the Company as of the date of this Agreement is set forth in the Reports. All of the outstanding shares of the Common Stock and any other outstanding security of the Company have been duly and validly authorized. No shares of Common Stock or any other security of the Company were issued in violation of any preemptive rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company. Furthermore, there are no equity plans, contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company, except as set forth on Schedule 2.1(c). Except as set forth on Schedule 2.1(c).The Company is not a party to or bound by any agreement or understanding granting registration or anti-dilution rights to any person or entity with respect to any of its equity or debt securities, except where such registration or anti-dilution rights pursuant to such agreements individually or in the aggregate, have not had or reasonably would be expected to have a Material Adverse Effect. Except for customary transfer restrictions contained in agreements entered into by the Company in order to sell restricted securities, the Company is not a party to, and it has no knowledge of, any agreement or understanding restricting the voting or transfer of any shares of the capital stock of the Company. For purposes of this Section 2.1 “knowledge” means the actual or constructive knowledge of the Company.

 

(d)          Issuance of Securities. The Notes to be issued at the Closing have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Securities shall be validly issued and outstanding, fully-paid, non-assessable and free any clear of all Liens (as defined below) of any pre-emptive rights and rights of refusal of any kind. When the Conversion Shares and/or Stock Payment Shares are issued in accordance with the terms of the Notes, such shares will be duly authorized by all necessary corporate action and validly issued and outstanding, fully paid and nonassessable, free and clear of all Liens, encumbrances, pre-emptive rights and rights of refusal of any kind.

 

(e)          No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company, the performance by the Company of its obligations under the Transaction Documents, and the consummation by the Company of the transactions contemplated by the Transaction Documents, and the issuance of the Securities as contemplated by the Transaction Documents, do not and will not (i) violate or conflict with any provision of the Company’s Certificate of Incorporation (the “Certificate of Incorporation”) or Bylaws (the “Bylaws”), each as amended to date (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries’ respective properties or assets are bound, (iii) result in a violation of any foreign, federal, state or local statute, law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries are bound or affected, or (iv) create or impose a lien, mortgage, security interest, charge or encumbrance of any nature (each, a “Lien”) on any property or asset of the Company or its Subsidiaries under any agreement or any commitment to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or by which any of their respective properties or assets are bound, except, in the case of clauses (ii), (iii) and (iv), for such conflicts, defaults, terminations, amendments, violations, acceleration, cancellations, creations and impositions as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is required under foreign, federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents or issue and sell the Securities in accordance with the terms hereof other than as required by the Registration Rights Agreement, any filings or approvals required from the Financial Industry Regulatory Authority, Inc. (“FINRA”) and any approval of the Company's stockholders, as may be required by the NYSE Amex.

 

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(f)          SEC Documents, Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing including filings incorporated by reference therein being referred to herein as the “SEC Documents”). At the times of their respective filings, the Reports complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder. The Reports did not, and do not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with Regulation S-X and all other published rules and regulations of the SEC. Such financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

 

(g)          Subsidiaries.

 

(i)          Schedule 2.1(g) sets forth each Subsidiary of the Company, showing the jurisdiction of its incorporation or organization and showing the percentage of each person’s or entity’s ownership of the outstanding stock or other interests of such Subsidiary. For the purposes of this Agreement, “Subsidiary” shall mean any corporation or other entity of which at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company and/or any of its other Subsidiaries. All the outstanding shares of capital stock (if any) of each subsidiary of the Company have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company directly or indirectly through one or more wholly-owned subsidiaries, free and clear of any claim, lien, encumbrance, security interest, restriction upon voting or transfer or any other claim of any third party. Except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, there are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any Subsidiary for the purchase or acquisition of any shares of capital stock of any Subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any shares of such capital stock. Neither the Company nor any Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the capital stock of any Subsidiary or any convertible securities, rights, warrants or options of the type described in the preceding sentence, except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. Neither the Company nor any Subsidiary is party to, nor has any knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of any Subsidiary.

 

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(h)          No Material Adverse Change. Since September 30, 2011, (i) the Company has not experienced or suffered any event or series of events that, individually or in the aggregate, has had or reasonably would be expected to have a Material Adverse Effect; and (ii) no event or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

 

(i)          No Undisclosed Liabilities. Neither the Company nor any Subsidiary has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the Company’s financial statements included in the Reports to the extent required to be so reflected or reserved against in accordance with GAAP, except for (i) liabilities that have arisen in the ordinary course of business consistent with past practice and that have not had a Material Adverse Effect, and (ii) liabilities that, individually or in the aggregate, have not had and would not reasonably be expected to have or result in a Material Adverse Effect.

 

(j)          Indebtedness. Schedule 2.1(j) hereto sets forth as of the Closing Date all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” shall include (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, current swap agreements, interest rate hedging agreements, interest rate swaps, or other financial products, (c) all capital or equipment lease obligations or purchase money security interests that exceed $100,000 in the aggregate in any fiscal year, (d) all obligations or liabilities secured by a Lien on any asset of the Company, irrespective of whether such obligation or liability is assumed, other than capital or equipment leases and purchase money security interests in amounts excluded from disclosure under clause (c) above, and (e) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any of the foregoing obligations of any other person or entity.

 

(k)          Rank of Indebtedness. Except as set forth on Schedule 2.1(k), no Indebtedness of the Company or any of its Subsidiaries existing as of the Closing is senior to, or pari passu with, the Notes in right of payment or redemption, whether with respect to interest, damages or upon liquidation or dissolution or otherwise.

 

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(l)          Title to Assets. Except for telecommunications switches, each of the Company and the Subsidiaries has good and marketable title to all of its real and personal property which are material to the business of the Company, free and clear of any Liens, except for those that would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. All leases of the Company and each of its Subsidiaries are valid and subsisting and in full force and effect.

 

(m)          Actions Pending. There is no action, suit, claim, arbitration, alternate dispute resolution proceeding or other proceeding (collectively, “Proceedings”) pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary that questions the validity of this Agreement or any of the other Transaction Documents or any of the transactions contemplated hereby or thereby or any action taken or to be taken pursuant hereto or thereto. There are no material Proceedings pending or, to the knowledge of the Company, threatened against or involving the Company, any Subsidiary or any of their respective properties or assets. No Proceeding described in the Reports would, individually or in the aggregate, reasonably be expected, if adversely determined, to have a Material Adverse Effect. There are no outstanding Proceedings, orders, judgments, injunctions, awards, decrees or, to the knowledge of the Company, investigations of any court, arbitrator or governmental, regulatory body, self-regulatory agency or stock exchange against the Company or any Subsidiary or, to the knowledge of the Company, any officers or directors of the Company or Subsidiary in their capacities as such, except for those that would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect.

 

(n)          Compliance with Law. Except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, the Company and its Subsidiaries have been and are presently conducting their respective businesses in accordance with all applicable foreign, federal, state and local governmental laws, rules, regulations and ordinances. The Company and each of its Subsidiaries have all material franchises, permits, licenses, consents and other material governmental or regulatory authorizations and approvals necessary for the conduct of its business as now being conducted by it except where any failures to possess the same would not individually or in the aggregate reasonably be expected to have or result in a Material Adverse Effect. The Company has complied and will comply in all material respects with all applicable federal and state securities laws in connection with the Offering.

 

(o)          Taxes. The Company and each Subsidiary each has (i) timely filed all necessary federal, state, local and foreign tax returns, and all such returns were true, complete and correct, and (ii) paid all federal, state, local and foreign taxes, assessments, governmental or other charges due and payable for which it is liable, including, without limitation, all sales and use taxes and all taxes which the Company or any of its Subsidiaries is obligated to withhold from amounts owing to employees, creditors and third parties, and (iii) does not have any tax deficiency or claims outstanding or assessed or, to its knowledge, proposed against any of them, except those, in each of the cases described in clauses (i), (ii) and (iii) of this paragraph (n), that would not, singularly or in the aggregate, have a Material Adverse Effect. The Company is not, nor has it been in the last five years, a U.S. real property holding corporation under Section 897 of the Code. The Company and its Subsidiaries have not engaged in any transaction which is a corporate tax shelter or which could be characterized as such by the Internal Revenue Service or any other taxing authority. The accruals and reserves on the books and records of the Company and its Subsidiaries in respect of tax liabilities are adequate to meet any assessments and related liabilities, and since December 31, 2010, the Company and its Subsidiaries have not incurred any liability for taxes other than in the ordinary course. For purposes of this Section 2.1(o), taxes shall include any and all interest and penalties. The Company is not under a material audit by any taxing authority.

 

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(p)          Certain Fees. Except as set forth on Schedule 2.1(p), the Company has not employed any broker or finder or incurred any liability for any brokerage or investment banking fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in connection with the Transaction Documents.

 

(q)          Disclosure. Except for the information concerning the transactions contemplated by this Agreement, the Company confirms that neither it nor any other person or entity acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. Neither this Agreement nor the Schedules hereto nor any other documents, certificates or instruments furnished to the Purchasers by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by this Agreement contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

 

(r)          Intellectual Property. The Company and its subsidiaries own or possess the valid right to use all (i) valid and enforceable patents, patent applications, trademarks, trademark registrations, service marks, service mark registrations, Internet domain name registrations, copyrights, copyright registrations, licenses, trade secret rights (“Intellectual Property Rights”) and (ii) inventions, software, works of authorships, trade marks, service marks, trade names, databases, formulae, know how, Internet domain names and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary confidential information, systems, or procedures) (collectively, “Intellectual Property Assets”) necessary to conduct their respective businesses as currently conducted, and as proposed to be conducted and described in the Reports and the Prospectus. To the knowledge of the Company, neither the Company nor any of its Subsidiaries is infringing, misappropriating, or otherwise violating, valid and enforceable Intellectual Property Rights of any other person, and, except as set forth in the Reports and the Prospectus, have not received written notice of any challenge, by any other person to the rights of the Company and its subsidiaries with respect to any Intellectual Property Rights or Intellectual Property Assets owned or used by the Company or its subsidiaries. To the knowledge of the Company, except as described in the Reports, the Company and its subsidiaries’ respective businesses as now conducted do not give rise to any infringement of, any misappropriation of, or other violation of, any valid and enforceable Intellectual Property Rights of any other person. All licenses for the use of the Intellectual Property Rights described in the Reports and the Prospectus are valid, binding upon, and enforceable by or against the parties thereto in accordance to its terms. The Company has complied in all material respects with, and is not in breach nor has received any asserted or threatened claim of breach of any Intellectual Property license that has not been resolved, and to the knowledge of the Company there has been no unresolved breach or anticipated breach by any other person to any Intellectual Property license, except where such breach, singularly or in the aggregate, would not have a Material Adverse Effect. There are no unresolved claims against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person, except to the extent that any such claim does not have a Material Adverse Effect. The Company has taken reasonable steps to protect, maintain and safeguard its Intellectual Property Rights, including the execution of appropriate nondisclosure and confidentiality agreements. The consummation of the transactions contemplated by this Agreement will not result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other person in respect of, the Company's right to own, use, or hold for use any of the Intellectual Property Rights as owned, used or held for use in the conduct of the business as currently conducted. The Company has taken the necessary actions to obtain ownership of all works of authorship and inventions made by its employees, consultants and contractors during the time they were employed by or under contract with the Company and which relate to the Company’s business. All key employees have signed confidentiality and invention assignment agreements with the Company.

 

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(s)          Environmental Compliance. The Company and each of its Subsidiaries have obtained all material approvals, authorization, certificates, consents, licenses, orders and permits or other similar authorizations of all governmental authorities (whether foreign, federal, state or local), or from any other person or entity, that are required under any Environmental Laws, except where any such failures would not individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. “Environmental Laws” shall mean all applicable foreign, federal, state and local laws relating to the protection of the environment including, without limitation, all requirements pertaining to reporting, licensing, permitting, controlling, investigating or remediating emissions, discharges, releases or threatened releases of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous substances, chemical substances, pollutants, contaminants or toxic substances, material or wastes, whether solid, liquid or gaseous in nature. The Company and each of its Subsidiaries are also in compliance with all requirements, limitations, restrictions, conditions, standards, schedules and timetables required or imposed under all Environmental Laws, except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect. Except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, there are no past or present events, conditions, circumstances, incidents, actions or omissions relating to or in any way affecting the Company or its Subsidiaries that violate or may violate any Environmental Law or that may give rise to any environmental liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or investigation under any Environmental Law, or based on or related to the manufacture, processing, distribution, use, treatment, storage (including without limitation underground storage tanks), disposal, transport or handling, or the emission, discharge, release or threatened release of any hazardous substance.

 

(t)          Books and Records; Internal Accounting Controls. The books and records of the Company and its Subsidiaries accurately reflect in all material respects the information relating to the business of the Company and the Subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company or any Subsidiary. The Company has established disclosure controls and procedures (as defined in 1934 Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the 1934 Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the 1934 Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.

 

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(u)          Material Agreements. True, complete and correct copies of each material contract of the Company or any Subsidiary required to be filed on a Current Report on Form 8-K, a Quarterly Report on Form 10-Q, or an Annual Report on Form 10-K, in each case pursuant to Item 601(a) and Item 601(b)(10) of Regulation S-K under the 1934 Act (the “Company Material Agreements”) are attached or incorporated as exhibits to the Reports. Each of the Company Material Agreements is valid and binding on the Company and the Subsidiaries, as applicable, and in full force and effect. The Company and each of the Subsidiaries, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Material Agreement. Neither the Company nor any Subsidiary knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Material Agreement.

 

(v)         Employees. There is (A) no significant unfair labor practice complaint pending against the Company, or any of its subsidiaries, nor to the knowledge of the Company, threatened against it or any of its subsidiaries, before the National Labor Relations Board, any state or local labor relation board or any foreign labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries, or, to the knowledge of the Company, threatened against it and (B) no labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the Company’s knowledge, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or its subsidiaries principal suppliers, manufacturers, customers or contractors, that could reasonably be expected, singularly or in the aggregate, to have a Material Adverse Effect. Neither the Company nor any Subsidiary has any employment contract, agreement regarding proprietary information, non-competition agreement, non-solicitation agreement, confidentiality agreement, or any other similar contract or restrictive covenant, relating to the right of any officer, employee or consultant to be employed or engaged by the Company or such Subsidiary required to be disclosed in the Reports that is not so disclosed. No “named executive officer” (as defined in Item 402 of Regulation S-K) of the Company has terminated or, to the knowledge of the Company, has any present intention of terminating his or her employment with the Company or any Subsidiary. The Company and each Subsidiary is in compliance with all foreign, federal, state and local laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, and employee benefits plans (including, without limitation, the Employee Retirement Income Securities Act of 1974, as amended, and any similar law of the PRC), except where such non-compliance would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect.

 

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(w)          Transactions with Affiliates. There are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions between (a) the Company, any Subsidiary or any of their respective customers or suppliers on the one hand, and (b) on the other hand, any officer, employee, consultant or director of the Company, or any of its Subsidiaries, or any person or entity owning at least 5% of the outstanding capital stock of the Company or any Subsidiary or any member of the immediate family of such officer, employee, consultant, director or stockholder or any corporation or other entity controlled by such officer, employee, consultant, director or stockholder, or a member of the immediate family of such officer, employee, consultant, director or stockholder which, in each case, is required to be disclosed in the SEC Documents or in the Company’s most recently filed definitive proxy statement on Schedule 14A, that is not so disclosed in the SEC Documents or in such proxy statement.

 

(x)          Absence of Certain Developments. Since the date on which the most recent Report was filed with the SEC through the date hereof, neither the Company nor any of its subsidiaries has (i) issued or granted any securities other than options to purchase common stock pursuant to the Company’s stock option plan or securities issued upon exercise of stock options in the ordinary course of business, (ii) incurred any material liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any material transaction whether or not in the ordinary course of business, (iv) declared or paid any dividend on its capital stock, (v) suffered any material damage, destruction or casualty loss, whether or not covered by insurance, or (vi) suffered any losses or waived any rights of value, whether or not in the ordinary course of business, or suffered the loss of any amount of prospective business, which individually or in the aggregate would have a Material Adverse Effect.

 

(y)          No Guarantees of Indebtedness. The Company has not guaranteed (directly or indirectly) any Indebtedness of any Subsidiary or other person.

 

(z)          Investment Company Act Status. Neither the Company nor any Subsidiary is, nor as a result of and immediately upon the Closing will be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

 

(aa)         Independent Nature of Purchasers. The Company acknowledges that the obligations of each Purchaser under the Transaction Documents are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under the Transaction Documents. The Company acknowledges that each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.

 

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(bb)         Dilutive Effect. The Company understands and acknowledges that its obligation to issue the Securities pursuant to the Transaction Documents is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interest of other shareholders of the Company.

 

(cc)         DTC Status. The Company’s transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Fast Automated Securities Transfer Program. The name, address, telephone number, fax number, contact person and email of the Company transfer agent is set forth on Schedule 2.1(cc).

 

(dd)         Governmental Approvals. Except for the filing of the Registration Statement pursuant to the Registration Rights Agreement and the filing of any notice prior or subsequent to the Closing that may be required under applicable state and/or federal securities laws or by FINRA or the NYSE Amex (which if required, shall be filed on a timely basis), no authorization, consent, approval, license, exemption of, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the performance by the Company of its obligations under the Transaction Documents.

 

(ee)         Insurance. The Company and each of its Subsidiaries carry or are covered by insurance in such amounts and covering such risks as management of the Company believes to be prudent. Neither the Company nor any such Subsidiary has been refused any material insurance coverage sought or applied for and the Company does not have any reason to believe that it or any Subsidiary will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have or result in a Material Adverse Effect.

 

(ff)         Trading Activities. It is understood and acknowledged by the Company that none of the Purchasers has been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Conversion Shares or the Stock Payment Shares for any specified term. The Company further understands and acknowledges that one or more Purchasers may engage in hedging and/or trading activities at various times during the period that the Conversion Shares or the Stock Payment Shares, are outstanding, including, without limitation, during the periods that the value of the Conversion Shares, the Stock Payment Shares are being determined and such hedging and/or trading activities, if any, can reduce the value of the existing stockholders’ equity interest in the Company both at and after the time the hedging and/or trading activities are being conducted.

 

(gg)         Certain Business Practices. None of the Company or any Company Subsidiary or, to the Company's knowledge, any director, officer, agent, employee or other person or entity acting for or on behalf of Company or any Subsidiary has violated the U.S. Foreign Corrupt Practices Act of 1977, as amended or to the knowledge of the Company, anti-corruption laws applicable to the Company or any Subsidiary.

 

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(hh)         Shell Company Status. The Company is not currently, and has not been in the prior twelve months, an issuer of the type described in paragraph (i) of Rule 144 under the Securities Act.

 

(ii)         No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Notes pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Regulation D and Rule 506 thereof under the Securities Act nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Notes to be integrated with other offerings if to do so would prevent the Company from selling Notes pursuant to Regulation D and Rule 506 thereof under the Securities Act or otherwise prevent a completed offering of Securities hereunder.

 

(jj)         Trading Market. The Company is in compliance in all material respects with the applicable listing and corporate governance rules and regulations of the NYSE Amex (the “Principal Market”). The Company has not, in the preceding twelve (12) months, received notice from the Principal Market to the effect that the Company is not in compliance with the listing or maintenance requirements of the Principal Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

 

2.2.        Representations and Warranties of the Purchasers. Each of the Purchasers hereby represents and warrants to the Company with respect solely to itself and not with respect to any other Purchaser as follows as of the date hereof and as of the Closing Date:

 

(a)          Organization and Standing of the Purchasers. If the Purchaser is an entity, such Purchaser is a corporation, limited liability company, partnership or limited partnership duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

 

(b)          Authorization and Power. Each Purchaser has the requisite power and authority to enter into and perform the Transaction Documents and to purchase Notes being sold to it hereunder. The execution, delivery and performance of the Transaction Documents by each Purchaser and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Purchaser or its board of directors, stockholders, members or partners, as the case may be, is required. When executed and delivered by the Purchasers, the Transaction Documents shall constitute valid and binding obligations of each Purchaser enforceable against such Purchaser in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

 

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(c)          No Conflicts. The execution, delivery and performance by each Purchaser of the Transaction Documents to which it is a party and the consummation by each Purchaser of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of the Purchaser, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Purchaser is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Purchaser, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations that would not, individually or in the aggregate, reasonably be expected to have or result in a material adverse effect on the ability of the Purchaser to perform its obligations hereunder.

 

(d)          Certain Fees. Except as set forth on Schedule 2.2(d), the Purchasers have not employed any broker or finder or incurred any liability for any brokerage or investment banking fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in connection with the Transaction Documents.

 

(e)          Accredited Investor. Each Purchaser is an “accredited investor” (as defined in Rule 501 of Regulation D), and such Purchaser has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Securities. Each Purchaser is purchasing the Notes for its own account, not with a view toward the distribution thereof; provided, however, the foregoing representations shall not be deemed to limit a Purchaser’s ability to resell the Securities in accordance with applicable securities laws. Each Purchaser acknowledges that an investment in the Securities is speculative and involves a high degree of risk.

 

(f)          No General Solicitation. Each Purchaser represents that it is not purchasing the Securities in response to a general solicitation or a published advertisement in connection with the offer and sale of the Securities.

 

(g)          No Short Position.         No Purchaser has had a short position in the Company since being presented with this investment opportunity and does not have a short position on the date hereof and will not have a short position on the Closing Date.

 

Article 3

 

COVENANTS AND AGREEMENTS

 

Unless otherwise specified in this Article, for so long as any Notes remain outstanding, and between the date hereof and the Closing Date, the Company covenants with each Purchaser as follows, which covenants are for the benefit of each Purchaser their respective permitted assignees.

 

3.1.        Issuance of the Notes. The Company will issue the Notes to each Purchaser at the Closing.

 

3.2.        Compliance with Laws; Commission. The Company shall take all necessary actions and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance (free from any restriction on transferability under federal securities laws) of the Securities to the Purchasers or their respective subsequent holders.

 

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3.3.        Registration and Listing. The Company shall cause its Common Stock to continue to be registered under Sections 12(b) of the 1934 Act, to comply in all material respects with its reporting and filing obligations under the 1934 Act and to not take any action or file any document (whether or not permitted by the Securities Act or the rules promulgated thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the 1934 Act or Securities Act even if the rules and regulations thereunder would permit such termination. The Company will use its reasonable commercial efforts to continue the listing or trading of its Common Stock on the Principal Market.

 

3.4.        Keeping of Records and Books of Account. The Company shall use reasonable commercial efforts to keep and cause each Subsidiary to keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions of the Company and its Subsidiaries, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

 

3.5.        Other Agreements. The Company shall not enter into any agreement in which the terms of such agreement would restrict or impair the right or ability of the Company to perform under any Transaction Document. The Company shall comply with each of its obligations, covenants and agreements under the other Transaction Documents in all material respects.

 

3.6.        Use of Proceeds. The proceeds from the sale of the Securities hereunder shall be used by the Company for general corporate purposes.

 

3.7.        Pledge of Securities. The Company acknowledges and agrees that the Securities may be pledged by the Purchasers in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and the Purchasers shall not be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Agreement. The Company hereby agrees to execute and deliver such documentation as the Purchasers may reasonably request in connection with a pledge of the Securities by the Purchasers.

 

3.8.        Disclosure of Transaction.

 

(a)          Except for press releases and public statements as may upon the advice of outside counsel be required by law or the rules or regulations of the Principal Market or the SEC (“Required Disclosures”), the Company shall consult with the Purchasers before issuing any press release with respect to the Transaction Documents or the transactions contemplated thereby and shall not issue any such press release or make any public statements (including any non-confidential filings with governmental entities that name another party hereto) without the prior consent of the Purchasers, which consent shall not be unreasonably withheld or delayed. In the case of any Required Disclosure, the Company shall provide the Purchasers with prior notice of such Required Disclosure and use its reasonable best efforts to consult with and coordinate such Required Disclosure with the Purchasers. Unless the Company and the Purchasers otherwise agree, the Company shall only include in a Required Disclosure such information that is legally required to be disclosed upon the advice of counsel.

 

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(b)          The Company shall disclose the transactions contemplated hereby in its Annual Report on Form 10-K (the “Form 10-K”), which shall be filed with the SEC on the date hereof (the “Announcement Date”), which Form 10-K shall attach as exhibits all press releases relating to the transactions contemplated by this Agreement and the Transaction Documents. The Form 10-K shall be subject to prior review and comment by the Purchasers. Upon the filing of the Form 10-K, no Purchaser shall be deemed to be in possession of any non-public information regarding the Company. Notwithstanding the Company’s failure to comply with its obligation to file the Form 10-K, pursuant to this Section 3.8(b), following the Announcement Date, no Purchaser shall be deemed to have any obligation of confidentiality with respect to any non-public information of the Company that was provided to such Purchaser by the Company.

 

(c)          Not later than sixty (60) days after the Closing Date (the “Cleansing Date”), the Company shall cause any material non-public information provided to the Purchasers by the Company to cease to be material non-public information, including, without limitation, by making appropriate public disclosure of such information. From and after the Cleansing Date, no Purchaser shall be in possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of their respective officers, directors, employees or agents that is not publicly disclosed.

 

3.9.        Disclosure of Material Information; No Obligation of Confidentiality.

 

(a)          The Company covenants and agrees that neither it nor any other person or entity acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. In the event of a breach of the foregoing covenant by the Company, or any of its Subsidiaries, or any of its or their respective officers, directors, employees and agents, in addition to any other remedy provided herein or in the Transaction Documents, the Company shall publicly disclose any material, non-public information in a Current Report on Form 8-K within one business day following the date that it discloses such information to any Purchaser or such earlier time as may be required by Regulation FD or other applicable law.

 

(b)          No Purchaser shall be deemed to have any obligation of confidentiality with respect to (i) any non-public information of the Company deliberately disclosed to such Purchaser in breach of Section 3.9(a) (whether or not the Company files a Current Report on Form 8-K as provided above), (ii) the fact that any Purchaser has exercised any of its rights and/or remedies under the Transaction Documents or (iii) any information obtained by any Purchaser as a result of exercising any of its rights and/or remedies under the Transaction Documents. In further addition, no Purchaser shall be deemed to be in breach of any duty to the Company and/or to have misappropriated any non-public information of the Company, if such Purchaser engages in transactions of securities of the Company, including, without limitation, any hedging transactions, short sales or any derivative transactions based on securities of the Company while in possession of such non-public information.

 

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(c)          Any Form 8-K, including all exhibits thereto, filed by the Company pursuant to Section 3.9(a) shall be subject to prior review and comment by the applicable Purchasers.

 

(d)          From and after the filing of any such Form 8-K pursuant to Section 3.9(a) with the SEC, no Purchaser shall be in possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of their respective officers, directors, employees or agents, that is not disclosed in such Form 8-K filed pursuant to Section 3.9(a).

 

3.10.        Amendments to Charter Documents. The Company shall not, without the consent of the Purchasers amend or waive any provision of the Certificate of Incorporation or Bylaws of the Company whether by merger, consolidation or otherwise in any way that would adversely affect any rights of the holder of the Securities other than as permitted pursuant to Section 3.16 hereof.

 

3.11.        No Pledge. Neither the Company nor any Subsidiary shall create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance, hypothecation or other grant of security interest, whether direct or indirect, voluntary or involuntary or by operation of law on any of their respective assets (“Pledge Limitations”) without the prior written consent of the Purchasers. Such Pledge Limitations shall not apply to any Permitted Liens. “Permitted Liens” shall mean: (i) liens imposed by law for taxes, assessments or charges or levies of any governmental authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (ii) liens of landlords and liens of carriers, warehousemen, suppliers, mechanics, materialmen and other liens in existence on the date hereof or thereafter imposed by law and created in the ordinary course of business; (iii) liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts, statutory obligations and other similar obligations, (iv) easements (including, without limitations, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded) and interest of ground lessors, which do not interfere materially with the ordinary conduct of the business of the Company; (v) letters of credit or deposits in the ordinary course to secure leases, and (vi) liens consisting of customary transfer restrictions in joint venture agreements, stockholder agreements or other similar agreements, in each case, except to the extent any of the foregoing would reasonably be expected to result in or results in a Material Adverse Effect.

 

3.12.        Indebtedness; Rank. The Company will not, directly or indirectly, enter into, create, incur, assume or suffer to exist any Indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom, that is senior in any respect to the Notes without the prior written consent of the holders representing two-third of the outstanding principal amount of the Notes, except for the sole purpose of repaying the Notes after a Launch Failure (as defined in the Notes).

 

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3.13.        No Guarantees of Indebtedness. Except for performance bonds, bank guarantees associated with obtaining new contracts and maintaining contracts currently in existence to the extent in the ordinary course of business and not for the purpose of raising financing, the Company will not guarantee (directly or indirectly), any Indebtedness of any Subsidiary or any other person.

 

3.14.        Certificate re: Tax Status: Upon the request of any Purchaser, the Company shall deliver to such Purchaser a certificate in the form of Exhibit F and as of such date as may be requested by such Purchaser and shall make such filings as may be required to permit such Purchaser to rely on such certification to establish that an interest in the Company is not a U.S. real property interest holding corporation for the purposes of the Code.

 

3.15.        Special Stockholders Meeting.

 

(i)          The Company agrees to hold a meeting of its stockholders, to file with the SEC a proxy statement within 75 days from the date hereof, and to hold within 120 days from the date hereof a stockholders meeting for the purpose of approving the issuance in full of all Conversion Shares and Stock Payment Shares in accordance with the rules and regulations of NYSE Amex (the “Stockholder Proposals”).

 

(ii)         Following a Launch Failure, the Company agrees to call a special meeting of shareholders, to file with the SEC a proxy statement within thirty (30) days of the date of such Launch Failure and will use reasonable best efforts to hold within 45 days of the date of such Launch Failure (or 60 days after the date of Launch Failure if the proxy statement is reviewed by the SEC), a special stockholders meeting for the purpose of amending the Company’s certificate of incorporation to increase the authorized number of shares of Common Stock from 250,000,000 shares of Common Stock to 350,000,000 shares of Common Stock.

 

3.16.        Subsequent Equity Sales. Except for the sole purpose of repaying the Notes after a Launch Failure, so long as the Notes are outstanding, neither the Company nor any Subsidiary shall enter into a Variable Rate Transaction (as defined below). “Variable Rate Transaction” shall mean a transaction in which the Company issues or sells, or agrees to issue or sell (a) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of, Common Stock either (i) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such debt or equity securities, (ii) with a fixed conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock (but excluding standard stock split anti-dilution provisions), or (ii) under a warrant exercisable for a number of shares based upon and/or varying with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such warrant, or (b) any securities of the Company pursuant to an “equity line” structure.

 

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3.17.        Restricted Payments. The Company will not, nor will it permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment (as defined herein), except for Restricted Payments (as defined herein) made by any Subsidiary to the Company. “Restricted Payments” shall mean for any Person, (a) any dividend or distribution on any class of its capital stock, (b) any payment on account of, or the setting apart of assets for a sinking or other analogous fund, or the purchase, redemption, retirement, defeasance or other acquisition of any shares of its capital stock or any options, warrants, or other rights to purchase its capital stock, whether now or hereafter outstanding and (c) any payment, repayment, redemption, retirement, repurchase or other acquisition, direct or indirect, of, on account of, or in respect of, the principal of any Indebtedness that is subordinated to the obligations arising under the Notes (or any installment thereof) prior to the regularly scheduled maturity date thereof (as in effect on the date such Indebtedness was originally incurred). In addition, the Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness (other than Permitted Senior Indebtedness), whether by way of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, (i) an event constituting an Event of Default has occurred and is continuing or (ii) an event that with the passage of time and without being cured would constitute an Event of Default has occurred and is continuing.

 

3.18.        Exculpation of JGB Collateral LLC. JGB Collateral LLC (“JGB”) may act as agent for certain Purchasers hereunder in connection with the Escrow Agreement. The Company and each Purchaser hereby acknowledges and agrees that JGB shall have no liability to the Company or any Purchaser as a direct or indirect result of acting in such capacity and that neither the Company nor any Purchaser shall have any claims against JGB as a direct or indirect result of JGB acting in such capacity, unless such claim, arises as a result of JGB’s fraud, gross negligence or willful misconduct.

 

3.19.        Transfers. To the extent that any Purchaser transfers all or a portion of the Notes owned by such Purchaser to an affiliate of such Purchaser, then the Company shall enter into such agreements and take such other actions as may be required to transfer all or the applicable portion of such transferring Purchaser’s interest in the funds held in the Escrow Account to an additional escrow account(s) of such affiliated transferee.

 

3.20.        Right to Funds Held in Escrow Account. The Company acknowledges and agrees that until funds held in the Escrow Account are disbursed to the Company in accordance with the terms of the Escrow Agreement, the Company has no right, title or interest in such funds held in the Escrow Account (as defined in the Escrow Agreements).

 

3.21.        Further Assurances. Following the Closing Date, the Company shall, and shall cause its Subsidiaries, from time to time, at their own expense, to promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary and that the Agent (as defined in the Security Documents) may reasonably request, in order to perfect and protect the Security Interests (as defined in the Security Documents) granted or purported to be granted under the Security Documents or to enable the Agent and Purchasers to exercise and enforce their rights and remedies hereunder with respect to any of the Collateral (as defined in the Security Documents). Without limiting the foregoing or any provision of the Security Documents, the Company shall, and shall cause its Subsidiaries to, cooperate with the Agent in connection with perfecting liens in Collateral after the Closing Date and take such actions reasonably requested by the Agent in order to perfect such liens.

 

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Article 4

 

CONDITIONS

 

4.1.        Conditions Precedent to the Obligation of the Company to Close and to Sell the Notes. The obligation hereunder of the Company to close and issue and sell the Notes to the Purchasers at the Closing is subject to the satisfaction or waiver, at or before the Closing of the conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

 

(a)          Accuracy of the Purchasers’ Representations and Warranties. The representations and warranties of each Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects as of such date.

 

(b)          Performance by the Purchasers. Each Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchasers at or prior to the Closing Date.

 

(c)          No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(d)          Delivery of Purchase Price. Each Purchaser shall have delivered to the Company its Purchase Price, as listed on Exhibit A hereto, for the Notes purchased by such Purchaser.

 

(e)          Delivery of Transaction Documents. The Transaction Documents to be executed by the Purchasers shall have been duly executed and delivered by the Purchasers to the Company.

 

4.2.        Conditions Precedent to the Obligation of each Purchaser to Close and to Purchase the Notes. The obligation hereunder of each Purchaser to purchase the Notes and consummate the transactions contemplated by this Agreement is subject to the satisfaction or waiver, at or before the Closing, of each of the conditions set forth below. These conditions are for each Purchaser’s sole benefit and may be waived by such Purchaser (for itself and not for any other Purchaser) at any time in their sole discretion.

 

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(a)          Accuracy of the Company’s Representations and Warranties. The representations and warranties of the Company in this Agreement and the other Transaction Documents shall be true and correct in all material respects as of the date when made and as of the Closing Date, except for representations and warranties that speak as of a particular date, which shall be true and correct in all material respects as of such date.

 

(b)          Performance by the Company; Execution and Delivery. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Company and each other Purchaser shall have executed and delivered each of the Transaction Documents.

 

(c)          No Suspension, Etc. The shares of Common Stock (i) shall be designated for quotation or listed on the Principal Market and (ii) shall not have been suspended, as of the Closing Date, by the SEC or the Principal Market from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

 

(d)          No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(e)          No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Company or any Subsidiary or any Purchaser, or any of the officers, directors or affiliates of the Company or any Subsidiary or any Purchaser seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

 

(f)          Opinion of Counsel. The Purchasers shall have received an opinion of counsel to the Company, dated the Closing Date, substantially in the form of Exhibit G hereto, with such exceptions and limitations as shall be reasonably acceptable to counsel to the Purchasers.

 

(g)          Notes; Other Transaction Documents. At or prior to the Closing, the Company shall have duly issued and delivered to the Purchasers the Notes (in such denominations as each Purchaser may request) in the amounts set forth on Exhibit A hereto. The other Transaction Documents to be executed by the Company and Subsidiaries shall have been duly executed and delivered by the Company to the Purchasers as well as evidence that any UCC filings required under the Security Agreement shall have been duly made.

 

(h)          Secretary’s Certificate. The Company shall have delivered to the Purchasers a certificate, signed by the Secretary of the Company and dated as of the Closing Date, as to (i) the resolutions adopted by its Board of Directors approving the transactions contemplated hereby, (ii) its charter, as in effect at the Closing Date, (iii) its bylaws, as in effect at the Closing Date, and (iv) the authority and incumbency of the officers executing the Transaction Documents and any other documents required to be executed or delivered in connection therewith.

 

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(i)          Officer’s Certificate. On the Closing Date, the Company shall have delivered to the Purchasers a certificate signed by an executive officer on behalf of the Company, dated as of the Closing Date, confirming the accuracy of the Company’s representations, warranties and performance of covenants as of the Closing Date and confirming the compliance by the Company with the conditions precedent set forth in paragraphs (a)-(h) and (j)-(l) of this Section 4.2 as of the Closing Date.

 

(j)          Material Adverse Effect. No change having a Material Adverse Effect shall have occurred.

 

(k)          Approvals. Except as otherwise provided in Section 3.15 herein, the Company shall have obtained all required consents and approvals of its Board of Directors deliver and perform the Transaction Documents.

 

(l)          Voting Agreement. The Purchasers shall have received the Voting Agreement, in the form of Exhibit H attached hereto, from officers, directors and certain shareholders of the Company, with respect to affirmatively voting their shares of Common Stock for the Stockholder Proposal, which shall represent at least thirty-five (35) percent of the outstanding shares of Common Stock on the Closing Date.

 

Article 5

 

TERMINATION

 

5.1.        Termination. This Agreement may be terminated at any time prior to the Closing Date by:

 

(a)          Purchasers representing a majority of the principal amount of the Notes to be issued if the Closing shall not have occurred by April 3, 2012, (the “Termination Date”), provided, however that the right to terminate this Agreement under this Section 5.1.1 shall not be available to any party whose breach of any representation or warranty or failure to perform any obligation under this Agreement shall have caused or resulted in the failure of the Closing to occur on or prior to such date; or

 

(b)          Purchasers representing a majority of the of the principal amount of the Notes to be issued or the Company in the event that any federal, state or local court, governmental, legislative, judicial, administrative or regulatory authority, agency, commission, body or other governmental entity or self regulatory organization or stock exchange (each, a “Governmental Authority”) shall have issued any statute, law, ordinance, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and restrain, enjoins or otherwise prohibits consummation of any transaction contemplated by this Agreement (collectively, an “Order”) and such Order shall have become final and nonappealable; or

 

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(c)          the Company if there has been a material breach of any representation, warranty, covenant or agreement made by Purchasers in this Agreement, or any such representation and warranty shall have become untrue after the date of this Agreement, such that Section 4.1(a) would not be satisfied and such breach or condition is not curable or, if curable, is not cured within five (5) days after written notice thereof is given by the Company to Purchasers (but in any event not later than the Termination Date); or

 

(d)          Purchasers representing a majority of the principal amount of the Notes to be issued if there has been a material breach of any representation, warranty, covenant or agreement made by the Company in this Agreement, or any such representation and warranty shall have become untrue after the date of this Agreement, such that Section 4.2(a) would not be satisfied and such breach or condition is not curable or, if curable, is not cured within five (5) days after written notice thereof is given by Purchaser to the Company (but in any event not later than the Termination Date); or

 

(e)          with the mutual written consent of the Purchasers representing a majority of the principal amount of the Notes to be issued and the Company.

 

5.2.        In the event of termination of this Agreement as provided in Section 5.1, this Agreement shall forthwith become void, except that this Article 5, Article 6 and Article 7 herein shall survive. No such termination shall relieve any party from liability for any breach of this Agreement, material misrepresentation or fraud.

 

Article 6

INDEMNIFICATION

 

6.1.        General Indemnity. The Company agrees to indemnify and hold harmless each Purchaser and its respective directors, officers, affiliates, members, managers, employees, agents, successors and assigns (collectively, “Indemnified Parties”) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by any Indemnified Party as a result of, arising out of or based upon (i) any inaccuracy in or breach of the Company’s representations or warranties in this Agreement; (ii) the Company’s breach of agreements or covenants made by the Company in this Agreement or any Transaction Document; (iii) any third party claims arising out of or resulting from the transactions contemplated by this Agreement or any other Transaction Document (unless such claim is based upon conduct by such Indemnified Party that constitutes fraud, gross negligence or willful misconduct); (iv) any breach by the Company of the Securities Act or the rules promulgated thereunder, or (v) any third party claims arising directly or indirectly out of such Indemnified Party’s status as owner of the Securities or the actual, alleged or deemed control or ability to influence the Company or any Subsidiary (unless such claim is based upon conduct by such Purchaser that constitutes fraud, gross negligence or willful misconduct). This provision shall survive the termination of this Agreement and the Transaction Documents.

 

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6.2.        Indemnification Procedure. With respect to any third-party claims giving rise to a claim for indemnification, the Indemnified Party will give written notice to the Company of such third party claim; provided, that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the Company of its obligations under this Article 5 except to the extent that the Company is actually materially prejudiced by such failure to give notice. In case any such action, proceeding or claim is brought against an Indemnified Party in respect of which indemnification is sought hereunder, the Company shall be entitled to participate in and, unless in the reasonable judgment of the Indemnified Party a conflict of interest between it and the Company exists with respect to such action, proceeding or claim (in which case the Company shall be responsible for the reasonable fees and expenses of one separate counsel for the Indemnified Parties), to assume the defense thereof with counsel satisfactory to the Indemnified Party. In the event that the Company advises an Indemnified Party that it will not contest such a claim for indemnification hereunder, or fails, within 10 days of receipt of any indemnification notice to notify, in writing, such person or entity of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the Company elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the Indemnified Party’s costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The Company shall keep the Indemnified Party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the Company elects to defend any such action or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. Notwithstanding anything in this Article 6 to the contrary, the Company shall not, without the Indemnified Party’s prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof. The indemnification obligations to defend the Indemnified Party required by this Article 6 shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, so long as the Indemnified Party shall refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar rights of the Indemnified Party against the Company or others, and (b) any liabilities the Company may be subject to pursuant to the law.

 

6.3.        Contribution. If the indemnification provided for in Section 6.1 is unavailable to any Indemnified Party thereunder in respect of any losses, liabilities, deficiencies, costs, damages or expenses (or actions in respect thereof) referred to in such Section, then the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, liabilities, deficiencies, costs, damages or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and such Indemnified Party on the other.

 

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Article 7

 

MISCELLANEOUS

 

7.1.        Fees and Expenses. The Company shall reimburse JGB Management Inc. for all costs and expenses incurred by such Purchaser in connection with the negotiation, drafting and execution of the Transaction Documents and the transactions contemplated thereby (including all legal fees, travel, disbursements and due diligence in connection therewith and all fees incurred in connection with any necessary regulatory filings and clearances) not to exceed $125,000 [THE MAJORITY OF THIS WILL BE FOR THE COST OF PERFECTING LIENS ON ASSETS IN EUROPE]; provided, however, that the amount of such costs and expenses due to the Purchasers shall be reduced by an amount equal to $50,000, which has been previously advanced to the Purchasers. In addition, the Company shall pay all reasonable fees and expenses incurred by any Purchaser in connection with the enforcement of this Agreement or any of the other Transaction Documents, including, without limitation, all reasonable attorneys’ fees and expenses; provided, however, that in the event that the enforcement of this Agreement is contested and it is finally judicially determined that such Purchaser was not entitled to the enforcement of the Transaction Document sought, then the Purchaser seeking enforcement shall reimburse the Company for all fees and expenses paid pursuant to this sentence. The Company shall be responsible for its own fees and expenses incurred in connection with the transactions contemplated by this Agreement, including the fees and expenses of the Placement Agents. The Company shall pay all fees of its transfer agent, stamp taxes and other taxes and duties levied in connection with the delivery of the Securities to each Purchaser. This provision shall survive termination of this Agreement and the Transaction Documents.

 

7.2.        Specific Performance; Consent to Jurisdiction; Venue.

 

(a)          The Company and the Purchasers acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement or the other Transaction Documents were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement or the other Transaction Documents and to enforce specifically the terms and provisions hereof or thereof without the requirement of posting a bond or providing any other security, this being in addition to any other remedy to which any of them may be entitled by law or equity.

 

(b)          The parties agree that venue for any dispute arising under this Agreement will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue. The parties irrevocably consent to personal jurisdiction in the state and federal courts in New York County of the state of New York. The Company and each Purchaser consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 7.2 shall affect or limit any right to serve process in any other manner permitted by law. The parties hereby waive all rights to a trial by jury.

 

7.3.        Amendment. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and Purchasers holding at least a two-thirds of the outstanding principal amount of the Notes; provided, that if any Purchaser is materially adversely affected by such waiver or amendment, such waiver or amendment shall not be effective without the written consent of the adversely affected Purchaser.

 

25
 

 

7.4.        Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery by telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur or (c) upon delivery by e-mail (if delivered on a Business Day during normal business hours where such notice is to be received) upon recipient’s actual receipt and acknowledgement of such e-mail. The addresses for such communications shall be:

 

If to the Company:

Elephant Talk Communications, Corp.

19103 Centre Rose Boulevard
Lutz, FL 33558
Attention: Steve van der Velden
Telephone No.: (813) 926-8920
Facsimile No.:

E-mail: 

   
with a copy to:

Ellenoff Grossman & Schole LLP

150 East 42nd Street
New York, NY 10017

Attention: David Selengut, Esq.

Telephone No.: (212) 370-1300

Facsimile No.: (212) 370-7889
E-mail: selengut@egsllp.com 

   
If to any Purchaser: At the address of such Purchaser set forth on such Purchaser’s signature page

 

Any party hereto may from time to time change its address for notices by giving written notice of such changed address to the other party hereto.

 

26
 

 

7.5.        Waivers. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. No consideration shall be offered or paid to any Purchaser to amend or waive or modify any provision of this Agreement unless the same consideration is also offered to all of the parties to this Agreement then holding Preferred Shares. This provision constitutes a separate right granted to each Purchaser by the Company and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase disposition or voting of Securities or otherwise.

 

7.6.        Headings. The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

 

7.7.        Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. The Purchasers may assign the Securities and its rights under this Agreement and the other Transaction Documents and any other rights hereto and thereto without the consent of the Company. The Company may not assign or delegate any of its rights or obligations hereunder or under any Transaction Document.

 

7.8.        No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity.

 

7.9.        Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles that would result in the application of the substantive law of another jurisdiction. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.

 

7.10.        Survival. The covenants, agreements and representations and warranties of the Company under the Transaction Documents shall survive the execution and delivery hereof indefinitely.

 

7.11.        Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. Signature pages to this Agreement may be delivered by facsimile or other means of electronic transmission.

 

7.12.        Publicity. Subject to Section 3.8, the Company agrees that it will not disclose, and will not include in any public announcement, the names of the Purchasers without the consent of the Purchasers, which consent shall not be unreasonably withheld or delayed, or unless and until such disclosure is required by law, rule or applicable regulation, and then only to the extent of such requirement. Notwithstanding the foregoing, the Purchasers consent to being identified in any filings the Company makes with the SEC to the extent required by law or the rules and regulations of the SEC.

 

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7.13.        Severability. The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement and this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

 

7.14.        Further Assurances. From and after the date of this Agreement, upon the request of the Purchasers or the Company, the Company and each Purchaser shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the other Transaction Documents

 

7.15.        Independent Nature of Purchasers’ Obligations and Rights. The rights and obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchaser as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges, that each Purchaser has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.

 

7.16.        Time Is of the Essence. Time is of the essence of this Agreement and each Transaction Document.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

28
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized officers as of the date first above written.

 

  ELEPHANT TALK COMMUNICATIONS CORP.
   
  By: /s/Steven van der Velden
     
  Name: Steven van der Velden
     
  Title: President and Chief Executive Officer
     
  PURCHASERS
   
  JGB Capital Partner,LP
     
  By: /s/ JGB Capital Partner,LP
     
  JGB Capital Offshore Ltd.
     
  By: /s/JGB Capital Offshore Ltd.
     
  JGB Partners, LP
     
  By: /s/ JGB Partners, LP
     
  Hudson Bay Master Fund, Ltd.
     
  By: Hudson Bay Capital Management LP,
  Investment Manager
     
  By: /s/Yoav Roth
    Name: Yoav Roth
    Title: Authorized Signatory
     
  Iroquois Master Fund Ltd.
     
  By: /s/ Joshua Silverman
    Name: Joshua Silverman
    Title: Authorized Signatory

 

29
 

 

EXHIBIT A

 

LIST OF PURCHASERS AND AMOUNT OF NOTES

 

A-1
 

 

EXHIBIT B

 

FORM OF NOTE

 

B-1
 

 

EXHIBIT C

 

REGISTRATION RIGHTS AGREEMENT

 

C-1
 

 

EXHIBIT D

 

FORM OF SECURITY AGREEMENT

 

D-1
 

 

EXHIBIT E

 

FORM OF ESCROW AGREEMENT

 

E-1
 

 

EXHIBIT F

 

FIRPTA CERTIFICATE

 

F-1
 

 

EXHIBIT G

 

OPINION OF COUNSEL TO COMPANY

 

G-1
 

 

EXHIBIT H

 

VOTING AGREEMENT

 

H-1

 EX-10.29 3 v304852_ex10-29.htm EXHIBIT 10.29

 

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.

 

8% FORM OF SENIOR SECURED CONVERTIBLE NOTE

 

Elephant Talk Communications, Corp.
8% Senior Secured Convertible Note

 

Issuance Date: March 29, 2012

Original Principal Amount: $8,800,000 

No.: [A-1]

 

FOR VALUE RECEIVED, Elephant Talk Communications, Corp., a Delaware corporation (the “Company”), hereby promises to pay to the order of [HOLDER] or its registered assigns (“Holder”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to any Installment Payment (as defined below), redemption, conversion or otherwise, the “Principal”) when due, whether upon any Installment Date, the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the applicable Interest Rate (as defined below) from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due and payable, whether upon any Installment Date, the Maturity Date or acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof). This Convertible Note (including all Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Convertible Notes issued pursuant to the Securities Purchase Agreement (as defined below) (collectively, the “Notes” and such other Convertible Notes, the “Other Notes”). Certain capitalized terms used herein are defined in Section 25.

 

1.          PAYMENTS OF PRINCIPAL AND INTEREST. The Company will pay the Principal of and Interest and premium, if any, on the Notes as set forth herein. The amounts of principal and Interest corresponding to each Installment Date are set forth on Exhibit A attached hereto, without giving effect to any Default Interest, Stock Replacement Payment, Late Charges or other adjustments as provided in this Note. For the avoidance of doubt, no Installment Amount shall be reduced as a result of the Holder’s conversion of any part of this Note (other than a Conversion effected in accordance with Section 2(g)); provided, however, if the entire outstanding Principal, Interest, Late Charges and other amounts due hereunder is less than the applicable Installment Amount for any Installment Date such lesser amount shall be due and payable on such Installment Date. Interest on the Notes will accrue at an annual rate equal to eight percent (8%) (the “Interest Rate”); provided, however, that upon the occurrence and during the continuance of an Event of Default, until such Event of Default is cured (if applicable), the Interest Rate shall be equal to the lesser of (x) nineteen percent (19%) per annum and (y) the maximum applicable legal rate per annum. Interest shall be paid on each Installment Date commencing on the Initial Installment Date. If an Installment Date is not a Trading Day, payment shall instead be made on the next succeeding Trading Day, and no additional Interest shall accrue on the Notes for the intervening period. Interest on the Notes will be computed on the basis of a 365-day year and the actual number of days elapsed.

 

 
 

 

2.          INSTALLMENT PAYMENTS.

 

(a)          General. On each applicable Installment Date, the Company shall pay to the Holder the Installment Amount due on such Installment Date, at the Company’s option, in cash or shares of Common Stock or any combination of cash and shares of Common Stock subject to the provisions of this Section 2; provided, however, that no portion of the Installment Amount may be paid in shares of Common Stock unless (A) the Equity Conditions are satisfied, or waived by the Holder, as applicable, (B) the Holder’s Exchange Cap Allocation (as defined below) and/or Authorized Share Allocation (as defined below) has not been exceeded and (C) the portion of the Installment Amount to be paid in shares of Common Stock does not, unless waived by the Holder, exceed the Dollar Volume Limitation.

 

(b)          Installment Notice. On a date not less than twenty two (22) Trading Days, but in no event more than twenty-five (25) Trading Days, prior to each Installment Date (the “Installment Notice Date”), the Company shall deliver a written notice by e-mail or facsimile (an “Installment Notice”) to the Holder, which shall either: (i) confirm that the entire applicable Installment Amount shall be paid in cash; or (ii) (A) state that the Company elects to pay all or a portion of the Installment Amount in shares of Common Stock, (B) specify the portion which the Company elects to pay in cash (such amount, the “Cash Payment Amount”) and the portion that the Company elects to pay in shares of Common Stock (such portion a “Stock Payment Amount”), which amounts when added together must equal the applicable Installment Amount, (C) certify that the Equity Conditions are then satisfied, (D) specify the applicable Dollar Volume Limitation (expressed in U.S. Dollars) and certify that the Stock Payment Amount does not exceed such applicable Dollar Volume Limitation and (E) certify that the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation has not been exceeded. If (x) the Company does not timely deliver an Installment Notice in accordance with this Section 2(b) or (y) the Equity Conditions are not satisfied, then, unless waived by the Holder, the Company shall be deemed to have delivered an Installment Notice electing to pay the entire Installment Amount in cash. Any Cash Payment Amount shall be paid in accordance with Section 2(c) and any Stock Payment Amount shall be paid in accordance with Section 2(d). Each Installment Notice, whether actually given or deemed given, shall be irrevocable and may not be modified or amended.

 

(c)          Mechanics of Cash Payment. On each Installment Date, to the extent that the Company elects to pay all or any portion of the Installment Amount in cash as provided above, the Company shall pay the applicable Cash Payment Amount for such Installment Date to the Holder by wire transfer of immediately available funds.

 

2
 

 

(e)          Mechanics of Stock Payment. To the extent that the Company elects to pay all or any portion of the applicable Installment Amount in shares of Common Stock, the applicable Stock Payment Amount shall be paid as follows:

 

(i)          twenty-one (21) Trading Days prior to the applicable Installment Date (the “Advance Date”), the Company shall deliver to the Holder a number of shares of Common Stock determined by dividing (x) the Stock Payment Amount for such Installment Date by (y) ninety percent (90%) of the VWAP on the Trading Day immediately preceding such Advance Date (the “Advance Shares”), as such number of Advance Shares may be reduced pursuant to clause (y) of Section 2(d)(ii); and

 

(ii)         not later than two (2) Trading Days after the applicable Installment Date, the Company shall deliver an additional number of shares of Common Stock (the “True-Up Shares”), if any, to the Holder equal to the positive difference between (a) the Stock Payment Amount divided by the Stock Payment Price for such Installment Date and (b) the Advance Shares (without taking into account any reduction in the number of Advance Shares delivered to the Holder as a result of clause (y) of this Section 2(d)(ii)); provided; however, that if clause (b) exceeds clause (a), then, at the Company’s option, the Holder shall (x) return such excess number of shares Common Stock to the Company within five (5) Trading Days after the Installment Date, and such excess shares shall be deemed cancelled for all purposes effective as of the applicable Installment Date or (y) the Holder shall retain such excess number of shares of Common Stock and the number of Advance Shares that Company is required to deliver on the next Advance Date shall be reduced by the amount of such excess number of shares of Common Stock. For the avoidance of doubt, the Holder shall not have any liability to the Company to the extent that any Advance Shares that are returned to the Company pursuant to the immediately preceding sentence decrease in value following the applicable Advance Date.

 

(f)          Busted Stock Payments. Notwithstanding any other provision of this Section 2, to the extent that the Company elects to pay all or any portion of an Installment Amount in shares of Common Stock:

 

(i)          to the extent that the aggregate number of Advance Shares or True-Up Shares to be delivered to the Holder pursuant to Section 2(d) in respect of any individual Stock Payment Amount would cause such Holder to exceed the Maximum Percentage (as defined below), then, (I) the Holder shall provide written notice to the Company that such delivery of all or a portion of the Advance Shares or True-Up Shares would cause such Holder to exceed the Maximum Percentage, and (II) in addition to delivery of the number of Advance Shares or True-Up Shares that would not cause such Holder to exceed the Maximum Percentage, the Company shall pay to the Holder in lieu of such number of Advance Shares or True-Up Shares that would cause such Holder to exceed the Maximum Percentage (such excess number of shares, the “Excess Shares”), not more than the later of (x) three (3) Trading Days after such Installment Date and (y) three (3) Trading Days after the date of the Holder’s written notice, an amount in cash equal to the portion of the Stock Payment Amount that would otherwise be payable in respect of the Excess Shares;

 

 

3
 

  

(ii)         to the extent that such Stock Payment Amount, when aggregated with any shares of Common Stock already issued to the Holder in respect of this Note, would cause the Holder’s Exchange Cap Allocation or Authorized Share Allocation, as the case may be, to be exceeded, then that portion of such Stock Payment Amount that would not exceed the Holder’s Exchange Cap Allocation or Authorized Share Allocation, as the case may be, shall be delivered to the Holder in shares of Common Stock as provided above and the Company shall pay to the Holder, not more than three (3) Trading Days after the Installment Date, an amount in cash equal Stock Replacement Payment in lieu of any the portion of the Stock Payment Amount that would cause the Holder’s Exchange Cap Allocation or Authorized Share Allocation, as the case may be, to be exceeded;

 

(iii)        if the Equity Conditions are neither (x) satisfied nor (y) waived in accordance with the terms hereof, as applicable, on the Trading Day immediately preceding the Advance Date and/or on the Advance Date, or if the VWAP cannot be determined on the Trading Day immediately preceding the Advance Date, or if the Company fails to deliver the Advance Shares to the Holder on the Advance Date, then the Holder may, at its option, upon written notice to the Company, require the Company to pay to the Holder, not later than two (2) Trading Days after the Installment Date, an amount of cash equal to the Stock Replacement Payment in lieu of any the portion of the Stock Payment Amount; or

 

(iv)        if subsequent to the delivery of the Advance Shares, (A) the Equity Conditions are neither satisfied nor waived in accordance with the terms hereof, as applicable, on any day during the Stock Payment Pricing Period or (B) if the VWAP cannot be determined on any day during the Stock Payment Pricing Period, then the Holder may, at its option, elect in a written notice to the Company to redeliver all or any portion of the Advance Shares to the Company and the Company shall pay to the Holder, not later than two (2) Trading Days after such Installment Date, an amount of cash equal to the Stock Replacement Payment in lieu of such portion of the Stock Payment Amount for which such Holder has elected in writing to redeliver Advance Shares to the Company. For the avoidance of doubt, to the extent this Section 2(e)(iv) applies, then by the second (2nd) Trading Day after such Installment Date, the Company must pay to the Holder an amount of cash and Advance Shares equal in value to at least the applicable Cash Payment Amount plus an amount equal to the product of (x) a fraction the numerator of which is the average VWAP of the Common Stock for the applicable Stock Payment Pricing Period and the denominator of which is the Stock Payment Price for such Stock Payment Pricing Period and (y) the entire Stock Payment Amount.

 

The “Stock Replacement Payment” shall be determined according to the following formula:

 

SRP = (S/X) * Y

 

For the purposes of the foregoing formula:

 

SRP = Stock Replacement Payment

 

S = the Stock Payment Amount (or (A) in the case that either or both of the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation is exceeded as provided above, only that portion of such Stock Payment Amount that would exceed the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation, as applicable, and/or (B) in the case of Section 2(e)(iv) that portion of the Stock Payment Amount for which the Holder has elected in its written notice to redeliver Advance Shares to the Company).

 

4
 

 

X = the Stock Payment Price for the applicable Installment Date.

 

Y = the highest VWAP during the Stock Payment Pricing Period for the applicable Installment Date.

 

(g)          Delivery of Shares. Any shares of Common Stock required to be delivered by the Company to the Holder under this Section 2 shall be credited to the Holder’s or its designee’s balance account with Depository Trust Company (“DTC”) through its Deposit/Withdrawal at Custodian system. In addition, the provisions of Section 3(c)(ii) shall apply to the delivery of shares Common Stock under this Section 2 mutatis mutandis as if each date when shares of Common Stock are required to be delivered under this Section 2 was a Share Delivery Date (as defined below).

 

(h)          Conversion Rights Unaffected.  Notwithstanding any provision to the contrary, the Holder may deliver a Conversion Notice (as defined below) on the 26th, 27th or 28th Trading day prior to any Installment Date with respect to all or any portion of the specific Installment Amount to be paid on such Installment Date.  Accordingly, the Conversion Amount for any such conversion shall reduce the applicable Installment Amount for such Installment Date dollar for dollar.

 

3.          CONVERSION OF NOTES. This Note shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock, on the terms and conditions set forth in this Section 3.

 

(a)          Conversion Right. Subject to the provisions of Section 3(d), at any time or times on or after the Issuance Date (including, without limitation, on the Maturity Date), the Holder shall be entitled to convert all or any portion of the outstanding and unpaid Conversion Amount (as defined below) into validly issued, fully paid and non-assessable shares of Common Stock in accordance with Section 3(c) and Section 2(h), at the Conversion Rate. The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all transfer, stamp, issuance and similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount.

 

(b)          Conversion Prices; Conversion Rates. The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the "Conversion Rate").

 

(i)          “Conversion Amount” means the sum of (A) the portion of the Principal to be converted, redeemed or otherwise with respect to which this determination is being made, (B) accrued and unpaid Interest with respect to such Principal, and (C) accrued and unpaid Late Charges with respect to such Principal and Interest.

 

 

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(ii)         “Conversion Price” means, as of any Conversion Date (as defined below) or other date of determination, $[___] [NTD: 115% OF THE TRAILING 30 DAY CLOSING PRICE PRIOR TO CLOSING], subject to adjustment as provided herein. Notwithstanding the foregoing, following a Launch Failure, the Conversion Price for any Conversion Date shall be the lowest of (a) the Conversion Price in effect on the Trading Day immediately prior to such Launch Failure, (b) the amount equal to 90% of the average of the five lowest VWAPs for the twenty (20) consecutive Trading Days prior to such Conversion Date, and (c) the amount equal to 90% of the lowest reported trade price for the Common Stock as reported by Bloomberg on such Conversion Date (the “Reset Conversion Price”). The Holder’s determination of the Reset Conversion Price shall be final and binding on the Company absent fraud or manifest error.

 

(c)          Mechanics of Conversion.

 

(i)          Conversion Prior to Maturity Date. To convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall deliver (whether via facsimile, e-mail or otherwise), for receipt on or prior to 11:59:59 p.m., New York time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit B (the “Conversion Notice”) to the Company. If and only if required by Section 3(c)(iii), within two (2) Trading Days following a conversion of this Note as aforesaid, the Holder shall surrender this Note to a nationally recognized overnight delivery service for delivery to the Company (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction as contemplated by Section 15(b)). On or before the second (2nd) Trading Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile and e-mail an acknowledgment of confirmation, in the form attached hereto as Exhibit C, of receipt of such Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the fifth (5th) Trading Day following the date of receipt of a Conversion Notice, the Company shall credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at Custodian system. If this Note is physically surrendered for conversion pursuant to Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three (3) Business Days after receipt of this Note and at its own expense, issue and deliver to the Holder (or its designee) a new Note (in accordance with Section 15(d)) representing the outstanding Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

 

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(ii)         Company’s Failure to Timely Convert. If the Company shall fail, for any reason or for no reason, within five (5) Trading Days after the Company’s receipt of a Conversion Notice (whether via facsimile, e-mail or otherwise) (the “Share Delivery Date”), to credit the Holder’s or its designee’s balance account with DTC for such number of shares of Common Stock to which the Holder is entitled upon the Holder’s conversion of any Conversion Amount (a “Conversion Failure”), then, in addition to all other remedies available to the Holder, (1) the Company shall pay in cash to the Holder on each day that the issuance of such shares of Common Stock is not timely effected an amount equal to 1% of the product of (A) the sum of the number of shares of Common Stock not issued to the Holder on a timely basis and to which the Holder is entitled multiplied by (B) the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the last possible date which the Company could have issued such shares of Common Stock to the Holder without violating Section 3(c)(i) and (2) the Holder, upon written notice to the Company, may, at its sole option, void its Conversion Notice with respect to, and retain or have returned (as the case may be) any portion of this Note that has not been converted pursuant to such Conversion Notice, provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if the Company shall fail to credit the Holder’s or its designee’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon the Holder’s conversion hereunder by the Share Delivery Date, and if on or after such Share Delivery Date the Holder (or any other Person in respect, or on behalf, of the Holder) purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of the number of shares of Common Stock, issuable upon such conversion that the Holder so anticipated receiving from the Company, then, in addition to all other remedies available to the Holder, the Company shall, within three (3) Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (including, without limitation, by any other Person in respect, or on behalf, of the Holder) (the “Buy-In Price”), at which point the Company’s obligation to credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon the Holder’s conversion hereunder shall terminate, or (ii) promptly honor its obligation to so credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon the Holder’s conversion hereunder and pay cash to the Holder in an amount equal to the Buy-In Price. Nothing herein shall limit the Holder’s right to pursue any other remedies available to it hereunder, at law or in equity, including, without limitation, a decree of specific performance and/or injunctive relief.

 

(iii)        Registration; Book-Entry. The Company shall maintain a register (the “Register”) for the recordation of the names and addresses of the holders of each of the Notes and the principal amount of the Notes held by such holders (the “Registered Notes”). A Registered Note may be assigned, transferred or sold in whole or in part only by registration of such assignment or sale on the Register. Upon its receipt of a request to assign, transfer or sell all or part of any Registered Note by the holder thereof, the Company shall record the information contained therein in the Register and issue one or more new Registered Notes in the same aggregate principal amount as the principal amount of the surrendered Registered Note to the designated assignee or transferee pursuant to Section 15. Notwithstanding anything to the contrary set forth in this Section 3, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted (in which event this Note shall be delivered to the Company as contemplated by Section 3(c)(i)) or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of this Note upon physical surrender of this Note. The Holder and the Company shall maintain records showing the Principal, Interest and Late Charges converted and/or paid (as the case may be) and the dates of such conversions and/or payments (as the case may be) or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.

 

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(iv)        Pro Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such date. In the event of a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 18.

 

(v)         Cash Settlement. Notwithstanding anything contained herein to the contrary, to the extent that the number of shares of Common Stock to be issued in connection with any conversion hereunder would exceed the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation or, for purposes of a forced conversion under Section 8(b), the Maximum Percentage, such conversion shall be “cash settled” and the Company shall pay to such Holder an amount in cash equal to the sum of (x) the Conversion Amount being converted and (y) the Conversion Premium (as defined below). The “Conversion Premium” means the product of (v) the difference between (A) the VWAP of the Common Stock on the Conversion Date and (B) the Conversion Price in effect on such Conversion Date and (w) the number of shares of Common Stock to which the Holder is entitled in connection with such Conversion, no later than two (2) Trading Days after the date of the applicable Conversion Notice. Notwithstanding the foregoing, the Company’s aggregate liability under this Section 3(c)(v) shall not exceed $8,800,000 (to be divided pro rata per Note) less any amortization payments. For the avoidance of doubt, the foregoing does not limit the Holder’s other rights and remedies hereunder at law, in equity or otherwise.

 

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(d)          Limitations on Conversions.

 

(i)          Beneficial Ownership. Notwithstanding anything to the contrary set forth in this Note, at no time may the Company issue to the Holder shares of Common Stock if the number of shares of Common Stock to be issued pursuant to such issuance would exceed, when aggregated with all other shares of Common Stock beneficially owned by the Holder at such time (as determined in accordance with Section 13(d) of the 1934 Act (as defined in the Securities Purchase Agreement) and the rules thereunder, including without limitation, shares of Common Stock that would be aggregated with the Holder’s beneficial ownership for purpose of determining a group under Section 13(d) of the 1934 Act), the number of shares of Common Stock that would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder, including without limitation, shares of Common Stock that would be aggregated with the Holder’s beneficial ownership for purpose of determining a group under Section 13(d) of the 1934 Act) more than 4.9% (the “Maximum Percentage”) of the then issued and outstanding shares of Common Stock. By written notice to the Company, the Holder may from time to time increase or decrease the Maximum Percentage to any other percentage not in excess of 9.9% specified in such notice; provided that (i) any such increase will not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of the Notes. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Maximum Percentage limitation. For any reason at any time, upon the written or oral request of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Note or other securities issued pursuant to the Securities Purchase Agreement.

 

(ii)         Principal Market Regulation. Subject to Sections 2(e)(ii) and 3(c)(v), the Company shall not issue any shares of Common Stock pursuant to the terms of this Note if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue pursuant to the terms of this Note without breaching the Company’s obligations under the rules or regulations of the Principal Market (the number of shares which may be issued without violating such rules and regulations, the “Exchange Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal Market for issuances of shares of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Holder. Until such approval or such written opinion is obtained, no Purchaser (as defined in the Securities Purchase Agreement) shall be issued in the aggregate, pursuant to the terms of this Notes, shares of Common Stock in an amount greater than the product of (i) the Exchange Cap multiplied by (ii) the quotient of (1) the original principal amount of Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on the Closing Date (as defined in the Securities Purchase Agreement) divided by (2) the aggregate original principal amount of all Notes issued to all the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser's Notes, the transferee shall be allocated a pro rata portion of such Purchaser's Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee. Upon conversion in full of a Purchaser’s Notes, the difference (if any) between such Purchaser’s Exchange Cap Allocation and the number of shares of Common Stock actually issued to such Purchaser upon such Purchaser’s conversion in full of such Notes shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in proportion to the aggregate principal amount of the Notes then held by each such holder.

 

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4.          RIGHTS UPON EVENT OF DEFAULT.

 

(a)          Event of Default. Each of the following events shall constitute an “Event of Default”:

 

(i)          the suspension from trading or the failure of the Common Stock to be trading or listed (as applicable) on an Eligible Market for a period of five (5) consecutive days or for more than an aggregate of ten (10) days in any 365-day period;

 

(ii)         the Company’s (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within three (3) Trading Days after the applicable Conversion Date or (B) notice, written or oral, to any holder of the Notes, including, without limitation, by way of public announcement or through any of its agents (which the Company fails to renounce the actions of its agent within three (3) Trading Days after becoming aware of such action), at any time, of its intention not to comply, as required, with a request for conversion of any Notes into shares of Common Stock that is requested in accordance with the provisions of the Notes, other than pursuant to Section 3(d);

 

(iii)        at any time following the tenth (10th) consecutive day that the Holder’s Authorized Share Allocation is less than the number of shares of Common Stock that the Holder would be entitled to receive upon a conversion of the full Conversion Amount of this Note (without regard to any limitations on conversion set forth in Section 3(d) or otherwise);

 

(iv)        the Company’s failure to pay to the Holder any amount of Principal, Interest, Late Charges or other amounts when and as due under this Note (including, without limitation, the Company’s failure to pay any redemption payments or amounts hereunder and/or the Company’s failure to deliver Advance Shares or True-Up Shares when and as due as provided in Section 2) or any other Transaction Document (as defined in the Securities Purchase Agreement) or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby;

 

(v)         the occurrence of any default under, redemption of or acceleration prior to maturity of any Indebtedness (as defined in the Securities Purchase Agreement but excluding any Indebtedness arising out of the Notes) of the Company or any of its Subsidiaries;

 

(vi)        bankruptcy, insolvency, reorganization, receivership, conservatorship or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any Significant Subsidiary, and, if instituted against the Company or any such Subsidiary by a third party, shall not be dismissed within ninety (90) days of their initiation;

 

 

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(vii)       the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree, order, judgment or other similar document in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, state or foreign law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the execution of a composition of debts, or the occurrence of any other similar federal, state or foreign proceeding, the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action or the commencement by any Person of a UCC foreclosure sale of a material portion of the Company’s or any Significant Subsidiary’s assets or any other similar action under federal, state or foreign law;

 

(viii)      the entry by a court of (i) a decree, order, judgment or other similar document adjudging the Company or any Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation, reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary under any applicable federal, state or foreign law or (ii) a decree, order, judgment or other similar document appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree, order, judgment or other similar document or any such other decree, order, judgment or other similar document unstayed and in effect for a period of thirty (30) consecutive days;

 

(ix)         a final judgment or judgments (excluding judgments relating to any actions set forth on Schedule 2.1(k) of the Securities Purchase Agreement that are not in excess of $2,000,000) for the payment of money aggregating in excess of $500,000 are rendered against the Company and/or any of its Subsidiaries and which judgments are not, within thirty (30) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within thirty (30) days after the expiration of such stay;

 

(x)          (a) the Company shall default on any of its obligations under any other debenture or any mortgage, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring agreement in an amount exceeding $150,000 and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

 

(xi)         any breach of the Company’s covenants set forth in Sections 3.9 (if such breach is not cured within 2 days of the date of breach), 3.10 (if such breach is not cured within 12 days of such breach), 3.11 (if such breach is not cured within 12 days of such breach), 3.12 (if such breach is not cured within 12 days of such breach), 3.13 (if such breach is not cured within 12 days of such breach), 3.15 (or if the Company fails to obtain the stockholder approval contemplated by such Section 3.15), if either such breach is not cured within 5 days of such breach, 3.16 , 3.17 (if such breach is not cured within 12 days of such breach) and/or 3.21 (if such breach is not cured within 12 days of such breach) of the Securities Purchase Agreement;

 

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(xii)        other than as specifically set forth in another clause of this Section 4(a), the Company breaches any material representation, warranty, covenant or other term or condition of any Transaction Document (including this Note), except, in the case of a breach of a material covenant or other term or condition that is curable, only if such breach remains uncured for a period of five (5) days after notice by Holder;

 

(xiii)       any material provision of any Security Document or any other Transaction Document shall at any time for any reason (other than pursuant to the express terms thereof) cease to be valid and binding on or enforceable against the Company or any Subsidiary intended to be a party thereto, only if such breach remains uncured for a period of five (5) days after notice by Holder, or the validity or enforceability thereof shall be contested by any party thereto, or a proceeding shall be commenced by the Company or any Subsidiary or any governmental authority having jurisdiction over any of them, seeking to establish the invalidity or unenforceability thereof, or the Company or any Subsidiary shall deny in writing that it has any liability or obligation purported to be created under any such Security Document or other such Transaction Document;

 

(xiv)      any Security Document, after delivery thereof pursuant to the Securities Purchase Agreement, shall, other than pursuant to the express terms thereof, for any reason fail or cease to create a valid, perfected first priority Lien (as defined in the Security Documents) in favor of the Collateral Agent (as defined in the Security Documents) for the benefit of the holders of the Notes on any Collateral (as defined in the Security Documents) purported to be covered thereby;

 

(xv)       any bank at which any deposit account, blocked account, or lockbox account of the Company or any Subsidiary is maintained shall fail to comply with any material term of any deposit account, blocked account, lockbox account or similar agreement to which such bank is a party or any securities intermediary, commodity intermediary or other financial institution at any time in custody, control or possession of any investment property of the Company or any Subsidiary shall fail to comply with any of the terms of any investment property control agreement to which such Person is a party (it being understood that only accounts pursuant to which the Collateral Agent has requested account control agreements should be subject to this clause (xv));

 

(xvi)      until the date that any Lien therein is released in accordance with the terms of the Security Documents, any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured;

 

(xvii)     a material false or inaccurate certification (including a false or inaccurate deemed certification) by the Company that the Equity Conditions are satisfied, the Dollar Volume Limitation has not been exceeded or as to whether any Event of Default has occurred;

 

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(xviii)    the failure of any Registration Statement required to be filed pursuant to the Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is ninety (90) days after the applicable Effectiveness Deadline (as defined in the Registration Rights Agreement), or, while the applicable Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to any holder of the Notes for sale of all of such holder's Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive trading days or for more than an aggregate of thirty (30) trading days in any 365-day period (other than days during an Allowable Grace Period (as defined in the Registration Rights Agreement)); provided, however, that notwithstanding anything to the contrary contained herein, the Company's failure to meet one or more of the requirements of this Section 4(a)(xviii) shall not constitute an Event of Default if all of the Registrable Securities then held by the holder of the Notes may be sold without the requirement to be in compliance with Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144 (including any volume limitations or public information requirements);

 

(xix)       any Event of Default (as defined in the Other Notes) occurs with respect to any Other Notes; or

 

(xx)        the occurrence of a Launch Failure.

 

(b)          Remedies. If an Event of Default occurs and is continuing with respect to any of the Notes, the Holder may declare all of the then outstanding Principal of this Note and all other Notes held by the Holder, including any Interest and unpaid Late Charges, to be due and payable immediately, except that in the case of an Event of Default arising from events described in clauses (vi), (vii) and/or (viii) of Section 4(a), this Note shall become due and payable automatically without further action or notice. In the event of such acceleration, the amount due and owing to the Holder shall be 110% of the outstanding Principal of the Notes held by the Holder (plus all accrued and unpaid Interest and Late Charges, if any). The Holder’s remedies under this Note shall be cumulative.

 

5.          RIGHTS UPON FUNDAMENTAL TRANSACTION.

 

(a)          Assumption. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 5(a) pursuant to written agreements in form and substance satisfactory to the Holder and approved by the Holder prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts then outstanding and the interest rates of the Notes held by such holder, having similar conversion rights as the Notes, having similar rights as set forth in Section 2 of the Notes and having similar ranking to the Notes, and satisfactory to the Holder and (ii) the Successor Entity is a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein. Upon consummation of a Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of this Note at any time after the consummation of such Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or other securities, cash, assets or other property), issuable upon the conversion or redemption of the Notes prior to such Fundamental Transaction, such shares of the publicly traded common stock (or their equivalent) of the Successor Entity (including its Parent Entity), as adjusted in accordance with the provisions of this Note. The provisions of this Section 5 shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion of this Note or other issuances of shares of Common Stock hereunder.

 

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(b)          Notice of a Fundamental Transaction; Redemption Right. No sooner than twenty (20) Trading Days nor later than ten (10) Trading Days prior to the consummation of a Fundamental Transaction, but not prior to the public announcement of such Fundamental Transaction, the Company shall deliver written notice thereof via facsimile, e-mail and overnight courier to the Holder (a “Fundamental Transaction Notice”). At any time during the period beginning after the Holder’s receipt of a Fundamental Transaction Notice or the Holder becoming aware of a Fundamental Transaction if a Fundamental Transaction Notice is not delivered to the Holder in accordance with the immediately preceding sentence (as applicable) and ending on the later of twenty (20) Trading Days after (A) consummation of such Fundamental Transaction or (B) the date of receipt of such Fundamental Transaction Notice, the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (“Fundamental Transaction Redemption Notice”) to the Company, which Fundamental Transaction Redemption Notice shall indicate the Principal amount of this Note that the Holder is electing to redeem. The portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the Company in cash at a price equal to 115% of the Principal amount being redeemed plus all accrued and unpaid Interests and Late Charges (the “Fundamental Transaction Redemption Price”) and such Fundamental Transaction Redemption Price shall be due and payable in cash not later then two (2) Trading Days after the consummation of such Fundamental Transaction. Redemptions required by this Section 5 shall have priority to payments to stockholders in connection with such Fundamental Transaction. Notwithstanding anything to the contrary in this Section 5, but subject to Section 3(d), until the Fundamental Transaction Redemption Price (together with any Late Charges thereon) is paid in full, the Principal amount of this Note submitted for redemption under this Section 5(b) (together with any accrued and unpaid Interest and Late Charges thereon) may be converted, in whole or in part, by the Holder into shares of Common Stock pursuant to Section 3.

 

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6.          RIGHTS UPON OTHER CORPORATE EVENTS. In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Note (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Note initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. The provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Holder. The provisions of this Section 6(b) shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Note.

 

7.          RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)          Adjustment of Conversion Price upon Issuance of Common Stock. So long as all or any portion of the Note remains outstanding, if and whenever on or after the Issuance Date the Company issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company) for a consideration per share less than a price equal to the Conversion Price in effect immediately prior to such issue or sale or deemed issuance or sale (such Conversion Price then in effect is referred to herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Applicable Price shall be reduced to an amount equal to an amount obtained by dividing the Applicable Price by a fraction, the numerator of which shall be the product of (i) the total number of shares of Common Stock outstanding immediately after such Dilutive Issuance multiplied by (ii) the Applicable Price, and the denominator of which shall be an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such Dilutive Issuance multiplied by the Applicable Price plus (b) the aggregate consideration received by the Company (determined as provided below) for such Dilutive Issuance. Notwithstanding the foregoing, no adjustments shall be made under this Section 7 with respect to any Exempt Issuance. “Exempt Issuance” shall mean the issuance of (i) shares of Common Stock or securities convertible or exchangeable into Common Stock to officers, directors, employees and consultants to the Company and (ii) up to fifteen (15) million shares of Common Stock or securities convertible or exchangeable into fifteen (15) million shares of Common Stock as all or part of the consideration for the acquisition (whether by merger or otherwise) by the Company for stock or assets of any other entity in a transaction approved by the Board of Directors of the Company. For purposes of determining the adjusted Conversion Price under this Section 7(a), the following shall be applicable:

 

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(i)          Exercise of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the exercise of such Option. For purposes of this Section 7(a)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Options or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option” shall be equal to (1) the lower of (x) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option and (y) the lowest exercise price set forth in such Option for which one share of Common Stock is issuable upon the exercise of any such Options or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option minus (2) the sum of all amounts paid or payable to the holder of such Option (or any other Person) upon the exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Option (or any other Person).

 

(ii)         Exercise of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the conversion, exercise or exchange of such Convertible Securities for such price per share. For the purposes of this Section 7(a)(ii), the “lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof” shall be equal to (1) the lower of (x) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the conversion, exercise or exchange of such Convertible Security and (y) the lowest conversion price set forth in such Convertible Security for which one share of Common Stock is issuable upon conversion, exercise or exchange thereof minus (2) the sum of all amounts paid or payable to the holder of such Convertible Security (or any other Person) upon the exercise of such Convertible Security plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Convertible Security (or any other Person).

 

(iii)        Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exercise or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for shares of Common Stock increases or decreases at any time, the Conversion Price in effect at the time of such increase or decrease shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased conversion rate (as the case may be) at the time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Issuance Date are increased or decreased in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the shares of Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such increase or decrease. No adjustment pursuant to this Section 7(a) shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

 

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(iv)        Calculation of Consideration Received. If any Option or Convertible Security is issued or deemed issued in connection with the issuance or sale or deemed issuance or sale of any other securities of the Company, together comprising one integrated transaction, (x) such Option or Convertible Security (as applicable) will be deemed to have been issued for consideration equal to the Black Scholes Consideration Value thereof and (y) the other securities issued or sold or deemed to have been issued or sold in such integrated transaction shall be deemed to have been issued for consideration equal to the difference of (I) the aggregate consideration received by the Company minus (II) the Black Scholes Consideration Value of each such Option or Convertible Security (as applicable). If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. If any shares of Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of consideration received by the Company for such securities will be the average VWAP of such security for the five (5) Trading Day period immediately preceding the date of receipt. If any shares of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities (as the case may be). The fair value of any consideration other than cash or publicly traded securities will be determined jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.

 

(v)         Record Date. If the Company takes a record of the holders of shares of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase shares of Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase (as the case may be).

 

(b)          Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. Without limiting any provision of Section 5 or Section 7(a), and so long as all or any portion of the Note remains outstanding, if the Company at any time on or after the Issuance Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. Without limiting any provision of Section 5, 6 or Section 7(a), if the Company at any time on or after the Issuance Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. Any adjustment pursuant to this Section 7(b) shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this Section 7(b) occurs during the period that a Conversion Price is calculated hereunder, then the calculation of such Conversion Price shall be adjusted appropriately to reflect such event.

 

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(c)          Other Events. In the event that the Company (or any Subsidiary) shall take any action to which the provisions hereof are not strictly applicable, or, if applicable, would not operate to protect the Holder from dilution or if any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s board of directors shall in good faith determine and implement an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder, provided that no such adjustment pursuant to this Section 7(c) will increase the Conversion Price as otherwise determined pursuant to this Section 7, provided further that if the Holder does not accept such adjustments as appropriately protecting its interests hereunder against such dilution, then the Company’s board of directors and the Holder shall agree, in good faith, upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose fees and expenses shall be borne by the Company.

 

(d)          No Modification of Company’s Covenants. For the avoidance of doubt, nothing contained in this Section 7 shall be deemed to modify or limit the Company’s covenants contained in the Securities Purchase Agreement.

 

8.          COMPANY’S RIGHT OF OPTIONAL REDEMPTION AND FORCED CONVERSION.

 

(a)          Company’s Right of Optional Redemption.

 

(i)          At any time after the one (1) year anniversary of the Issuance Date, the Company shall have the right to redeem a portion or the entire outstanding amount of this Note (including all Principal, Interest, Late Charges and any other amounts payable hereunder) (a “Company Optional Redemption”) at a redemption price equal to 115% thereof (together, the “Company Redemption Price”) subject to the provisions of this Section 8(a). The Company shall deliver written notice of a Company Optional Redemption (a “Company Optional Redemption Notice”) to the Holder thirty (30) Trading Days prior to the date set by the Company for such Company Optional Redemption (the “Company Redemption Date”). Once delivered, a Company Optional Redemption Notice shall be irrevocable. The Company Redemption Price shall be due and payable by the Company in cash. If the Company elects to cause a Company Optional Redemption pursuant to this Section 8(a), then it must simultaneously take the same action with respect to the Other Notes and if such redemption is for a portion of this Note such redemption shall be pro rata among the Holders.

 

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(ii)         At any time after a Launch Failure, the Company shall have the right to redeem a portion or the entire outstanding amount of this Note (including all Principal, Interest, Late Charges and any other amounts payable hereunder) (a “LF Company Optional Redemption”) at a redemption price equal to 100% thereof (together, the “LF Company Redemption Price”) subject to the provisions of this Section 8(a). The Company shall deliver written notice of an LF Company Optional Redemption (a “LF Company Optional Redemption Notice”) to the Holder one (1) Trading Day prior to the date set by the Company for such LF Company Optional Redemption (the “LF Company Redemption Date”). Once delivered, an LF Company Optional Redemption Notice shall be irrevocable. The LF Company Redemption Price shall be due and payable by the Company in cash. If the Company elects to cause an LF Company Optional Redemption pursuant to this Section 8(b), then it must simultaneously take the same action with respect to the Other Notes and if such redemption is for a portion of this Note such redemption shall be pro rata among the Holders.

 

(iii)        For the avoidance of doubt, the Holder may convert all or any portion this Note at any time prior to the Company Redemption Date or LF Company Redemption Date, as applicable, notwithstanding the Company’s delivery of a Company Optional Redemption Notice or LF Company Optional Redemption Notice, as applicable. To the extent, that the Holder converts all or any portion of the Note prior to the Company Redemption Date or LF Company Redemption Date, as applicable, the Holder shall not be entitled to receive the Company Redemption Price or the LF Company Redemption Price, as applicable, for the Conversion Amount so converted.

 

(b)          Forced Conversion.

 

(i)          If the VWAP of the Common Stock equals or exceeds 150% of the Conversion Price then in effect on each of thirty (30) consecutive Trading Days (the “Conversion Occurrence”), then the Company may state its intention to cause the conversion of one hundred (100) percent of this Note at the Conversion Price in effect as of the Forced Conversion Date (as defined below) by providing an irrevocable written notice (the “Conversion Occurrence Notice”) to the Holder; provided that such Conversion Occurrence Notice shall be sent within one (1) Trading Day after a Conversion Occurrence and must be sent concurrently to the holders of all Notes. The Conversion Occurrence Notice shall indicate that the Company seeks to cause conversion of one hundred (100) percent of this Note and shall set forth the date for such conversion of the Note (the “Forced Conversion Date”), which date shall be thirty (30) Trading Days after the date the Conversion Occurrence Notice is delivered (the “Conversion Notice Period”). The Company’s right to force conversion of this Note pursuant to this Section 8(b)(i) is a one-time right to force conversion.

 

(ii)         Notwithstanding the foregoing, the Company may not effect a forced conversion of this Note pursuant to this Section 8(b) unless:

 

a.           the Equity Conditions are satisfied, or waived by the Holder, during each day of the Conversion Notice Period;

 

b.           the number of shares of Common Stock to be issued in connection with any such forced conversion would not cause the Holder to exceed the Maximum Percentage, the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation. However, at the option of the Holder, conversion of the portion of this Note that may not be converted because such conversion would cause the Holder to exceed the Maximum Percentage, the Holder’s Exchange Cap Allocation and/or Authorized Share Allocation shall be deferred until such time as the conversion hereof shall not exceed such limits.

 

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c.           The conversion shall occur on the Forced Conversion Date, and the Company shall deliver the required number of shares to the Holder in accordance with Section 3(c)(i) mutatis mutandis. For the avoidance of doubt, if the Company fails to deliver the required number of shares of Common Stock on the Forced Conversion Date in accordance with Section 3(c)(i) mutatis mutandis the Holder shall have the remedies set forth in Section 3(c)(ii).

 

d.           Nothing in this Note shall limit the Holder’s right to convert after the Conversion Occurrence Notice has been received but before actual forced conversion. Without limiting the foregoing, the Holder may submit a Conversion Notice for the specific portion of the Note subject to a forced conversion at any time prior to the Forced Conversion Date notwithstanding the delivery of a Conversion Occurrence Notice.

 

9.          NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation (as defined in the Securities Purchase Agreement), Bylaws (as defined in the Securities Purchase Agreement) or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon conversion of this Note above the Conversion Price then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the conversion of this Note, and (iii) shall, so long as any of the Notes are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, the maximum number of shares of Common Stock as shall from time to time be necessary to effect the conversion of the Notes then outstanding (without regard to any limitations on conversion).

 

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10.         RESERVATION OF AUTHORIZED SHARES.

 

(a)          Reservation. The Company shall initially reserve out of its authorized and unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 225% of the entire Conversion Rate with respect to the entire Conversion Amount of each such Note as of the Issuance Date. So long as any of the Notes are outstanding, the Company shall take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes and other issuances hereunder, including Section 2, 225% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding, provided that at no time shall the number of shares of Common Stock so reserved be less than the number of shares required to be reserved by the previous sentence (without regard to any limitations on conversions) (the “Required Reserve Amount”). The initial number of shares of Common Stock reserved for issuance hereunder and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Notes based on the original principal amount of the Notes held by each holder on the Issuance Date or the date of the increase in the number of reserved shares (as the case may be) (the “Authorized Share Allocation”). In the event that a holder shall sell or otherwise transfer any of such holder’s Notes, each transferee shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the principal amount of the Notes then held by such holders. Following a Launch Failure, the Company may not issue any shares of Common Stock except pursuant to this Note and the Other Notes.

 

(b)          Insufficient Authorized Shares. If, notwithstanding Section 10(a), and not in limitation thereof, at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes or other issuances of shares of Common Stock hereunder, including Section 2, at least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall immediately take all action necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.

 

11.         VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law and as expressly provided in this Note.

 

12.         PARTICIPATION. In addition to any adjustments pursuant to Section 7, the Holder, as the holder of this Note, shall be entitled to receive such dividends paid and distributions made to the holders of Common Stock to the same extent as if the Holder had converted this Note into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock (provided, however, to the extent that the Holder’s right to participate in any such dividend or distribution would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such dividend or distribution to such extent (or the beneficial ownership of any such shares of Common Stock as a result of such dividend or distribution to such extent) and such dividend or distribution to such extent shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage).

 

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13.         AMENDING THE TERMS OF THIS NOTE. The prior written consent of the Holder shall be required for any change or amendment to this Note. No consideration shall be offered or paid to the Holder to amend or consent to a waiver or modification of any provision of this Note unless the same consideration is also offered to all of the holders of the Other Notes. The Holder shall be entitled, at its option, to the benefit of any amendment to any of the Other Notes.

 

14.         TRANSFER. This Note and any shares of Common Stock issued upon conversion of this Note may be offered, sold, assigned or transferred by the Holder without the consent of the Company.

 

15.         REISSUANCE OF THIS NOTE.

 

(a)          Transfer. If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 15(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less than the entire outstanding Principal is being transferred, a new Note (in accordance with Section 15(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note.

 

(b)          Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note (as to which a written certification and the indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary and reasonable form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 15(d)) representing the outstanding Principal.

 

(c)          Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 15(d) and in principal amounts of at least $1,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

 

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(d)          Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 15(a) or Section 15(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.

 

16.         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note (including, without limitation, compliance with Sections 2, 3 and 7).

 

17.         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, without limitation, attorneys’ fees and disbursements. The Company expressly acknowledges and agrees that no amounts due under this Note shall be affected, or limited, by the fact that the Purchase Price (as defined in the Securities Purchase Agreement) paid for this Note may have been less than the original Principal amount hereof.

 

18.         CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any Person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

 

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19.         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.

 

20.         DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Conversion Price, the Closing Bid Price, the Closing Sale Price, the VWAP, the Stock Replacement Payment, the Dollar Volume Limitation, the Exchange Cap Allocation, the Authorized Share Allocation, or fair market value (as the case may be) or the arithmetic calculation of the Conversion Rate (as the case may be), the Company or the Holder (as the case may be) shall submit the disputed determinations or arithmetic calculations (as the case may be) via facsimile (i) within two (2) Business Days after receipt of the applicable notice giving rise to such dispute to the Company or the Holder (as the case may be) or (ii) if no notice gave rise to such dispute, at any time after the Holder learned of the circumstances giving rise to such dispute. If the Holder and the Company are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation (as the case may be) being submitted to the Company or the Holder (as the case may be), then the Company shall, within two (2) Business Days, submit via facsimile (a) the disputed determination of the Conversion Price, the Closing Bid Price, the Closing Sale Price, the VWAP, the Stock Replacement Payment, the Dollar Volume Limitation, the Exchange Cap Allocation, the Authorized Share Allocation, or fair market value (as the case may be) to an independent, reputable U.S. investment bank selected by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate (as the case may be) to the Company’s independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant (as the case may be) to perform the determinations or calculations (as the case may be) and notify the Company and the Holder of the results no later than ten (10) Business Days from the time it receives such disputed determinations or calculations (as the case may be). Such investment bank’s or accountant’s determination or calculation (as the case may be) shall be binding upon all parties absent demonstrable error or fraud.

 

21.         NOTICES; PAYMENTS.

 

(a)          Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 7.4 of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any grant, issuances, or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property to all holders of shares of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

 

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(b)          Currency. All dollar amounts referred to in this Note are in United States Dollars (“U.S. Dollars”), and all amounts owing under this Note shall be paid in U.S. Dollars. All amounts denominated in other currencies shall be converted into the U.S. Dollar equivalent amount in accordance with the Exchange Rate on the date of calculation. “Exchange Rate” means, in relation to any amount of currency to be converted into U.S. Dollars pursuant to this Note, the U.S. Dollar exchange rate as published in the Wall Street Journal on the relevant date of calculation (it being understood and agreed that where an amount is calculated with reference to, or over, a period of time, the date of calculation shall be the final date of such period of time).

 

(c)          Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, unless otherwise expressly set forth herein, such payment shall be made in lawful money of the United States of America by a certified check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Buyers, shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement), provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day. Any amount of Principal or other amounts due under the Transaction Documents which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest on such amount at the rate of nineteen (19%) per annum from the date such amount was due until the same is paid in full (“Late Charge”).

 

22.         CANCELLATION. After all Principal, accrued Interest, Late Charges and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

 

23.         WAIVER OF NOTICE. To the extent permitted by law, the Company hereby irrevocably waives demand, notice, presentment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

 

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24.         GOVERNING LAW. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Company in any other jurisdiction to collect on the Company’s obligations to the Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

25.         CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:

 

(a)          “Black Scholes Consideration Value” means the value of the applicable Option or Convertible Security (as the case may be) as of the date of issuance thereof calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the public announcement of the execution of definitive documents with respect to the issuance of such Option or Convertible Security (as the case may be), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of such Option or Convertible Security (as the case may be) as of the date of issuance of such Option or Convertible Security (as the case may be) and (iii) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the date of issuance of such Option or Convertible Security (as the case may be).

 

(b)          “Bloomberg” means Bloomberg, L.P.

 

(c)          “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York or Sydney, Australia are authorized or required by law to remain closed.

 

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(d)          “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price (as the case may be) then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by Pink OTC Markets Inc.(formerly Pinks Sheets LLC). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case may be) of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 20. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period.

 

(e)          “Closing Date” has the meaning given in the Securities Purchase Agreement.

 

(f)          “Common Stock” means (i) the Company’s shares of common stock, $[0.001] par value per share, and (ii) any capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such common stock.

 

(g)          “Convertible Securities” means any stock or other security (other than Options) that is at any time and under any circumstances, directly or indirectly, convertible into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any shares of Common Stock.

 

(h)          “Current Subsidiary” means any Person in which the Company on the Issuance Date, directly or indirectly, (i) owns any of the outstanding capital stock or holds any equity or similar interest of such Person or (ii) controls or operates all or any part of the business, operations or administration of such Person.

 

(i)          “Dollar Volume Limitation” means fifteen percent (15%) of the aggregate dollar trading volume of the Common Stock on the Principal Market (or other applicable Eligible Market) over the thirty (30) consecutive Trading Day period ending on the Trading Day immediately preceding the date of any Installment Notice. For the purposes of this definition the term “dollar trading volume” for any Trading Day shall be determined by multiplying the VWAP by the volume as reported on Bloomberg for such Trading Day.

 

(j)          “Eligible Market” means the Principal Market, The New York Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Select Market or the Nasdaq Global Market.

 

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(k)          “Equity Conditions” means each of the following: (i) on each day during the Equity Conditions Measuring Period, each Registration Statement required to be filed under the Registration Rights Agreement shall be effective and all shares of Common Stock to be issued on the applicable Installment Date shall be eligible for resale by the Holder without restriction and without need for additional registration under any applicable federal or state securities laws, and the Company shall have no knowledge of any fact that would cause any shares of Common Stock not to be so eligible for resale by the Holder without restriction and without need for additional registration under any applicable federal or state securities laws; (ii) on each day during the Equity Conditions Measuring Period, the shares of Common Stock are designated for listing on an Eligible Market and shall not have been suspended from trading on such Eligible Market nor shall delisting or suspension by such Eligible Market have been threatened or pending in writing by such exchange nor shall there be any SEC or judicial stop trade order or trading suspension stop order; (iii) any shares of Common Stock to be issued in connection with the applicable Installment Date may be issued in full without violating the rules or regulations of the Principal Market or any applicable laws; (v) on each day during the Equity Conditions Measuring Period, the Company has not provided any Holder with any material, non-public information; (vi) on each day during the Equity Conditions Measuring Period, neither the Registration Statement nor any prospectus included therein contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading and such Registration Statement and any prospectus included therein shall comply with all applicable securities laws as to form and substance; (vii) the Transfer Agent is participating in DTC’s Fast Automated Securities Transfer Program; (ix) all shares of Common Stock to be issued in connection with the applicable Installment Date are duly authorized and will be validly issued, fully paid and non-assessable upon issuance, free and clear of all liens, claims or encumbrances, and the issuance thereof will not require any further approvals of the Company’s Board of Directors or stockholders; (x) on each day during the Equity Conditions Measuring Period, there shall not have occurred or be continuing, unless waiver by the Holder, either (A) an Event of Default or (B) an event that with the passage of time or giving of notice would constitute an Event of Default; and (xi) on each day during the Equity Conditions Measuring Period, unless waived by the Holder, the Closing Price of the Common Stock is at least $1.00 per share (appropriately adjusted for any stock split, stock dividend, stock combination, stock buy-back or other similar transaction). All references to “Registration Statement” shall include any prospectus included therein and any amendments or supplements to such Registration Statement or any such prospectus, as filed from time to time, including without limitation, any 1934 Act filings incorporated by reference therein.

 

(l)          “Equity Conditions Measuring Period” means the period beginning twenty-one (21) Trading Days prior to the applicable Installment Date (or such other date of determination) and ending on and including such Installment Date (or such other date of determination). For the avoidance of doubt, the Equity Conditions Measuring Period for each Installment Date shall include the Advance Date, the Stock Payment Pricing Period and such Installment Date.

 

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(m)          “Fundamental Transaction” means that (i) (1) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more related transactions, consolidate or merge with or into (whether or not the Company or any of its Subsidiaries is the surviving corporation) any other Person, or (2) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more related transactions, sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of its respective properties or assets to any other Person, or (3) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more related transactions, allow any other Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more related transactions, consummate a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with any other Person whereby such other Person acquires more than 50% of the outstanding shares of Voting Stock of the Company, or (5) the Company or any of its Subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize, recapitalize or reclassify the Common Stock, or (ii) any Person or Persons acting jointly or in concert is or shall become the beneficial owner, directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Voting Stock of the Company.

 

(n)          “Initial Installment Date” means May 1, 2012.

 

(o)          “Installment Amount” means (a) with respect to each Installment Date other than the Maturity Date, the amount set forth on Exhibit A as the Installment Amount for such Installment date and (b) with respect to the Maturity Date, the amount set forth on Exhibit A as the Installment Amount for the Maturity Date plus all other outstanding Principal, Interest, Late Charges and other amounts due and payable under this Note.

 

(p)          “Installment Date” means the Initial Installment Date and each date listed on Exhibit A as an Installment Date.

 

(q)          “Launch Failure” shall mean the failure of the Company and/or one of its Subsidiaries (in partnership with Adeptra), within sixty (60) days from the Closing Date, to enter into a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the Company and/or one of its Subsidiaries receives net compensation of at least $1,000,000.

 

(r)          “Maturity Date” shall mean May 1, 2014.

 

(s)          “New Subsidiary” means, as of any date of determination, any Person in which the Company after the Issuance Date, directly or indirectly, (i) owns or acquires any of the outstanding capital stock or holds any equity or similar interest of such Person or (ii) controls or operates all or any part of the business, operations or administration of such Person.

 

(t)          “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

 

(u)          “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

 

29
 

  

(v)         “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.

 

(w)          “Principal Market” means the NYSE Amex or such other Eligible Market where the Common Stock is then listed.

 

(x)          “Registration Rights Agreement” means that certain registration rights agreement, dated as of the Issuance Date, by and among the Company and the initial holders of Notes, as may be amended from time to time

 

(y)          “SEC” means the United States Securities and Exchange Commission or the successor thereto.

 

(z)          “Securities Purchase Agreement” means that certain securities purchase agreement, dated as of the Issuance Date, by and among the Company and the initial holders of Notes pursuant to which the Company issued Notes, as may be amended from time to time.

 

(aa)         “Significant Subsidiaries” means, as of any date of determination, collectively, all Subsidiaries that would constitute a “significant subsidiary” under Rule 1-02 of Regulation S-X promulgated by the SEC, and each of the foregoing, individually, a “Significant Subsidiary.”

 

(bb)         “Stock Payment Price” means, with respect to any Installment Date, ninety (90%) of the average of the five (5) lowest VWAPs of the Common Stock during the Stock Payment Pricing Period.

 

(cc)         “Stock Payment Pricing Period” means, with respect to any Installment Date, the twenty (20) Trading Days immediately prior to such Installment Date. For the avoidance of doubt, the Stock Payment Pricing Period does not include the Installment Date.

 

(dd)         “Subsidiaries” means, as of any date of determination, collectively, all Current Subsidiaries and all New Subsidiaries, and each of the foregoing, individually, a “Subsidiary.”

 

(ee)         “Successor Entity” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

 

(ff)         “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time) unless such day is otherwise designated as a Trading Day in writing by the Holder.

 

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(gg)         “Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers, trustees or other similar governing body of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

 

(hh)         “VWAP” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market (or, if the Principal Market is not the principal trading market for such security, then on the principal securities exchange or securities market on which such security is then traded) during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by Pink OTC Markets Inc.(formerly Pinks Sheets LLC). If the VWAP cannot be calculated for such security on such date on any of the foregoing bases, the VWAP of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 20. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period.

 

26.         MAXIMUM PAYMENTS. Nothing contained in this Note shall, or shall be deemed to, establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges under this Note exceeds the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Holder and thus refunded to the Company.

 

[signature page follows]

 

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.

 

Elephant Talk Communications, Corp.

 

By:  
  Name:
  Title:

 

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EXHIBIT A

 

Installment Dates

 

Installment  Installment
Date  Amount
5/1/12   
6/1/12   
7/1/12   
8/1/12   
9/1/12   
10/1/12   
11/1/12   
12/1/12   
1/1/13   
2/1/13   
3/1/13   
4/1/13   
5/1/13   
6/1/13   
7/1/13   
8/1/13   
9/1/13   
10/1/13   
11/1/13   
12/1/13   
1/1/14   
2/1/14   
3/1/14   
4/1/14   
5/1/14   

 

33
 

 

EXHIBIT B

 

ELEPHANT TALK COMMUNICATIONS, CORP.

CONVERSION NOTICE

 

Reference is made to the Convertible Note (the “Note”) issued to the undersigned by Elephant Talk Communications, Corp. (the “Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of common stock, [$0.0001 par value per share] (the “Common Stock”), of the Company, as of the date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

Conversion Price:

 

Number of shares of Common Stock to be issued:

 

Facsimile Number:

 

Dated:

 

DWAC Instructions:

 

Name of Holder:

  

By:  
  Print Name:
  Print Title:

 

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EXHIBIT C

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs [TRANSFER AGENT] to issue the above indicated number of shares of Common Stock.

 

Elephant Talk Communications, Corp.

 

By: /s/ Steven van der Velden
  Name: Steven van der Velden
  Title: President and CEO

 

35

 EX-10.30 4 v304852_ex10-30.htm EXHIBIT 10.30

 

SECURITY AGREEMENT

 

This SECURITY AGREEMENT (this “Agreement”), dated as of March 30, 2012, is made by and among the Grantors listed on the signature pages hereof (collectively, jointly and severally, the “Grantors” and each, individually, a “Grantor”), and JGB Collateral LLC, a Delaware limited liability company, as collateral agent for the Secured Parties (as defined herein) (the “Agent”).

 

WHEREAS, pursuant to that certain Securities Purchase Agreement dated as of March 29, 2012 (as amended, restated, supplemented, or otherwise modified from time to time, including all schedules thereto, the “Purchase Agreement”) by and between Elephant Talk Communications, Corp., a Delaware corporation (the “Company”), the Agent and the Secured Parties, the Company has agreed to sell, and the Secured Parties have agreed to purchase the Notes; and

 

WHEREAS, in order to induce the Secured Parties and the Agent, on behalf of and at the direction of the Secured Parties, to enter into the Purchase Agreement and for the Secured Parties to purchase the Notes as provided for in the Purchase Agreement, the Grantors have agreed to grant a continuing security interest in and to the Collateral in order to secure the prompt and complete payment, observance and performance of the Secured Obligations.

 

NOW, THEREFORE, in consideration of the foregoing premises and in reliance on the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

 

1.          Defined Terms. All capitalized terms used herein (including in the preamble and recitals hereof) without definition shall have the meanings ascribed thereto in the Purchase Agreement. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein or in the Purchase Agreement; provided, however, that if the Code is used to define any term used herein and if such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern. In addition to those terms defined elsewhere in this Agreement, as used in this Agreement, the following terms shall have the following meanings:

 

(a)          “Account” means an Account (as that term is defined in the Code).

 

(b)          “Account Debtor” means an Account debtor (as that term is defined in the Code).

 

(c)          “Agency Letter” means that certain letter dated as of March 30, 2012 from the Agent to the Secured Parties establishing the agency relationship between Agent and such Secured Parties.

 

(d)          “Bankruptcy Code” means title 11 of the United States Code, as in effect from time to time.

 

 
 

 

(e)          “Books” means books and records (including each Grantor’s Records indicating, summarizing, or evidencing such Grantor’s assets (including the Collateral) or liabilities, each Grantor’s Records relating to such Grantor’s business operations or financial condition, and each Grantor’s goods or General Intangibles related to such information).

 

(f)          “Business Day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York are authorized or required by law or executive order to remain closed.

 

(g)          “Chattel Paper” means Chattel paper (as that term is defined in the Code) and includes tangible chattel paper and electronic chattel paper.

 

(h)          “Code” means the New York Uniform Commercial Code, as in effect from time to time; provided, however, that in the event that, by reason of mandatory provisions of Law, any or all of the attachment, perfection, priority, or remedies with respect to the Secured Party and the Agent’s Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies.

 

(i)          “Collateral” has the meaning specified therefor in Section 2.

 

(j)          “Commercial Tort Claims” means Commercial tort claims (as that term is defined in the Code), and includes those commercial tort claims listed on Schedule 9 attached hereto.

 

(k)          “Control Agreement” means a control agreement, in form and substance satisfactory to the Agent and the Grantors, executed and delivered by a Grantor, the Agent and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account).

 

(l)          “Copyrights” means copyrights and copyright registrations, and also includes (i) the copyright registrations and recordings thereof and all applications in connection therewith listed on Schedule 3 attached hereto and made a part hereof, (ii) all reissues, continuations, extensions or renewals thereof, (iii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iv) the right to sue for past, present and future infringements and dilutions thereof, (v) the goodwill of each Grantor’s business symbolized by the foregoing or connected therewith, and (vi) all of each Grantor’s rights corresponding thereto throughout the world.

 

(m)          “Copyright Security Agreement” means each Copyright Security Agreement among Grantors, or any of them, and the Agent in substantially the form of Exhibit A attached hereto, pursuant to which Grantors have granted to the Agent on behalf of the Secured Parties a security interest in all their respective Copyrights.

 

2
 

 

(n)          “Deposit Account” means a Deposit account (as that term is defined in the Code).

 

(o)          “Equipment” means Equipment (as that term is defined in the Code).

 

(p)          “Event of Default” means any of the following events:

 

(i)         The occurrence of an “Event of Default” (as defined in the Notes) under any of the Notes;

 

(ii)       Any representation or warranty of any Grantor in this Agreement shall prove to have been incorrect in any material respect when made;

 

(iii)      The failure by any Grantor to observe or perform any of its obligations hereunder for 5 Business Days after delivery to such Grantor of notice of such failure by or on behalf of the Agent unless such default is capable of cure but cannot be cured within such time frame and such Grantor is using best efforts to cure same in a timely fashion; or

 

(iv)      If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Grantor, or a proceeding shall be commenced by any Grantor, or by any Governmental Authority having jurisdiction over any Grantor, seeking to establish the invalidity or unenforceability thereof, or any Grantor shall deny that any Grantor has any liability or obligation purported to be created under this Agreement.

 

(q)          “General Intangibles” means General intangibles (as that term is defined in the Code) and, in any event, includes payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill (including the goodwill associated with any Trademark, Patent, or Copyright), Patents, Trademarks, Copyrights, URLs and domain names, industrial designs, other industrial or Intellectual Property or rights therein or applications therefor, whether under license or otherwise, programs, programming materials, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, including Intellectual Property Licenses, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, pension plan refunds, pension plan refund claims, insurance premium rebates, tax refunds, and tax refund claims, interests in a partnership or limited liability company which do not constitute a security under Article 8 of the Code, and any other personal property other than Commercial Tort Claims, money, Accounts, Chattel Paper, Deposit Accounts, goods, Investment Related Property, Negotiable Collateral, and oil, gas, or other minerals before extraction.

 

(q)          “Governmental Authority” means any domestic or foreign federal, state, local, or other governmental or administrative body, instrumentality, board, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

 

3
 

 

(r)          “Grantor” and “Grantors” have the meanings specified therefor in the recitals to this Agreement.

 

(s)          “Guaranties” means the Guaranty dated of even date herewith executed by Guarantors in favor of the Secured Parties, together with any other guaranty or similar agreement now or hereafter executed by a Guarantor in favor of any Secured Party in connection with the Notes or any of the other Transaction Document.

 

(t)          “Guarantor” means each Grantor and each other Person that now or hereafter executes a Guaranty.

 

(u)          “Holders” mean the holders of the Notes from time to time, their endorsees, transferees and assigns.

 

(v)         “Insolvency Proceeding” means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency Law or any equivalent Laws in any other jurisdiction, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

 

(w)          “Intellectual Property” means Patents, Copyrights, Trademarks, the goodwill associated with such Trademarks, trade secrets and customer lists, and Intellectual Property Licenses.

 

(x)          “Intellectual Property Licenses” means rights under or interests in any patent, trademark, copyright or other intellectual property, including software license agreements with any other party, whether the applicable Grantor is a licensee or licensor under any such license agreement, including the license agreements listed on Schedule 4 attached hereto and made a part hereof.

 

(y)          “Inventory” means Inventory (as that term is defined in the Code).

 

(z)          “Investment Related Property” means (i) investment property (as that term is defined in the Code), and (ii) all of the following (regardless of whether classified as investment property under the Code): all Pledged Interests, Pledged Operating Agreements, and Pledged Partnership Agreements.

 

(aa)         “Lien” means any security interest, pledge, hypothecation, mortgage, assignment, lien (statutory or other, and including environmental and tax liens), deposit arrangement, violation, charge, lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preference, priority, other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease or any synthetic or other financing lease having substantially the same economic effect as any of the foregoing), restrictive covenant, condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.

 

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(bb)         “Negotiable Collateral” means letters of credit, letter-of-credit rights, instruments, promissory notes, drafts, and documents.

 

(cc)         “Note” has the meaning specified therefor in the Purchase Agreement.

 

(dd)         “Patents” means patents and patent applications, and also includes (i) the patents and patent applications listed on Schedule 5 attached hereto and made a part hereof, (ii) all renewals thereof, (iii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iv) the right to sue for past, present and future infringements and dilutions thereof, and (v) all of each Grantor’s rights corresponding thereto throughout the world.

 

(ee)         “Patent Security Agreement” means each Patent Security Agreement among the Grantors and the Agent in substantially the form of Exhibit B attached hereto, pursuant to which the Grantors have granted to the Agent on behalf of the Secured Parties a security interest in all their respective Patents.

 

(ff)         “Permitted Liens” means (i) liens imposed by law for taxes, assessments or charges or levies of any governmental authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (ii) liens of landlords and liens of carriers, warehousemen, suppliers, mechanics, materialmen and other liens in existence on the date hereof or thereafter imposed by law and created in the ordinary course of business; (iii) liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts, statutory obligations and other similar obligations, (iv) easements (including, without limitations, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded) and interest of ground lessors, which do not interfere materially with the ordinary conduct of the business of the Company; (v) letters of credit or deposits in the ordinary course to secure leases, (vi) liens permitted in the Purchase Agreement and the Note, and (vii) liens consisting of customary transfer restrictions in joint venture agreements, stockholder agreements or other similar agreements, in each case, except to the extent any of the foregoing would reasonably be expected to result in or results in a Material Adverse Effect.

 

(gg)         “Permitted Protest” means the right of any Grantor to protest any Lien (other than any Lien that secures the Secured Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on such Grantor’s books and records in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by such Grantor in good faith, and (c) while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of the Agent’s Liens.

 

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(hh)         “Person” means any individual, corporation, partnership, trust, limited liability company, governmental entity, regulatory or self-regulatory authority, association or other entity.

 

(ii)         “Pledged Companies” means, each Person listed on Schedule 8 hereto as a “Pledged Company”, together with each other Person all or a portion of whose Stock is acquired or otherwise owned by a Grantor after the date hereof.

 

(jj)         “Pledged Interests” means all of each Grantor’s right, title and interest in and to all of the Stock now or hereafter owned by such Grantor, regardless of class or designation, including all substitutions therefor and replacements thereof, all proceeds thereof and all rights relating thereto, also including any certificates representing the Stock, the right to receive any certificates representing any of the Stock, all warrants, options, share appreciation rights and other rights, contractual or otherwise, in respect thereof, and the right to receive dividends, distributions of income, profits, surplus, or other compensation by way of income or liquidating distributions, in cash or in kind, and cash, instruments, and other property from time to time received, receivable, or otherwise distributed in respect of or in addition to, in substitution of, on account of, or in exchange for any or all of the foregoing.

 

(kk)         “Pledged Operating Agreements” means all of each Grantor’s rights, powers, and remedies under the limited liability company operating agreements of each of the Pledged Companies that are limited liability companies.

 

(ll)         “Pledged Partnership Agreements” means all of each Grantor’s rights, powers, and remedies under the partnership agreements of each of the Pledged Companies that are partnerships.

 

(mm)         “Proceeds” has the meaning specified therefor in Section 2.

 

(nn)         “Purchase Agreement” has the meaning specified therefor in the recitals to this Agreement.

 

(oo)         “Real Property” means any estates or interests in real property now owned or hereafter acquired by any Grantor and the improvements thereto.

 

(pp)         “Records” means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.

 

(qq)         “Secured Obligations” mean all of the present and future payment and performance obligations of Grantors arising under the Transaction Documents, including, without duplication, reasonable attorneys’ fees and expenses and any interest, fees, or expenses that accrue after the filing of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any Insolvency Proceeding.

 

(rr)         “Secured Parties” means the Holders of the Notes.

 

(ss)         “Securities Account” means a Securities account (as that term is defined in the Code).

 

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(tt)         “Security Documents” means, collectively, this Agreement, each Copyright Security Agreement, each Patent Security Agreement, each Trademark Security Agreement, each Control Agreement, and each other security agreement, pledge agreement, assignment, mortgage, security deed, deed of trust, and other agreement or document executed and delivered by a Grantor as security for any of the Secured Obligations.

 

(uu)         “Security Interest” and “Security Interests” have the meanings specified therefor in Section 2.

 

(vv)         “Stock” means all shares, options, warrants, interests (including membership and partnership interests), participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the United States Securities and Exchange Commission and any successor thereto under the Securities Exchange Act of 1934, as in effect from time to time).

 

(ww)         “Supporting Obligations” means Supporting obligations (as such term is defined in the Code).

 

(xx)        “Trademarks” means trademarks, trade names, trademark applications, service marks, service mark applications, and also includes (i) the trade names, trademarks, trademark applications, service marks, and service mark applications listed on Schedule 6 attached hereto and made a part hereof, and (ii) all renewals thereof, (iii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iv) the right to sue for past, present and future infringements and dilutions thereof, (v) the goodwill of each Grantor’s business symbolized by the foregoing or connected therewith, and (vi) all of each Grantor’s rights corresponding thereto throughout the world.

 

(yy)         “Trademark Security Agreement” means each Trademark Security Agreement among the Grantors and the Agent in substantially the form of Exhibit C attached hereto, pursuant to which Grantors have granted to the Agent on behalf of the Secured Parties a security interest in all their respective Trademarks.

 

(zz)         “URL” means “uniform resource locator,” an internet web address.

 

2.          Grant of Security. Each Grantor hereby unconditionally grants, assigns, and pledges to the Agent, for the benefit of the Secured Parties, a separate, continuing first priority security interest (each, a “Security Interest” and, collectively, the “Security Interests”) in all assets of such Grantor whether now owned or hereafter acquired or arising and wherever located, including such Grantor’s right, title, and interest in and to the following, whether now owned or hereafter acquired or arising and wherever located (collectively, the “Collateral”):

 

(a)          all of such Grantor’s Accounts;

 

(b)          all of such Grantor’s Books;

 

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(c)          all of such Grantor’s Chattel Paper;

 

(d)          all of such Grantor’s Deposit Accounts;

 

(e)          all of such Grantor’s Equipment and fixtures;

 

(f)          all of such Grantor’s General Intangibles;

 

(g)          all of such Grantor’s Inventory;

 

(h)          all of such Grantor’s Investment Related Property;

 

(i)          all of such Grantor’s Negotiable Collateral;

 

(j)          all of such Grantor’s rights in respect of Supporting Obligations;

 

(k)          all of such Grantor’s Commercial Tort Claims;

 

(l)          all of such Grantor’s money, cash, cash equivalents, or other assets of each such Grantor that now or hereafter come into the possession, custody, or control of the Agent or any Secured Party;

 

(m)          all of the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance or Commercial Tort Claims covering or relating to any or all of the foregoing, and any and all Accounts, Books, Chattel Paper, Deposit Accounts, Equipment, General Intangibles, Inventory, Investment Related Property, Negotiable Collateral, Supporting Obligations, money, or other tangible or intangible property resulting from the sale, lease, license, exchange, collection, or other disposition of any of the foregoing, the proceeds of any award in condemnation with respect to any of the foregoing, any rebates or refunds, whether for taxes or otherwise, and all proceeds of any such proceeds, or any portion thereof or interest therein, and the proceeds thereof, and all proceeds of any loss of, damage to, or destruction of the above, whether insured or not insured, and, to the extent not otherwise included, any indemnity, warranty, or guaranty payable by reason of loss or damage to, or otherwise with respect to any of the foregoing (the “Proceeds”). Without limiting the generality of the foregoing, the term “Proceeds” includes whatever is receivable or received when Investment Related Property or proceeds are sold, exchanged, collected, or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to any Grantor or the Agent from time to time with respect to any of the Investment Related Property.

 

3.          Security for Obligations. This Agreement and the Security Interests created hereby secure the payment and performance of the Secured Obligations, whether now existing or arising hereafter. Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts that constitute part of the Secured Obligations and would be owed by Grantors, or any of them, to the Secured Parties, or any of them, or the Agent but for the fact that they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Grantor.

 

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4.          Grantors Remain Liable. Anything herein to the contrary notwithstanding, (a) each of the Grantors shall remain liable under the contracts and agreements included in the Collateral, including the Pledged Operating Agreements and the Pledged Partnership Agreements, to perform all of the duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Agent of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under such contracts and agreements included in the Collateral, and (c) the Secured Parties or the Agent shall not have any obligation or liability under such contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Secured Parties or the Agent be obligated to perform any of the obligations or duties of any Grantors thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Until an Event of Default shall occur and be continuing, except as otherwise provided in this Agreement or any other Transaction Document, the Grantors shall have the right to possession and enjoyment of the Collateral for the purpose of conducting the ordinary course of their respective businesses, subject to and upon the terms hereof and the other Transaction Documents. Without limiting the generality of the foregoing, it is the intention of the parties hereto that record and beneficial ownership of the Pledged Interests, including all voting, consensual, and dividend rights, shall remain in the applicable Grantor until the occurrence of an Event of Default and until the Agent shall notify the applicable Grantor of the Agent’s exercise of voting, consensual, or dividend rights with respect to the Pledged Interests pursuant to Section 16 hereof.

 

5.        Agent’s Duties.

 

(a)     Other than as specified in this Agreement and any amendment hereto, the Agent shall not be required to take or refrain from taking any actions, to exercise or refrain from exercising any rights, or to make or refrain from making any requests unless it shall first receive proper written instructions from Secured Parties (or their respective successors or assigns) holding at representing at least two-thirds of the aggregate principal amount of the Notes then outstanding.

 

(b)     The Agent shall hold all Collateral received by it, and shall make disposition thereof, only in accordance with this Agreement or any amendment thereto.  Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Interests, whether or not the Agent or any of the Secured Parties has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral.

 

(c)     The Agent shall not be under any duty or obligation to inspect, review or examine any document, instrument, certificate, agreement or other papers to determine that they are enforceable or that they are other than what they purport to be on their face.  The Agent shall hold any Collateral delivered to the Agent as the agent of and for the benefit of each Secured Party, without preference as to any Secured Party.

 

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(d)     The duties and obligations of the Agent shall be determined solely by the express provisions of this Agreement and the Purchase Agreement, or any amendments or any instructions permitted hereby.  The Agent shall have no obligation with respect to any other matters covered in any other document other than as expressly provided herein, or any amendment hereto.  The Agent shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement or as set forth in a written amendment to this Agreement executed by the parties hereto or their successors or assigns.  No representations, warranties, covenants or obligations of the Agent or any Secured Party shall be implied with respect to this Agreement or the Agent’s services hereunder.  Without limiting the generality of the foregoing, the Agent:

 

(i)      shall use the same degree of care and skill as a reasonable person would use in similar circumstances (without limiting the generality of the foregoing, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Agent accords its own property of like tenor);

 

(ii)      shall not be obligated to take any legal action hereunder that might in its reasonable judgment involve any risk of expense or liability unless it has been furnished with indemnity or security satisfactory to it from the Secured Parties;

 

(iii)      may conclusively rely on and shall be protected in acting in good faith upon any certificate, instrument, opinion, notice, letter, or other document, or any security, delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties;

 

(iv)      may conclusively rely on and shall be protected in acting in good faith upon the written instructions of Secured Parties holding at least two-thirds of the aggregate principal amount of the Notes then outstanding;

 

(v)      may consult its own independent counsel satisfactory to it and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in furtherance of its duties hereunder, in accordance with the opinion of such counsel;

 

(vi)      may execute any of the powers hereunder or perform any duties hereunder either directly or through agents or attorneys and shall not be liable for the acts or omissions of any such agent or attorney appointed with due care hereunder; and

 

(vii)      will be regarded as making no representation and having no responsibilities (except as expressly set forth herein) as to the validity, sufficiency, value, genuineness, ownership or transferability of any portion of the Collateral, and will not be required to and will not make any representations as to the validity, value or genuineness of any portion of the Collateral.

 

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(e)      Neither the Agent nor any of its partners, agents or employees, shall be liable for any error in judgment, for any mistake of fact or for any action taken or omitted to be taken by it or them hereunder or in connection herewith in good faith and believed by it or them to be within the purview of this Agreement, except for fraud, gross negligence or willful misconduct.  In no event shall the Agent or its partners, officers, agents and employees be held liable for any special, indirect, punitive or consequential damages resulting from any action taken or omitted to be taken by it or them hereunder in connection herewith even if advised of the possibility of such damages.

 

(f)      Whenever, in the administration of this Agreement, the Agent reasonably shall deem it necessary that a matter be proved or established prior to taking, suffering or omitting any action under this Agreement, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate of the Secured Parties, and such certificate shall be full warranty to the Agent for any action taken, suffered or omitted under the provisions of this Agreement, upon the faith thereof.

 

6.          Representations and Warranties. Each Grantor hereby represents and warrants as follows:

 

(a)          The exact legal name of each of the Grantors is set forth on the signature pages of this Agreement.

 

(b)          Schedule 1 attached hereto sets forth all Real Property owned or leased by the Grantors as of the date hereof.

 

(c)          Schedule 2 attached hereto sets forth all Deposit Accounts owned by the Grantors as of the date hereof.

 

(d)          As of the date hereof and except in the ordinary course of business, no Grantor has any interest in, or title to, any material Copyrights, Intellectual Property Licenses, Patents, or Trademarks except as set forth on Schedules 3, 4, 5 and 6, respectively, attached hereto. This Agreement is effective to create a valid and continuing Lien on such Copyrights, Intellectual Property Licenses, Patents and Trademarks and, upon filing of the Copyright Security Agreement with the United States Copyright Office and filing of the Patent Security Agreement and the Trademark Security Agreement with the United State Patent and Trademark Office, and the filing of appropriate financing statements (the “UCC Statements”) in the jurisdictions listed on Schedule 7 hereto, all action necessary or desirable to protect and perfect the Security Interests in and to each Grantor’s Patents, Trademarks, or Copyrights has been taken and such perfected Security Interests are enforceable as such as against any and all creditors of and purchasers from any Grantor. No Grantor has any interest in any Copyright that is necessary in connection with the operation of such Grantor’s business, except for those Copyrights identified on Schedule 3 attached hereto which have been registered with the United States Copyright Office.

 

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(e)          This Agreement creates a valid security interest in the Collateral of each of Grantors, to the extent a security interest therein can be created under the Code, securing the payment of the Secured Obligations. Except to the extent a security interest in the Collateral cannot be perfected by the filing of a financing statement under the Code, all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken or will have been taken upon the filing of the UCC Statements listing each applicable Grantor, as a debtor, and the Agent, as secured party, in the jurisdictions listed next to such Grantor’s name on Schedule 7 attached hereto. Upon the making of such filings, the Agent, on behalf of the Secured Parties, shall have a first priority perfected security interest in the Collateral of each Grantor to the extent such security interest can be perfected by the filing of a financing statement. All action by any Grantor necessary to protect and perfect such security interest on each item of Collateral has been duly taken.

 

(f)          (i) Except for the Security Interests created hereby, such Grantor is and will at all times be the sole holder of record and the legal and beneficial owner, free and clear of all Liens other than Permitted Liens, of the Pledged Interests indicated on Schedule 8 as being owned by such Grantor and, when acquired by such Grantor, any Pledged Interests acquired after the date hereof; (ii) all of the Pledged Interests are duly authorized, validly issued, fully paid and nonassessable and the Pledged Interests constitute or will constitute the percentage of the issued and outstanding Stock of the Pledged Companies of such Grantor identified on Schedule 8 hereto; (iii) such Grantor has the right and requisite authority to pledge the Investment Related Property pledged by such Grantor to the Agent as provided herein; (iv) all actions necessary or desirable to perfect, establish the first priority of, or otherwise protect, the Agent’s Liens in the Investment Related Collateral, and the proceeds thereof, have been duly taken, (A) upon the execution and delivery of this Agreement; (B) upon the taking of possession by the Agent of any certificates constituting the Pledged Interests, to the extent such Pledged Interests are represented by certificates, together with undated powers endorsed in blank by the applicable Grantor; (C) upon the filing of UCC Statements in the applicable jurisdiction set forth on Schedule 7 attached hereto for such Grantor with respect to the Pledged Interests of such Grantor that are not represented by certificates, and (D) with respect to any Securities Accounts, upon the delivery of Control Agreements with respect thereto; and (v) each Grantor has delivered to and deposited with the Agent (or, with respect to any Pledged Interests created or obtained after the date hereof, will deliver and deposit in accordance with Sections 7(a) and 9 hereof) all certificates representing the Pledged Interests owned by such Grantor to the extent such Pledged Interests are represented by certificates, and undated powers endorsed in blank with respect to such certificates. None of the Pledged Interests owned or held by such Grantor has been issued or transferred in violation of any securities registration, securities disclosure, or similar Laws of any jurisdiction to which such issuance or transfer may be subject.

 

(g)          No consent, approval, authorization, or other order or other action by, and no notice to or filing with, any Governmental Authority or any other Person is required (i) for the grant of a Security Interest by such Grantor in and to the Collateral pursuant to this Agreement or for the execution, delivery, or performance of this Agreement by such Grantor, or (ii) for the exercise by the Agent of the voting or other rights provided in this Agreement with respect to Investment Related Property or the remedies in respect of the Collateral pursuant to this Agreement, except as may be required in connection with such disposition of Investment Related Property by Laws affecting the offering and sale of securities generally.

 

7.          Covenants. Each Grantor, jointly and severally, covenants and agrees with the Agent (for the benefit of the Secured Parties) that from and after the date of this Agreement and until the date of termination of this Agreement in accordance with Section 20 hereof (but only to the extent the particular assets described in this Section 7 constitute Collateral hereunder):

 

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(a)          Possession of Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Investment Related Property, or Chattel Paper, and if and to the extent that perfection or priority of the Secured Party and Agent’s Security Interests is dependent on or enhanced by possession, the applicable Grantor shall execute such other documents and instruments as are necessary or, if applicable, endorse and deliver physical possession of such Negotiable Collateral, Investment Related Property, or Chattel Paper to the Agent, together with such undated powers endorsed in blank as shall be requested by the Agent.

 

(b)          Chattel Paper.

 

(i)          Each Grantor shall take all steps reasonably necessary to grant the Agent control of and a first priority security interest in all Chattel Paper in accordance with the Code, the New York Electronic Signatures and Records Act and Section 201 of the federal Electronic Signatures in Global and National Commerce Act as in effect in any relevant jurisdiction; and

 

(ii)         If any Grantor retains possession of any Chattel Paper or instruments (which retention of possession shall be subject to the extent permitted hereby and by the Purchase Agreement), such Chattel Paper and instruments shall be promptly marked with the following legend: “This writing and the obligations evidenced or secured hereby are subject to the Security Interests of JGB Collateral LLC for the benefit of the Secured Parties named in that certain Security Agreement dated March 30, 2012.”

 

(c)          Control Agreements.

 

(i)          Each Grantor shall obtain an authenticated Control Agreement from each bank maintaining a Deposit Account for such Grantor; and

 

(ii)         Each Grantor shall obtain authenticated Control Agreements from each issuer of uncertificated securities, securities intermediary, or commodities intermediary issuing or holding any financial assets or commodities to or for any Grantor.

 

(d)          Letter-of-Credit Rights. Each Grantor that is or becomes the beneficiary of a letter of credit shall promptly (and in any event within 2 Business Days after becoming a beneficiary), notify the Agent thereof in writing, and enter into a multi-party agreement with the Agent and the issuing or confirming bank with respect to letter-of-credit rights assigning such letter-of-credit rights to the Agent and directing all payments thereunder to the Agent, all in form and substance satisfactory to the Agent.

 

(e)          Commercial Tort Claims. Each Grantor shall promptly (and in any event within 2 Business Days of receipt thereof), notify the Secured Parties and the Agent in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the date hereof and promptly amend Schedule 9 to this Agreement to describe such after-acquired Commercial Tort Claim in a manner that reasonably identifies such Commercial Tort Claim, and hereby authorizes the filing of additional financing statements or amendments to existing financing statements describing such Commercial Tort Claims, and agrees to do such other acts or things deemed necessary or desirable to give the Agent and Secured Party a first priority, perfected security interest in any such Commercial Tort Claim.

 

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(f)          Government Contracts. If any Account or Chattel Paper arises out of a contract or contracts with the United States of America or any department, agency, or instrumentality thereof, the Grantors shall promptly (and in any event within 2 Business Days of the creation thereof) notify the Agent thereof in writing and execute any instruments or take any steps necessary in order that all moneys due or to become due under such contract or contracts shall be assigned to the Agent (for the benefit of the Secured Parties), and shall provide written notice thereof under the Assignment of Claims Act or other applicable Law.

 

(g)          Intellectual Property.

 

(i)          In order to facilitate filings with the United States Patent and Trademark Office and the United States Copyright Office or any other applicable Governmental Authority, each Grantor shall execute and deliver to the Agent one or more Copyright Security Agreements, Trademark Security Agreements, or Patent Security Agreements to further evidence the Agent’s Liens on such Grantor’s Patents, Trademarks, or Copyrights, and the General Intangibles of such Grantor relating thereto or represented thereby;

 

(ii)         Each Grantor shall have the duty, to the extent necessary or economically desirable in the operation of such Grantor’s business, (A) to promptly sue for infringement, misappropriation, or dilution and to recover any and all damages for such infringement, misappropriation, or dilution, (B) to prosecute diligently any trademark application or service mark application that is part of the Trademarks pending as of the date hereof or hereafter until the termination of this Agreement, (C) to prosecute diligently any patent application that is part of the Patents pending as of the date hereof or hereafter until the termination of this Agreement, and (D) to take all reasonable and necessary action to preserve and maintain all of such Grantor’s Trademarks, Patents, Copyrights, Intellectual Property Licenses, and its rights therein, including the filing of applications for renewal, affidavits of use, affidavits of noncontestability and opposition and interference and cancellation proceedings. Each Grantor shall promptly file an application with the United States Copyright Office for any Copyright that has not been registered with the United States Copyright Office if such Copyright is necessary in connection with the operation of such Grantor’s business. Any expenses incurred in connection with the foregoing shall be borne by the appropriate Grantor. Each Grantor further agrees not to abandon any Trademark, Patent, Copyright, or Intellectual Property License that is necessary or economically desirable in the operation of such Grantor’s business;

 

(iii)        The Grantors acknowledge and agree that the Agent shall have no duties with respect to the Trademarks, Patents, Copyrights, or Intellectual Property Licenses. Without limiting the generality of this Section 7(g), the Grantors acknowledge and agree that the Agent and each Secured Party shall not be under any obligation to take any steps necessary to preserve rights in the Trademarks, Patents, Copyrights, or Intellectual Property Licenses against any other Person, but the Agent may do so at its option from and after the occurrence and during the continuance of an Event of Default, and all expenses incurred in connection therewith (including reasonable fees and expenses of attorneys and other professionals) shall be for the sole account of the Grantors and shall be deemed to be Secured Obligations; and

 

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(iv)        In no event shall any Grantor, either itself or through any agent, employee, licensee, or designee, file an application for the registration of any Patent, Trademark, or Copyright with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency without giving the Agent prior written notice thereof. Promptly upon any such filing, each Grantor shall comply with Section 7(g)(i) hereof.

 

(h)          Investment Related Property.

 

(i)          If any Grantor shall receive or become entitled to receive any Pledged Interests after the date hereof, it shall promptly (and in any event within 2 Business Days of receipt thereof) identify such Pledged Interests in a written notice to the Agent;

 

(ii)         All sums of money and property paid or distributed in respect of the Investment Related Property that are received by any Grantor shall be held by such Grantor in trust for the benefit of the Agent segregated from such Grantor’s other property, and such Grantor shall deliver it forthwith to the Agent in the exact form received;

 

(iii)        Each Grantor shall promptly deliver to the Agent a copy of each notice or other communication received by it in respect of any Pledged Interests;

 

(iv)        No Grantor shall make or consent to any amendment or other modification or waiver with respect to any Pledged Interests, Pledged Operating Agreement, or Pledged Partnership Agreement, or enter into any agreement or permit to exist any restriction with respect to any Pledged Interests other than pursuant to the Purchase Agreement;

 

(v)         Each Grantor agrees that it will obtain all necessary approvals and make all necessary filings under federal, state, local, or foreign Law in connection with the Security Interests on the Investment Related Property or any sale or transfer thereof; and

 

(vi)        As to all limited liability company or partnership interests issued under any Pledged Operating Agreement or Pledged Partnership Agreement, each Grantor hereby represents, warrants and covenants that the Pledged Interests issued pursuant to such agreement (A) are not and shall not be dealt in or traded on securities exchanges or in securities markets, (B) do not and will not constitute investment company securities, and (C) are not and will not be held by such Grantor in a securities account. In addition, none of the Pledged Operating Agreements, the Pledged Partnership Agreements, or any other agreements governing any of the Pledged Interests issued under any Pledged Operating Agreement or Pledged Partnership Agreement provides or shall provide that such Pledged Interests are securities governed by Article 8 of the Uniform Commercial Code as in effect in any relevant jurisdiction.

 

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(i)          Transfers and Other Liens. Grantors shall not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, except as expressly permitted by this Agreement and the other Transaction Documents, or (ii) create or permit to exist any Lien upon or with respect to any of the Collateral of any of Grantors, except for Permitted Liens. The inclusion of Proceeds in the Collateral shall not be deemed to constitute consent by the Agent to any sale or other disposition of any of the Collateral except as expressly permitted in this Agreement or the Purchase Agreement.

 

(j)          Other Actions as to Any and All Collateral. Each Grantor shall promptly (and in any event within 2 Business Days of acquiring or obtaining such Collateral) notify the Agent in writing upon (i) acquiring or otherwise obtaining any Collateral after the date hereof consisting of Trademarks, Patents, Copyrights, Intellectual Property Licenses, Investment Related Property, Chattel Paper (electronic, tangible or otherwise), Documents (as defined in Article 9 of the Code), Promissory notes (as defined in the Code), or Instruments (as defined in the Code) or (ii) any amount payable under or in connection with any of the Collateral being or becoming evidenced after the date hereof by any Chattel Paper, documents, promissory notes, or instruments and, in each such case, promptly execute such other documents, or if applicable, deliver such Chattel Paper, other documents or certificates evidencing any Investment Related Property and do such other acts or things necessary or desirable to protect the Agent and Secured Parties’ Security Interests therein.

 

(k)          Future Subsidiaries. If any person becomes a Subsidiary of the Company after the date hereof, the Company shall cause such Person, within 2 days after it becomes a Subsidiary, (i) to execute and deliver a joinder to this Agreement and the other Security Documents in which such new Subsidiary agrees to be bound by the terms hereof and thereof as if it where an original Grantor party hereto and thereto, such joinder agreements to be in form and substance reasonably satisfactory to the Agent, and (ii) to take any other necessary action so that such new Subsidiary is bound by the provisions hereof in the same manner and to the same extent as each other Grantor.

 

8.          Relation to Other Transaction Documents. The provisions of this Agreement shall be read and construed with the Transaction Documents referred to below in the manner so indicated.

 

(a)          Purchase Agreement and Notes. In the event of any conflict between any provision in this Agreement and a provision in the Purchase Agreement, the Notes or the Warrant, such provision of the Purchase Agreement, the Notes or the Warrant shall control.

 

(b)          Patent, Trademark, Copyright Security Agreements. The provisions of the Copyright Security Agreements, Trademark Security Agreements, and Patent Security Agreements are supplemental to the provisions of this Agreement, and nothing contained in the Copyright Security Agreements, Trademark Security Agreements or the Patent Security Agreements shall limit any of the rights or remedies of the Agent hereunder.

 

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9.          Further Assurances.

 

(a)          Each Grantor agrees that from time to time, at its own expense, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary and that the Agent may reasonably request, in order to perfect and protect the Security Interests granted or purported to be granted hereby or to enable the Agent and the Secured Parties to exercise and enforce their rights and remedies hereunder with respect to any of the Collateral.

 

(b)          Each Grantor authorizes the filing by the Agent of financing or continuation statements, or amendments thereto, and such Grantor will execute and deliver to the Agent such other instruments or notices, as may be necessary and as the Agent may reasonably request, in order to perfect and preserve the Security Interests granted or purported to be granted hereby.

 

(c)          Each Grantor authorizes the Agent at any time and from time to time to file, transmit, or communicate, as applicable, financing statements and amendments (i) describing the Collateral as “all personal property of debtor” or “all assets of debtor” or words of similar effect, (ii) describing the Collateral as being of equal or lesser scope or with greater detail, or (iii) that contain any information required by part 5 of Article 9 of the Code for the sufficiency or filing office acceptance. Each Grantor also hereby ratifies any and all financing statements or amendments previously filed by the Agent in any jurisdiction.

 

(d)          Each Grantor acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement filed in connection with this Agreement without first notifying the Agent of such filing and then having received the prior written consent of the Agent, subject to such Grantor's rights under Section 9-509(d)(2) of the Code.

 

10.         Agent’s Right to Perform Contracts, Exercise Rights, etc. Upon the occurrence and during the continuance of an Event of Default, the Agent (a) may, but shall not be required to, proceed to perform any and all of the obligations of any Grantor contained in any contract, lease, or other agreement and exercise any and all rights of any Grantor therein contained as fully as such Grantor itself could, (b) shall have the right, but not the obligation, to use any Grantor’s rights under Intellectual Property Licenses in connection with the enforcement of the Secured Party and the Agent’s rights hereunder, including the right to prepare for sale and sell any and all Inventory and Equipment now or hereafter owned by any Grantor and now or hereafter covered by such licenses, and (c) shall have the right, but not the obligation, to request that any Stock that is pledged hereunder be registered in the name of the Agent or any of its nominees.

 

11.         Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints the Agent its attorney-in-fact at the time of the execution of this Agreement. The Agent shall have full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, at such time as an Event of Default has occurred and is continuing, to take any action and to execute any instrument that the Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including:

 

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(a)          to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in connection with any Collateral of such Grantor;

 

(b)          to receive and open all mail addressed to such Grantor and to notify postal authorities to change the address for the delivery of mail to such Grantor to that of the Agent;

 

(c)          to receive, indorse, and collect any drafts or other instruments, documents, Negotiable Collateral or Chattel Paper;

 

(d)          to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral of such Grantor or otherwise to enforce the rights of the Agent and the Secured Parties with respect to any of the Collateral;

 

(e)          to repair, alter, or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any Person obligated to such Grantor in respect of any Account of such Grantor;

 

(f)          to use any labels, Patents, Trademarks, trade names, URLs, domain names, industrial designs, Copyrights, advertising matter or other industrial or intellectual property rights, in advertising for sale and selling Inventory and other Collateral and to collect any amounts due under Accounts, contracts or Negotiable Collateral of such Grantor; and

 

(g)          The Agent shall have the right, but shall not be obligated, to bring suit in its own name but for the benefit of the Secured Parties to enforce the Trademarks, Patents, Copyrights and Intellectual Property Licenses and, if the Agent shall commence any such suit, the appropriate Grantor shall, at the request of the Agent, do any and all lawful acts and execute any and all proper documents reasonably required by the Agent in aid of such enforcement.

 

To the extent permitted by Law, each Grantor hereby ratifies all that such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable until this Agreement is terminated.

 

12.         Agent May Perform. If any of Grantors fails to perform any agreement contained herein, the Agent may itself, but shall not be required to, perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith (including attorneys’ fees and expenses) shall be payable, jointly and severally, by Grantors.

 

13.         Agent’s Duties; Bailee for Perfection. The powers conferred on the Agent hereunder are solely to protect the Agent’s interests in the Collateral and shall not impose any duty upon the Agent in favor of any Grantor to exercise any such powers. Except for the safe custody of any Collateral in its actual possession and the accounting for moneys actually received by it hereunder, the Agent shall not have any duty to any Grantor as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in actual possession if such Collateral is accorded treatment substantially equal to that which the Agent accords its own property. The Grantors hereby agree that if the Agent is in possession of any Collateral at such time as the Secured Obligations owing to the Agent and the Secured Parties have been paid in full, the Agent may re-deliver such Collateral to the applicable Grantor without recourse to or representation or warranty by the Agent.

 

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14.         Collection of Accounts, General Intangibles and Negotiable Collateral. At any time upon the occurrence and during the continuation of an Event of Default, the Agent may, but shall not be required to, (a) notify Account Debtors of any Grantor that the Accounts, General Intangibles, Chattel Paper or Negotiable Collateral have been assigned to the Agent or that the Agent has a security interest therein, and (b) collect the Accounts, General Intangibles and Negotiable Collateral directly, and any collection costs and expenses shall constitute part of such Grantor's Secured Obligations under the Purchase Agreement.

 

15.         Disposition of Pledged Interests by the Agent. The Pledged Interests may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of the Pledged Interests other than pursuant to an effective registration statement or an exemption from the Securities Act, each Grantor understands that in connection with such disposition, the Agent may approach only a restricted number of potential purchasers and further understands that a sale under such circumstances may yield a lower price for the Pledged Interests than if the Pledged Interests were registered and qualified pursuant to federal, state and other securities Laws and sold on the open market. Each Grantor, therefore, agrees that: (a) if the Agent shall, pursuant to the terms of this Agreement, sell or cause the Pledged Interests or any portion thereof to be sold at a private sale, the Agent shall have the right to conclusively rely upon and shall be fully protected in relying upon the advice and opinion of any nationally recognized brokerage or investment firm (but shall not be obligated to seek such advice and the failure to do so shall not be considered in determining the commercial reasonableness of such action) as to the best manner in which to offer the Pledged Interest or any portion thereof for sale and as to the best price reasonably obtainable at the private sale thereof; and (b) such reliance shall be conclusive evidence that the Agent has handled the disposition in a commercially reasonable manner.

 

16.         Voting Rights.

 

(a)          Upon the occurrence and during the continuation of an Event of Default, (i) the Agent may, at its option, and with 2 Business Days prior notice to any Grantor, and in addition to all rights and remedies available to the Agent under any other agreement, at law, in equity, or otherwise, exercise all voting rights and all other ownership or consensual rights in respect of the Pledged Interests owned by such Grantor, but under no circumstances is the Agent obligated by the terms of this Agreement to exercise such rights, and (ii) if the Agent duly exercises its right to vote any of such Pledged Interests, each Grantor hereby appoints the Agent, such Grantor’s true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote such Pledged Interests in any manner that the Agent deems advisable for or against all matters submitted or which may be submitted to a vote of shareholders, partners or members, as the case may be. The power-of-attorney granted hereby is coupled with an interest and shall be irrevocable.

 

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(b)          For so long as any Grantor shall have the right to vote the Pledged Interests owned by it, such Grantor covenants and agrees that it will not, without the prior written consent of the Agent, vote or take any consensual action with respect to such Pledged Interests that would materially adversely affect the rights of the Agent or the value of the Pledged Interests.

 

17.         Remedies. Upon the occurrence and during the continuance of an Event of Default:

 

(a)          The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, in the other Transaction Documents, or otherwise available to it, all the rights and remedies of a secured party on default under the Code or any other applicable Law. Without limiting the generality of the foregoing, each Grantor expressly agrees that, in any such event, the Agent, without any demand, advertisement, or notice of any kind (except a notice specified below of time and place of public or private sale) to or upon any of Grantors or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code or by any other applicable Law), may take immediate possession of all or any portion of the Collateral and (i) require Grantors to, and each Grantor hereby agrees that it will at its own expense and upon request of the Agent, assemble all or part of the Collateral as directed by the Agent and make it available to the Secured Parties at one or more locations where such Grantor regularly maintains Inventory, and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent’s offices or elsewhere, for cash, on credit, and upon such other terms as the Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of sale shall be required by Law, at least 10 days’ notice to any of Grantors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification and specifically such notice shall constitute a reasonable “authenticated notification of disposition” within the meaning of Section 9-611 of the Code. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

 

(b)          The Agent is hereby granted a license or other right to use, without liability for royalties or any other charge, each Grantor’s labels, Patents, Copyrights, rights of use of any name, trade secrets, trade names, Trademarks, service marks and advertising matter, URLs, domain names, industrial designs, other industrial or intellectual property or any property of a similar nature, whether owned by any of Grantors or with respect to which any of Grantors have rights under license, sublicense, or other agreements (but only to the extent (i) such license, sublicense or agreement does not prohibit such use by the Agent and (ii) such Grantor will not be in default under such license, sublicense, or other agreement as a result of such use by the Agent), as it pertains to the Collateral, in preparing for sale, advertising for sale and selling any Collateral, and each Grantor’s rights under all licenses and all franchise agreements shall inure to the benefit of the Agent.

 

(c)          Any cash held by the Agent as Collateral and all proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied against the Secured Obligations in the order set forth in Section 17 hereof. In the event the proceeds of Collateral are insufficient to satisfy all of the Secured Obligations in full, each Grantor shall remain jointly and severally liable for any such deficiency.

 

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(d)          Each Grantor hereby acknowledges that the Secured Obligations arose out of a commercial transaction, and agrees that if an Event of Default shall occur and be continuing the Agent shall have the right to an immediate writ of possession without notice of a hearing. The Agent shall have the right to the appointment of a receiver for the properties and assets of each of Grantors, and each Grantor hereby consents to such rights and such appointment and hereby waives any objection such Grantors may have thereto or the right to have a bond or other security posted by the Agent.

 

18.         Application of Proceeds of Collateral. All proceeds of Collateral received by the Agent shall be applied as follows:

 

(a)          first, ratably to pay any expenses due to the Agent and Secured Parties (including the reasonable costs and expenses of Agent’s counsel and those paid or incurred by the Agent and Secured Parties to correct any default under or enforce any provision of the Transaction Documents, or after the occurrence of any Default or Event of Default in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated) or indemnities then due to the Agent or the Secured Parties under the Transaction Documents, until paid in full;

 

(b)          second, ratably to pay any fees or premiums then due to the Secured Parties under the Transaction Documents, until paid in full;

 

(c)          third, ratably to pay interest due in respect of the Secured Obligations then due to the Secured Parties, until paid in full;

 

(d)          fourth, ratably to pay the principal amount of all Secured Obligations then due to the Secured Parties, until paid in full;

 

(e)          fifth, ratably to pay any other Secured Obligations then due to the Secured Parties; and

 

(f)          sixth, to Grantors or such other Person entitled thereto under applicable Law.

 

19.         Marshaling. The Agent shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Secured Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights and remedies hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, each Grantor hereby agrees that it will not invoke any Law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Agent or any Secured Party’s rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Secured Obligations or under which any of the Secured Obligations is outstanding or by which any of the Secured Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each Grantor hereby irrevocably waives the benefits of all such Laws.

 

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20.         Indemnity and Expenses.

 

(a)          Each Grantor agrees to indemnify the Agent and each Secured Party from and against all claims, lawsuits, losses, damages and liabilities (including reasonable attorneys’ fees and expenses) growing out of or resulting from this Agreement (including enforcement of this Agreement), except claims, losses or liabilities resulting from the fraud, gross negligence or willful misconduct of the party seeking indemnification as determined by a final non-appealable order of a court of competent jurisdiction. This provision shall survive the termination of this Agreement and the Transaction Documents and the repayment of the Secured Obligations.

 

(b)          The Grantors, jointly and severally, shall, upon demand, pay to the Agent all of the costs and expenses (including those of its agents and counsel) that the Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or, upon an Event of Default, the sale of, collection from, or other realization upon, any of the Collateral in accordance with this Agreement and the Transaction Documents, (iii) the exercise or enforcement of any of the rights of the Agent hereunder or (iv) the failure by any Grantor to perform or observe any of the provisions hereof. This provision shall survive the termination of this Agreement and the Transaction Documents and the repayment of the Secured Obligations.

 

21.         Addresses for Notices. All notices and other communications provided for hereunder (a) shall be given in the form and manner set forth in the Purchase Agreement and (b) shall be delivered, (i) in the case of notice to any Grantor, by delivery of such notice to the Company at the Company’s address specified in the Purchase Agreement or at such other address as shall be designated by the Company in a written notice to the Agent, and (ii) in the case of notice to the Agent, by delivery of such notice to the Secured Parties, or the Agent, as applicable at its address specified in the Purchase Agreement or at such other address as shall be designated by the Agent in a written notice to the Company.

 

22.         Separate, Continuing Security Interests. This Agreement shall create a separate, continuing security interest in the Collateral in favor of the Agent (for the benefit of the Secured Parties) and shall (a) remain in full force and effect until the Secured Obligations have been paid in full in cash or by conversion to equity, in either case, in accordance with the provisions of the Transaction Documents, (b) be binding upon each of Grantors, and their respective successors and assigns, and (c) inure to the benefit of, and be enforceable by, the Secured Parties and the Agent and its successors, transferees and assigns. Upon payment in full in cash of the Secured Obligations or by conversion to equity, in either case, in accordance with the provisions of the Transaction Documents, the Security Interests granted hereby shall terminate and all rights to the Collateral shall revert to Grantors or any other Person entitled thereto. At such time, the Agent will authorize the filing of appropriate termination statements to terminate such Security Interests. No transfer or renewal, extension, assignment, or termination of this Agreement or of the Purchase Agreement, any other Transaction Document, or any other instrument or document executed and delivered by any Grantor to the Agent nor any additional loans made by the Secured Parties to any Grantor, nor the taking of further security, nor the retaking or re-delivery of the Collateral to Grantors, or any of them, by any Secured Party or the Agent, nor any other act of any Secured Party or the Agent shall release any of Grantors from any obligation, except a release or discharge executed in writing by the Secured Parties and the Agent.

 

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23.         Agent. Each reference herein to any right granted to, benefit conferred upon or power exercisable by the “Agent” shall be a reference to the Agent, for the benefit of the Secured Parties. The Agent may resign or be removed as the Agent in accordance with, and subject to, Agency Letter. Any successor Agent (or any Secured Party, as the case may be) shall succeed to all the rights, powers, and duties of the retiring Agent and the term “Agent” shall mean such successor Agent (or the Secured Party, as the case may be) and the retiring Agent’s appointment, powers, and duties as the Agent shall be terminated. After any retiring Agent’s resignation hereunder as the Agent, the provisions of Agency Letter shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement.

 

24.         Governing Law; Jurisdiction; Jury Trial. This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the internal Laws of the State of New York, without regard to conflict of law principles that would result in the application of any Law other than the Laws of the State of New York. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each Grantor irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to the Company at the address set forth in the Purchase Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by Law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

25.         Counterparts; Facsimile. This Agreement may be executed and delivered by facsimile signature or by an e-mail that contains a portable document format (.pdf) file of an executed signature page in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The exchange of copies of this Agreement and of signature pages by facsimile or PDF transmission shall constitute effective execution and delivery of this Agreement as to the parties hereto and may be used in lieu of the original Agreement for all purposes.

 

26.         Headings. The section headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

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27.         Amendments and Waivers. No waiver of any provision of this Agreement, and no consent to any departure by any of Grantors herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent (acting upon written instructions from the Holders holding at least 66 2/3% of the outstanding principal amount of the Notes), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment of any provision of this Agreement shall be effective unless the same shall be in writing and signed by the Agent (acting upon written instructions from the Holders holding at least 66 2/3% of the outstanding principal amount of the Notes) and each of Grantors to which such amendment applies.

 

28.         Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

29.         Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to a Secured Party or the Agent under this Agreement upon any breach or default of any Grantor shall impair any such right, power or remedy of the Secured Party or the Agent nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.

 

30.         Remedies. The Agent shall have all rights and remedies set forth in this Agreement and in the Transaction Documents and all rights and remedies that the Agent has been granted at any time under any other agreement or contract and all of the rights that the Agent has under applicable Law. All remedies shall be cumulative and not alternative. Each Grantor acknowledges that in the event that it fails to perform, observe or discharge any or all of its obligations under this Agreement, any remedy at law may prove to be inadequate relief to the Agent. Each Grantor therefore agrees that the Agent shall be entitled to seek specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in any such case without the necessity of proving actual damages and without posting a bond or other security.

 

31.         Entire Agreement. This Agreement and the Transaction Documents, including the exhibits attached hereto and thereto, do and will constitute the full and entire understanding and agreement between the parties hereto with respect to the subject matter hereof and thereof.

 

32.         Construction. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Agreement instead of just the provision in which they are found. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

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33.         U.S.A. Patriot Act. The parties hereto acknowledge that in accordance with Section 326 of the U.S.A. Patriot Act, the Agent, like all financial institutions and in order to help fight the funding of terrorism and money laundering, is required to obtain, verify, and record information that identifies each person or legal entity that establishes a relationship or opens an account with the Agent. The parties to this Agreement agree that they will provide the Agent with such information as it may request in order for the Agent to satisfy the requirements of the U.S.A. Patriot Act.

 

34.         Force Majeure. In no event shall the Agent be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; it being understood that the Agent shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above.

 

GRANTORS: Elephant Talk Communications Corp., a Delaware
  corporation
   
  By: /s/Steven van der Velden
     
  Name: Steven van der Velden
     
  Title: President and Chief Executive Officer
   
  Elephant Talk Europe Holding B.V.
   
  By: /s/ Alex Vermeulen
   
  Elephant Talk Communication Holding AG
   
  By: /s/ Alex Vermeulen 
   
  Elephant Talk Communications S.L.U.
   
  By: /s/ Mark Nije
   
  Elephant Talk Mobile Services B.V.
   
  By: /s/ Mark Nije
   
  Elephant Talk Communication Austria GmbH
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Telekom GmbH
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communications S.R.L.
   
  By: /s/ Mark Nije

 

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  ET-Stream GmbH
   
  By: /s/ Alex Vermeulen 
   
  Elephant Talk Communication Carrier Services GmbH
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communication Europe GmbH
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communication Schweiz GmbH
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communications France S.A.S.
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communications Premium Rate Services Netherlands B.V.
   
  By:  /s/ Alex Vermeulen 
   
  Elephant Talk Communications PRS U.K. Ltd.
   
  By: /s/ Mark Nije
   
  Elephant Talk Communications Luxembourg SA
   
  By:  /s/ Alex Vermeulen 

 

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  Elephant Talk Business Services W.L.L. 
     
  By: /s/ Mark Nije
   
  Guangzhou Elephant Talk Information Technology Ltd
   
  By: /s/ Alex Vermeulen 
   
  ET-UTS N.V.
   
  By: Martin Zuurbier
   
  Elephant Talk Limited
   
  By: /s/ Steven van der Velden
   
  Elephant Talk Middle East & Africa (Holding) W.L.L.
   
  By: /S/ Steven van der Velden
   
  Elephant Talk Middle East & Africa (Holding) Jordan L.L.C.
   
  By: Martin Zuurbier
   
  Elephant Talk Middle East & Africa Bahrain W.L.L.
   
  By: Martin Zuurbier
   
  Elephant Talk Middle East & Africa FZ-LLC
   
  By: /S/ Steven van der Velden
   
  Validsoft Ltd.
   
  By: /S/ Steven van der Velden

 

28
 

 

  Validsoft (UK) Ltd 
     
  By: /S/ Patrick Carrol
   
  Validsoft (Australia) Pty Limited
   
  By: /S/ Patrick Carrol

 

29
 

 

AGENT: JGB Collateral LLC, not in its individual capacity but solely as Agent
  By: JGB Management, Inc., its sole member
   
  By: /s/ JGB Management, Inc.
    Name
    Title:

 

30

 EX-10.31 5 v304852_ex10-31.htm EXHIBIT 10.31

 

ESCROW AGREEMENT

 

This Escrow Agreement dated this 30 day of March 2012 (the “Escrow Agreement”), is entered into by and among Elephant Talk Communications Corp. (“ETAK”), Purchaser (“Purchaser,” and together with ETAK, the “Parties,” and each individually, a “Party”), and Wells Fargo Bank, National Association, a national banking association, as escrow agent (“Escrow Agent”).

 

RECITALS

 

A.           ETAK and certain purchasers, of which Purchaser is one such purchaser, have entered into that certain Securities Purchase Agreement dated as of March 29, 2012 (the “Purchase Agreement”), pursuant to which ETAK has agreed to sell, and the purchasers have agreed to purchase, 8% Senior Secured Convertible Notes in the aggregate principal amount of $8,800,000 (the “Note”) for consideration of $8,000,000 (the “Purchase Price”). Capitalized terms used herein that are not defined shall have the meanings given to them in the Notes.

 

B.           The Purchase Agreement requires that, with respect to Purchaser, $[ ] of the Purchase Price (the “Escrowed Amount”) be deposited into escrow to secure certain payment obligations of ETAK to Purchaser under the relevant Note;

 

C.           The Parties agree to place the Escrowed Amount in escrow and the Escrow Agent agrees to hold and distribute such funds in accordance with the terms of this Escrow Agreement.

 

In consideration of the promises and agreements of the Parties and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties and the Escrow Agent agree as follows:

 

ARTICLE 1

ESCROW DEPOSIT


Section 1.1.          Receipt of Escrow Property. Upon execution hereof, Agent shall deliver to the Escrow Agent the amount of $[ ] (the “Escrow Property”) in immediately available funds.


Section 1.2.          Investments.

 

(a)          The Escrow Agent is authorized and directed to deposit, transfer, hold and invest the Escrow Property and any investment income thereon as set forth in Exhibit A hereto, or as set forth in any subsequent written instruction signed by the Parties. Any investment earnings and income on the Escrow Property shall become part of the Escrow Property, and shall be disbursed in accordance with Section 1.3 or Section 1.5 of this Escrow Agreement.

 

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(b)          The Escrow Agent is hereby authorized and directed to sell or redeem any such investments as it deems necessary to make any payments or distributions required under this Escrow Agreement. The Escrow Agent shall have no responsibility or liability for any loss which may result from any investment or sale of investment made pursuant to this Escrow Agreement; provided, that, the Escrow Agent has invested the Escrow Property in accordance with Exhibit A. The Escrow Agent is hereby authorized, in making or disposing of any investment permitted by this Escrow Agreement, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or any such affiliate is acting as agent of the Escrow Agent or for any third person or dealing as principal for its own account. The Parties acknowledge that the Escrow Agent is not providing investment supervision, recommendations, or advice.

  

Section 1.3.          Disbursements.

 

(a)          Subject to subsection (d) below, Escrow Agent shall hold the Escrowed Property and all interest accrued thereon and shall dispose of the same only in accordance with the following provisions:

 

(i)   upon receipt of a written notice (a “Draw Notice”) from Purchaser stating (1) that ETAK failed to pay when due any amount due under the Notes (the “Amount Due”), (2) the section of the Note under which the payment obligation arose and (3) the dollar amount due, the Escrow Agent shall deliver to Purchaser cash equal to the lesser of the Amount Due under the relevant Note, and the remaining balance of the Escrow Property (including any accrued interest);

 

(ii)   upon receipt of a Draw Notice from the Agent stating (1) that an Event of Default has occurred and is continuing and that the repayment of the Note has been accelerated under Section 4(b) of the Note and (2) the amount due to Purchaser, the Escrow Agent shall deliver to Purchaser cash equal to the lesser of the amount due and the remaining balance of the Escrow Property (including any accrued interest) (the “Remaining Balance”);

 

(iii)   so long as Purchaser has not delivered a notice to the Escrow Agent that a Launch Failure (as defined in the Note) as occurred (a “Failure Notice”), then on each Installment Date (as defined in the Note), the Escrow Agent shall deliver (1) first, to Purchaser cash equal to the lesser of the sum of all Cash Payment Amounts (as defined in the Note) being made on such date and the Remaining Balance at such time, and (2) then, to ETAK cash equal to the lesser of all Stock Payment Amounts (as defined in the Note) being made on such date and the Remaining Balance at such time (taking into account all payments pursuant to Section 1.3(a)(iii)(1) immediately above). In connection with the foregoing, on each such Installment Date Purchaser shall deliver to the Escrow Agent written notice of the Cash Payment Amounts and Stock Payment Amounts, and the Escrow Agent shall not be required to make any calculations of such;

 

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(iv)   upon receipt of a Draw Notice from Purchaser stating (1) that no amounts are presently due and owing to Purchaser under the Note and (2) the aggregate outstanding principal amount of the Note plus all accrued and unpaid Interest and Late Charges thereon and any other amounts payable under the Note as of the date of the notice (the “Aggregate Outstanding Amount”) is less than the balance of the Escrow Property, the Escrow Agent shall deliver to ETAK cash equal to the difference between the Aggregate Outstanding Amount and the Remaining Balance at such time; and

 

(v)    upon a joint written direction signed by the Parties, the Escrow Agent shall disburse the Escrow, or the appropriate portion thereof, in accordance with the written direction.

 

(b)          Any notice given by a Party to the Escrow Agent under subsection (a) above shall include the relevant dollar amount related to that notice and shall also be given to the other Party simultaneously.

 

(c)          The Escrow Agent’s sole duty is to accept notice under subsection (a) and shall have no duty to determine nor shall be liable to ascertain the validity of the claims of Purchaser or ETAK under subsection (a).

 

(d)          The Escrow Agent shall disburse any Escrow Property (1) three (3) business days after receiving a Draw Notice under subsection (a)(i), (a)(ii) or (a)(iv), and (2) on the applicable Installment Date after receiving at least three (3) business days’ prior written notice from Purchaser of the applicable Cash Payment Amounts and the applicable Stock Payment Amounts; unless in any such case it receives written notice pursuant to Subsection (e) hereto, upon which subsection (e) shall govern.

 

(e)          To the extent that the non-requesting Party objects in good faith to any request for payment, such Party must deliver a written objection notice, stating the basis for such objection, to the Escrow Agent and the other Party within seven (7) business days after the date of the applicable Draw Notice requesting payment and such objection shall be resolved in accordance with Section 3.5 hereof.

 

(f)          The Escrow Agent shall deliver the applicable portion of the Escrow Property at the election of the Party entitled to receive the same by (i) a good, unendorsed check of Escrow Agent payable to the order of such Party, or (ii) a bank wire transfer to an account designated by such Party.

 

Section 1.4.          Income Tax Allocation and Reporting.

 

(a)          The Parties agree that, for tax reporting purposes, all interest and other income from investment of the Escrow Property shall, as of the end of each calendar year and to the extent required by the Internal Revenue Service, be reported as having been earned by Purchaser, whether or not such income was disbursed during such calendar year.

 

3
 

 

(b)          Prior to closing, the Parties shall provide the Escrow Agent with certified tax identification numbers by furnishing appropriate forms W-9 or W-8 and such other forms and documents that the Escrow Agent may request. The Parties understand that if such tax reporting documentation is not provided and certified to the Escrow Agent, the Escrow Agent may be required by the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, to withhold a portion of any interest or other income earned on the investment of the Escrow Property.

 

(c)          To the extent that the Escrow Agent becomes liable for the payment of any taxes in respect of income derived from the investment of the Escrow Property, the Escrow Agent shall satisfy such liability to the extent possible from the Escrow Property. The Parties, jointly and severally, shall indemnify, defend and hold the Escrow Agent harmless from and against any tax, late payment, interest, penalty or other cost or expense that may be assessed against the Escrow Agent on or with respect to the Escrow Property and the investment thereof unless such tax, late payment, interest, penalty or other expense was directly caused by the gross negligence or willful misconduct of the Escrow Agent. The indemnification provided by this Section 1.4(c) is in addition to the indemnification provided in Section 3.1 and shall survive the resignation or removal of the Escrow Agent and the termination of this Escrow Agreement.

 

Section 1.5.          Termination. Upon the disbursement of all of the Escrow Property, including any interest and investment earnings thereon, this Escrow Agreement shall terminate and be of no further force and effect except that the provisions of Sections 1.4(c), 3.1 and 3.2 hereof shall survive termination.

 

Section 1.6.           Title to Funds. The Company acknowledges and agrees that until the Escrow Property is disbursed to the Company in accordance with the terms of this Agreement, the Company has no right, title or interest in such Escrow Property.

 

4
 

 

ARTICLE 2

DUTIES OF THE ESCROW AGENT

 

Section 2.1.          Scope of Responsibility. Notwithstanding any provision to the contrary, the Escrow Agent is obligated only to perform the duties specifically set forth in this Escrow Agreement, which shall be deemed purely ministerial in nature. Under no circumstances will the Escrow Agent be deemed to be a fiduciary to any Party or any other person under this Escrow Agreement. The Escrow Agent will not be responsible or liable for the failure of any Party to perform in accordance with this Escrow Agreement. The Escrow Agent shall neither be responsible for, nor chargeable with, knowledge of the terms and conditions of any other agreement, instrument, or document other than this Escrow Agreement, whether or not an original or a copy of such agreement has been provided to the Escrow Agent; and the Escrow Agent shall have no duty to know or inquire as to the performance or nonperformance of any provision of any such agreement, instrument, or document. References in this Escrow Agreement to any other agreement, instrument, or document are for the convenience of the Parties, and the Escrow Agent has no duties or obligations with respect thereto. This Escrow Agreement sets forth all matters pertinent to the escrow contemplated hereunder, and no additional obligations of the Escrow Agent shall be inferred or implied from the terms of this Escrow Agreement or any other agreement.

 

Section 2.2.          Attorneys and Agents. The Escrow Agent shall be entitled to rely on and shall not be liable for any action taken or omitted to be taken by the Escrow Agent in accordance with the advice of counsel or other professionals retained or consulted by the Escrow Agent. The Escrow Agent shall be reimbursed as set forth in Section 3.1 for any and all compensation (fees, expenses and other costs) paid and/or reimbursed to such counsel and/or professionals. The Escrow Agent may perform any and all of its duties through its agents, representatives, attorneys, custodians, and/or nominees.

 

Section 2.3.          Reliance. The Escrow Agent shall not be liable for any action taken or not taken by it in accordance with the direction or consent of the Parties or their respective agents, representatives, successors, or assigns. The Escrow Agent shall not be liable for acting or refraining from acting upon any notice, request, consent, direction, requisition, certificate, order, affidavit, letter, or other paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, without further inquiry into the person’s or persons’ authority. Concurrent with the execution of this Escrow Agreement, the Parties shall deliver to the Escrow Agent authorized signers’ forms in the form of Exhibit B-1 and Exhibit B-2 to this Escrow Agreement.

 

Section 2.4.          Right Not Duty Undertaken. The permissive rights of the Escrow Agent to do things enumerated in this Escrow Agreement shall not be construed as duties.

 

Section 2.5.          No Financial Obligation. No provision of this Escrow Agreement shall require the Escrow Agent to risk or advance its own funds or otherwise incur any financial liability or potential financial liability in the performance of its duties or the exercise of its rights under this Escrow Agreement.

 

5
 

 

ARTICLE 3

PROVISIONS CONCERNING THE ESCROW AGENT

 

Section 3.1.          Indemnification. The Parties, jointly and severally, shall indemnify, defend and hold harmless the Escrow Agent from and against any and all loss, liability, cost, damage and expense, including, without limitation, attorneys’ fees and expenses or other professional fees and expenses which the Escrow Agent may suffer or incur by reason of any action, claim or proceeding brought against the Escrow Agent, arising out of or relating in any way to this Escrow Agreement or any transaction to which this Escrow Agreement relates, unless such loss, liability, cost, damage or expense shall have been finally adjudicated to have been directly caused by the willful misconduct or gross negligence of the Escrow Agent. The provisions of this Section 3.1 shall survive the resignation or removal of the Escrow Agent and the termination of this Escrow Agreement.

 

Section 3.2.          Limitation of Liability. the escrow agent SHALL NOT be liable, directly or indirectly, for any (i) damages, Losses or expenses arising out of the services provided hereunder, other than damages, losses or expenses which have been finally adjudicated to have DIRECTLY resulted from the escrow agent’s gross negligence or willful misconduct, or (ii) special, Indirect or consequential damages or LOSSES OF ANY KIND WHATSOEVER (INCLUDING WITHOUT LIMITATION LOST PROFITS), even if the escrow agent has been advised of the possibility of such LOSSES OR damages AND REGARDLESS OF THE FORM OF ACTION.

 

Section 3.3.          Resignation or Removal. The Escrow Agent may resign by furnishing written notice of its resignation to the Parties, and the Parties may remove the Escrow Agent by furnishing to the Escrow Agent a joint written notice of its removal along with payment of all fees and expenses to which it is entitled through the date of termination. Such resignation or removal, as the case may be, shall be effective thirty (30) days after the delivery of such notice or upon the earlier appointment of a successor, and the Escrow Agent’s sole responsibility thereafter shall be to safely keep the Escrow Property and to deliver the same to a successor escrow agent as shall be appointed by the Parties, as evidenced by a joint written notice filed with the Escrow Agent or in accordance with a court order. If the Parties have failed to appoint a successor escrow agent prior to the expiration of thirty (30) days following the delivery of such notice of resignation or removal, the Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor escrow agent or for other appropriate relief, and any such resulting appointment shall be binding upon the Parties.

 

6
 

 

Section 3.4.          Compensation. The Escrow Agent shall be entitled to compensation for its services as stated in the fee schedule attached hereto as Exhibit C, which compensation shall be paid by ETAK. The fee agreed upon for the services rendered hereunder is intended as full compensation for the Escrow Agent's services as contemplated by this Escrow Agreement; provided, however, that in the event that the conditions for the disbursement of funds under this Escrow Agreement are not fulfilled, or the Escrow Agent renders any service not contemplated in this Escrow Agreement, or there is any assignment of interest in the subject matter of this Escrow Agreement, or any material modification hereof, or if any material controversy arises hereunder, or the Escrow Agent is made a party to any litigation pertaining to this Escrow Agreement or the subject matter hereof, then the Escrow Agent shall be compensated, at a rate determined in good faith by the Parties, for such extraordinary services and reimbursed for all costs and expenses, including reasonable attorneys’ fees and expenses, occasioned by any such delay, controversy, litigation or event. If any amount due to the Escrow Agent hereunder is not paid within thirty (30) days of the date due, the Escrow Agent in its sole discretion may charge interest on such amount up to the highest rate permitted by applicable law. The Escrow Agent shall have, and is hereby granted, a prior lien upon the Escrow Property with respect to its unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights, superior to the interests of any other persons or entities and is hereby granted the right to set off and deduct any unpaid fees, non-reimbursed expenses and unsatisfied indemnification rights from the Escrow Property.

 

Section 3.5.          Disagreements. If any conflict, disagreement or dispute arises between, among, or involving any of the parties hereto concerning the meaning or validity of any provision hereunder or concerning any other matter relating to this Escrow Agreement, or the Escrow Agent is in doubt as to the action to be taken hereunder, the Escrow Agent may, at its option, retain the Escrow Property until the Escrow Agent (i) receives a final non-appealable order of a court of competent jurisdiction or a final non-appealable arbitration decision directing delivery of the Escrow Property, (ii) receives a written agreement executed by each of the parties involved in such disagreement or dispute directing delivery of the Escrow Property, in which events the Escrow Agent shall be authorized to disburse the Escrow Property in accordance with such final court order, arbitration decision, or agreement, or (iii) files an interpleader action in a court of competent jurisdiction, and upon the filing thereof, the Escrow Agent shall be relieved of all liability as to the Escrow Property and shall be entitled to recover attorneys’ fees, expenses and other costs incurred in commencing and maintaining any such interpleader action. The Escrow Agent shall be entitled to act on any such agreement, court order, or arbitration decision without further question, inquiry, or consent.

 

Section 3.6.          Merger or Consolidation. Any corporation or association into which the Escrow Agent may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer all or substantially all of its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which the Escrow Agent is a party, shall be and become the successor escrow agent under this Escrow Agreement and shall have and succeed to the rights, powers, duties, immunities and privileges as its predecessor, without the execution or filing of any instrument or paper or the performance of any further act.

 

7
 

 

Section 3.7.          Attachment of Escrow Property; Compliance with Legal Orders. In the event that any Escrow Property shall be attached, garnished or levied upon by any court order, or the delivery thereof shall be stayed or enjoined by an order of a court, or any order, judgment or decree shall be made or entered by any court order affecting the Escrow Property, the Escrow Agent is hereby expressly authorized, in its sole discretion, to respond as it deems appropriate or to comply with all writs, orders or decrees so entered or issued, or which it is advised by legal counsel of its own choosing is binding upon it, whether with or without jurisdiction. In the event that the Escrow Agent obeys or complies with any such writ, order or decree it shall not be liable to any of the Parties or to any other person, firm or corporation, should, by reason of such compliance notwithstanding, such writ, order or decree be subsequently reversed, modified, annulled, set aside or vacated.

 

Section 3.8           Force Majeure. The Escrow Agent shall not be responsible or liable for any failure or delay in the performance of its obligation under this Escrow Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fire; flood; wars; acts of terrorism; civil or military disturbances; sabotage; epidemic; riots; interruptions, loss or malfunctions of utilities, computer (hardware or software) or communications services; accidents; labor disputes; acts of civil or military authority or governmental action; it being understood that the Escrow Agent shall use commercially reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as reasonably practicable under the circumstances.

 

ARTICLE 4

MISCELLANEOUS

 

Section 4.1.          Successors and Assigns. This Escrow Agreement shall be binding on and inure to the benefit of the Parties and the Escrow Agent and their respective successors and permitted assigns. No other persons shall have any rights under this Escrow Agreement.  No assignment of the interest of any of the Parties shall be binding unless and until written notice of such assignment shall be delivered to the other Party and the Escrow Agent and shall require the prior written consent of the other Party and the Escrow Agent (such consent not to be unreasonably withheld).

 

Section 4.2.          Escheat. The Parties are aware that under applicable state law, property which is presumed abandoned may under certain circumstances escheat to the applicable state. The Escrow Agent shall have no liability to the Parties, their respective heirs, legal representatives, successors and assigns, or any other party, should any or all of the Escrow Property escheat by operation of law.

 

8
 

 

Section 4.3.          Notices. All notices, requests, demands, and other communications required under this Escrow Agreement shall be in writing, in English, and shall be deemed to have been duly given if delivered (i) personally, (ii) by facsimile transmission with written confirmation of receipt, (iii) by overnight delivery with a reputable national overnight delivery service, or (iv) by mail or by certified mail, return receipt requested, and postage prepaid. If any notice is mailed, it shall be deemed given five business days after the date such notice is deposited in the United States mail. If notice is given to a party, it shall be given at the address for such party set forth below. It shall be the responsibility of the Parties to notify the Escrow Agent and the other Party in writing of any name or address changes. In the case of communications delivered to the Escrow Agent, such communications shall be deemed to have been given on the date received by the Escrow Agent.

 

If to Purchaser:

 

Purchaser Master Fund, Ltd.

c/o Purchaser Capital Management, LP

777 Third Avenue, 30th Floor

New York, NY 10017

Attn: Yoav Roth

Facsimile No.: (212) 571-1279

 

If to ETAK:

 

Elephant Talk Communications, Corp.

19103 Centre Rose Boulevard

Lutz, FL 33558

Attention: Steve van der Velden

Telephone No.: (813) 926-8920

 

If to the Escrow Agent:

 

Wells Fargo Bank, National Association

45 Broadway, 14th Floor

New York, NY 10006

Attention: Matthew Sherman; Corporate, Municipal and Escrow Solutions

Telephone: (212) 515-1573

Facsimile: (212) 509-1716

 

With a copy to ETAK at the address, etc. set forth above.

 

Section 4.4.          Governing Law. This Escrow Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. The parties submit to the exclusive jurisdiction of the state and federal courts located in New York County, New York for any action suit or proceeding arising out this Agreement.

 

9
 

 

Section 4.5.          Entire Agreement. This Escrow Agreement sets forth the entire agreement and understanding of the parties related to the Escrow Property.

 

Section 4.6.          Amendment. This Escrow Agreement may be amended, modified, superseded, rescinded, or canceled only by a written instrument executed by the Parties and the Escrow Agent.

 

Section 4.7.          Waivers. The failure of any party to this Escrow Agreement at any time or times to require performance of any provision under this Escrow Agreement shall in no manner affect the right at a later time to enforce the same performance. A waiver by any party to this Escrow Agreement of any such condition or breach of any term, covenant, representation, or warranty contained in this Escrow Agreement, in any one or more instances, shall neither be construed as a further or continuing waiver of any such condition or breach nor a waiver of any other condition or breach of any other term, covenant, representation, or warranty contained in this Escrow Agreement.

 

Section 4.8.          Headings. Section headings of this Escrow Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions of this Escrow Agreement.

 

Section 4.9.          Counterparts. This Escrow Agreement may be executed in one or more counterparts, each of which when executed shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument.

 

[The remainder of this page left intentionally blank.]

 

10
 

 

IN WITNESS WHEREOF, this Escrow Agreement has been duly executed as of the date first written above.

 

  ELEPHANT TALK COMMUNICATIONS CORP.
   
  By:  
     
  Name:  
     
  Title:  
   
  Purchaser
  By:
 
   
  By:  
     
  Name:
     
  Title: Authorized Signatory
   
  WELLS FARGO BANK, NATIONAL ASSOCIATION, as Escrow Agent
   
  By:  
     
  Name:  
     
  Title:  

 

S-1
 

 

EXHIBIT A

 

Agency and Custody Account Direction

For Cash Balances

Wells Fargo Money Market Deposit Accounts

  

 
 

 

EXHIBIT B-1

 

Certificate as to Authorized Signatures

 

 
 

 

 

EXHIBIT B-2

 

Certificate as to Authorized Signatures

 

 
 

 

EXHIBIT C

 

FEES OF ESCROW AGENT

 

 

 EX-10.32 6 v304852_ex10-32.htm EXHIBIT 10.32

SUBSIDIARY GUARANTY

 

This GUARANTY (this “Guaranty”), dated as of March [29], 2012, is made by the Company’s subsidiaries as indicated on the signature pages hereof, (collectively with any person executing and delivering a joinder to this Guaranty pursuant to Section 7 hereof, the “Guarantors”) in favor of each of the Purchasers (as defined below).

 

WHEREAS, pursuant to that certain Securities Purchase Agreement (the “Securities Purchase Agreement”), dated on or about the date hereof, Elephant Talk Communications, Corp., a Delaware corporation and the direct or indirect parent company of each Guarantor (the “Company”), and the Purchasers named therein (the “Purchasers”), the Company issued to the Purchasers the Company’s 8% Senior Secured Convertible Notes (the “Notes”);

 

WHEREAS, pursuant to that Securities Purchase Agreement, the Company and [_____], as agent for the Purchasers (the “Agent”), entered into that certain Security Agreement, dated on or about the date hereof (the “Security Agreement”);

 

WHEREAS, the Company and the Guarantors are members of a group of related entities, the success of any one of which is dependent in part on the success of the other members of such group;

 

WHEREAS, each Guarantor expects to receive substantial direct and indirect benefits from the Purchasers’ investment in the Company pursuant to the Transaction Documents (as defined in the Securities Purchase Agreement), which benefits are hereby acknowledged;

 

WHEREAS, it is a condition precedent to the Purchasers’ investment in the Company under the Securities Purchase Agreement that the Guarantors execute and deliver to the Purchasers this Guaranty; and

 

WHEREAS, each Guarantor wishes to guaranty the Company’s obligations to the Purchasers under or in respect of the Transaction Documents as provided herein.

 

NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, each Guarantor hereby agrees with the Purchasers as follows:

 

1.          Definitions. All capitalized terms used herein (including in the recitals hereof) without definition shall have the meanings ascribed thereto in the Securities Purchase Agreement.

 

 
 

 

2.          Guaranty of Payment and Performance. Each Guarantor hereby jointly and severally guarantees to the Purchasers the full and punctual payment when due (whether at stated maturity, by required pre-payment, by acceleration or otherwise), as well as the performance, of all of the Secured Obligations (as such term is defined in the Security Agreement) including all such which would become due but for the operation of the automatic stay pursuant to Section 362(a) of the Federal Bankruptcy Code and the operation of Sections 502(b) and 506(b) of the Federal Bankruptcy Code. This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment and performance of all of the Secured Obligations and not of their collectibility only and is in no way conditioned upon any requirement that the Purchasers or the Agent first attempt to collect any of the Secured Obligations from the Company or resort to any collateral security or other means of obtaining payment. Should the Company default in the payment or performance of any of the Secured Obligations, the obligations of each Guarantor hereunder with respect to such Secured Obligations in default shall, upon demand by the Purchasers, become immediately due and payable to the Purchasers, without notice of any nature, which notice is expressly waived by each Guarantor. Payments by the Guarantors hereunder may be required by the Purchasers on any number of occasions. All payments by the Guarantors hereunder shall be made to the Purchasers, in the manner and at the place of payment specified therefor in the Transaction Documents.

 

3.          Guarantor’s Agreement to Pay Enforcement Costs, etc. Each Guarantor further agrees, as the principal obligor and not as a guarantor only, to pay to the Purchasers, on demand, all costs and expenses (including court costs and legal expenses) incurred or expended by the Purchasers in connection with the Secured Obligations, this Guaranty and the enforcement thereof, together with interest on amounts recoverable under this Section 3 from the time when such amounts become due until payment, whether before or after judgment, at the rate of interest for overdue principal set forth in the Notes, provided that if such interest exceeds the maximum amount permitted to be paid under applicable law, then such interest shall be reduced to such maximum permitted amount.

 

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4.          Waivers by Guarantor; Purchasers’ Freedom to Act. Each Guarantor agrees that the Secured Obligations will be paid and performed strictly in accordance with their respective terms, regardless of any law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Purchasers with respect thereto. Each Guarantor waives promptness, diligence, presentment, demand, protest, notice of acceptance, notice of any Secured Obligations incurred and all other notices of any kind, all defenses that may be available by virtue of any valuation, stay, moratorium law or other similar law now or hereafter in effect, any right to require the marshaling of assets of the Company or any other Person primarily or secondarily liable with respect to any of the Secured Obligations, and all suretyship defenses generally, provided that such Guarantor does not waive any notice or grace period that is a condition precedent to the occurrence of an Event of Default under the Notes. Without limiting the generality of the foregoing, such Guarantor agrees to the provisions of any instrument evidencing, securing or otherwise executed in connection with any Secured Obligation and agrees that the obligations of such Guarantor hereunder shall not be released or discharged, in whole or in part, or otherwise affected by (a) the failure of the Purchasers or the Agent to assert any claim or demand or to enforce any right or remedy against the Company or any other Person primarily or secondarily liable with respect to any of the Secured Obligations; (b) any extensions, compromise, refinancing, consolidation or renewals of any Secured Obligation; (c) any change in the time, place or manner of payment of any of the Secured Obligations or any rescissions, waivers, compromise, refinancing, consolidation or other amendments or modifications of any of the terms or provisions of the Securities Purchase Agreement, the other Transaction Documents or any other agreement evidencing, securing or otherwise executed in connection with any of the Secured Obligations; (d) the addition, substitution or release of any Person primarily or secondarily liable for any Secured Obligation; (e) the adequacy of any rights that the Purchasers or the Agent may have against any collateral security or other means of obtaining repayment of any of the Secured Obligations; (f) the impairment of any collateral securing any of the Secured Obligations, including the failure to perfect or preserve any rights that the Purchasers or the Agent might have in such collateral security or the substitution, exchange, surrender, release, loss or destruction of any such collateral security; or (g) any other act or omission that might in any manner or to any extent vary the risk of such Guarantor or otherwise operate as a release or discharge of such Guarantor, all of which may be done without notice to such Guarantor. To the fullest extent permitted by law, each Guarantor hereby expressly waives any and all rights or defenses arising by reason of (x) any “one action” or “anti-deficiency” law that would otherwise prevent the Purchasers from bringing any action, including any claim for a deficiency, or exercising any other right or remedy (including any right of set-off), against such Guarantor before or after the Purchasers’ commencement or completion of any foreclosure action, whether judicially, by exercise of power of sale or otherwise or (y) any other law that in any other way would otherwise require any election of remedies by the Purchasers.

 

5.          Unenforceability of Secured Obligations Against Company. If for any reason the Company has no legal existence or is under no legal obligation to discharge any of the Secured Obligations, or if any of the Secured Obligations have become irrecoverable from the Company by reason of the Company’s insolvency, bankruptcy or reorganization or by other operation of law or for any other reason, this Guaranty shall nevertheless be binding on each Guarantor to the same extent as if such Guarantor at all times had been the principal obligor on all such Secured Obligations. In the event that acceleration of the time for payment of any of the Secured Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Company, or for any other reason, all such amounts otherwise subject to acceleration under the terms of the Securities Purchase Agreement, the other Transaction Documents or any other agreement evidencing, securing or otherwise executed in connection with any Secured Obligation shall be immediately due and payable by the Guarantors.

 

6.          Subrogation; Subordination.

 

6.1           Waiver of Rights Against Company. Until the final payment and performance in full of all of the Secured Obligations, each Guarantor (a) shall not exercise, and hereby waives, any rights against the Company arising as a result of payment by the Guarantor hereunder, by way of subrogation, reimbursement, restitution, contribution or otherwise, and will not prove any claim in competition with the Purchasers or the Agent in respect of any payment hereunder in any bankruptcy, insolvency or reorganization case or proceedings of any nature, (b) will not claim any setoff, recoupment or counterclaim against the Company in respect of any liability of the Guarantor to the Company and (c) waives any benefit of and any right to participate in any collateral security that may be held by the Purchasers or the Agent.

 

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6.2           Subordination. The payment of any amounts due with respect to any indebtedness of the Company for money borrowed or credit received now or hereafter owed to any Guarantor is hereby subordinated to the prior payment in full of all of the Secured Obligations. Each Guarantor agrees that, after the occurrence of any default in the payment or performance of any of the Secured Obligations, such Guarantor will not demand, sue for or otherwise attempt to collect any such indebtedness until all of the Secured Obligations shall have been paid in full. If, notwithstanding the foregoing, such Guarantor shall collect, enforce or receive any amounts in respect of such indebtedness while any Secured Obligations are still outstanding, such amounts shall be collected, enforced and received by such Guarantor as trustee for the Purchasers and be paid over to the Purchasers on account of the Secured Obligations without affecting in any manner the liability of such Guarantor under the other provisions of this Guaranty.

 

6.3           Provisions Supplemental. The provisions of this Section 6 shall be supplemental to and not in derogation of any rights and remedies of the Purchasers under any separate subordination agreement that the Purchasers may at any time and from time to time enter into with the Guarantors.

 

7.          Future Subsidiaries. If any Person becomes a Subsidiary of the Company after the date hereof, the Guarantors shall cause such Person, within 2 days after it becomes a Subsidiary, (a) to execute and deliver a joinder to this Guaranty in which such new Subsidiary agrees to be bound by the terms hereof as if it where an original Guarantor party hereto, such joinder agreement to be in form and substance reasonably satisfactory to the Purchasers, and (b) to take any other action that the Purchasers may reasonably request so that such new Subsidiary is bound by the provisions hereof in the same manner and to the same extent as each other Guarantor.

 

8.          Further Assurances. Each Guarantor agrees that it will from time to time, at the request of the Purchasers, do all such things and execute all such documents as the Purchasers may reasonably request to give full effect to this Guaranty and to perfect and preserve the rights and powers of the Purchasers hereunder. Each Guarantor acknowledges and confirms that it has established its own adequate means of obtaining from the Company on a continuing basis all information desired by such Guarantor concerning the financial condition of the Company and that such Guarantor will look to the Company and not to the Purchasers in order for such Guarantor to keep adequately informed of changes in the Company’s financial condition.

 

9.          Termination; Reinstatement. Upon payment in full in cash of the Secured Obligations in accordance with the provisions of the Transaction Documents, this Guaranty shall terminate. Notwithstanding the foregoing, this Guaranty shall be reinstated after such termination if at any time any payment made or value received with respect to any Secured Obligation is rescinded or must otherwise be returned by the Purchasers upon the insolvency, bankruptcy or reorganization of the Company or any of its Subsidiaries, or otherwise, all as though such payment had not been made or value received.

 

10.         Successors and Assigns. This Guaranty shall be binding upon each Guarantor, its successors and assigns, and shall inure to the benefit of the Purchasers and their respective successors, transferees and assigns. Without limiting the generality of the foregoing, if a Purchasers assigns or otherwise transfers the Note, its rights and obligations under the Securities Purchase Agreement, the other Transaction Documents or any other agreement held by it evidencing, securing or otherwise executed in connection with the Secured Obligations, or sells participations in any interest therein, to any other Person, in each case in accordance with the terms thereof, then such other Person shall automatically become vested, to the extent set forth in the agreement evidencing such assignment, transfer or participation, with all the rights in respect thereof granted to such Purchaser herein. No Guarantor may assign any of its obligations hereunder.

 

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11.         Addresses for Notices. All notices and other communications provided for hereunder (a) shall be given in the form and manner set forth in the Securities Purchase Agreement and (b) shall be delivered, (i) in the case of notice to any Guarantor, by delivery of such notice to the Company at the Company’s address specified in the Securities Purchase Agreement or at such other address as shall be designated by the Company in a written notice to the Purchasers and (ii) in the case of notice to the Purchasers, by delivery of such notice to the Purchasers at their respective addresses specified in the Securities Purchase Agreement or at such other address as shall be designated by a Purchaser in a written notice to the Company.

 

12.         Governing Law; Jurisdiction; Jury Trial. This Guaranty and any controversy arising out of or relating to this Guaranty shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflict of law principles that would result in the application of any law other than the laws of the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each Guarantor irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to the Company at the address set forth in the Securities Purchase Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS GUARANTY OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

13.         Counterparts; Facsimile. This Guaranty may be executed and delivered by facsimile signature or by an e-mail that contains a portable document format (.pdf) file of an executed signature page in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

14.         Headings. The section headings used in this Guaranty are used for convenience only and are not to be considered in construing or interpreting this Guaranty.

 

15.         Amendments and Waivers. Except as expressly provided herein, neither this Guaranty nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Guaranty and signed by Purchasers holding at least 66 2/3% of the outstanding principal amount of the Notes and each Guarantor.

 

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16.         Severability. If any provision of this Guaranty shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Guaranty in that jurisdiction or the validity or enforceability of any provision of this Guaranty in any other jurisdiction.

 

17.         Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to the Purchasers under this Guaranty upon any breach or default of any Guarantor shall impair any such right, power or remedy of the Purchasers nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.

 

18.         Remedies. The Purchasers shall have all rights and remedies set forth in this Guaranty and in the Transaction Documents and all rights and remedies that the Purchasers have been granted at any time under any other agreement or contract and all of the rights that the Purchasers have under applicable law. All remedies shall be cumulative and not alternative. Each Guarantor acknowledges that in the event that it fails to perform, observe or discharge any or all of its obligations under this Guaranty, any remedy at law may prove to be inadequate relief to the Purchasers. Each Guarantor therefore agrees that the Purchasers shall be entitled to seek specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in any such case without the necessity of proving actual damages and without posting a bond or other security.

 

19.         Entire Agreement. This Guaranty and the Transaction Documents, including the exhibits attached hereto and thereto, do and will constitute the full and entire understanding and agreement between the Guarantors and the Purchasers with respect to the subject matter hereof and thereof.

 

20.         Construction. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Guaranty instead of just the provision in which they are found. The language used in this Guaranty will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written.

 

  Elephant Talk Europe Holding B.V.
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communication Holding AG
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communications S.L.U.
     
  By:     /s/ Mark Nije
     
  Elephant Talk Mobile Services B.V.
     
  By:      /s/ Mark Nije
     
  Elephant Talk Communication Austria GmbH
   
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Telekom GmbH
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communications S.R.L.
     
  By:      /s/ Mark Nije
     
  ET-Stream GmbH
     
  By:     /s/ Alex Vermeulen 

 

Signature Page to Guaranty

 

 
 

 

  Elephant Talk Communication Carrier Services GmbH 
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communication Europe GmbH
     
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communication Schweiz GmbH
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communications France S.A.S.
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communications Premium Rate Services Netherlands B.V.
     
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Communications PRS U.K. Ltd.
     
  By:     /s/ Mark Nije
     
  Elephant Talk Communications Luxembourg SA
   
  By:     /s/ Alex Vermeulen 
     
  Elephant Talk Business Services W.L.L.
     
  By:      /s/ Mark Nije
     
  Guangzhou Elephant Talk Information Technology Ltd
     
  By:     /s/ Alex Vermeulen 

 

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  ET-UTS N.V. 
     
  By:    Martin Zuurbier
     
  Elephant Talk Limited
     
  By:  /s/ Steven van der Velden
     
  Elephant Talk Middle East & Africa (Holding) W.L.L.
     
  By:  /S/ Steven van der Velden
     
  Elephant Talk Middle East & Africa (Holding) Jordan L.L.C.
     
  By:    Martin Zuurbier
     
  Elephant Talk Middle East & Africa Bahrain W.L.L.
     
  By:    Martin Zuurbier
     
  Elephant Talk Middle East & Africa FZ-LLC
     
  By: /S/ Steven van der Velden
     
  Validsoft Ltd.
     
  By: /S/ Steven van der Velden
     
  Validsoft (UK) Ltd
     
  By:      /S/ Patrick Carrol
     
  Validsoft (Australia) Pty Limited
     
  By:       /S/ Patrick Carrol

 

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 EX-10.33 7 v304852_ex10-33.htm EXHIBIT 10.33

 

REGISTRATION RIGHTS AGREEMENT

 

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of March 30, 2012 by and among Elephant Talk Communications, Corp., a Delaware corporation, with headquarters located at 19103 Centre Rose Boulevard, Lutz, FL 33558 (the “Company”), and the investors listed on the Schedule of Purchasers attached hereto (each, a “Purchaser” and collectively, the “Purchasers”).

 

WHEREAS:

 

A.           In connection with the Securities Purchase Agreement by and among the parties hereto of even date herewith (the “Securities Purchase Agreement”), the Company has agreed, upon the terms and subject to the conditions of the Securities Purchase Agreement, to issue and sell to each Purchaser 8% Senior Secured Convertible Notes (the “Notes”).

 

B.           In accordance with the terms of the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws.

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Purchasers hereby agree as follows:

 

1.          Definitions.

 

Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

 

(a)          “Additional Effective Date” means the date the Additional Registration Statement is declared effective by the SEC.

 

(b)          “Additional Effectiveness Deadline” means the date which is fifteen (15) calendar days after the earlier of the Additional Filing Date and the Additional Filing Deadline (as defined below) or in the event that any such Additional Registration Statement is subject to a full review by the SEC, forty-five (45) calendar days after the earlier of the Additional Filing Date and the Additional Filing Deadline.

 

(c)          “Additional Filing Date” means the date on which the Additional Registration Statement is filed with the SEC.

 

(d)          “Additional Registrable Securities” means (i) any capital stock of the Company issued or issuable with respect to the Conversion Shares or the Notes, as applicable, as a result of any stock split, stock dividend, recapitalization, exchange, anti-dilution adjustment to the Notes, or similar event or otherwise, without regard to any limitations on the issuance of Common Shares under the Notes.

 

 
 

 

(e)          “Additional Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering any Additional Registrable Securities or a registration statement required to be filed pursuant to Section 2(b) hereof.

 

(f)          “Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

 

(g)          “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement.

 

(h)          “Common Shares” means the shares of common stock, no par value per share, of the Company.

 

(i)          “Conversion Shares” any and all Common Shares issued or issuable pursuant to the Notes, including, without limitation, upon conversion thereof or in connection with any Stock Payment Amount (as defined in the Notes).

 

(j)          “Effective Date” means the Initial Effective Date and any Additional Effective Date, as applicable.

 

(k)          “Effectiveness Deadline” means the Initial Effectiveness Deadline and any Additional Effectiveness Deadline, as applicable.

 

(l)          “Initial Effective Date” means the date that the Initial Registration Statement has been declared effective by the SEC.

 

(m)          “Initial Effectiveness Deadline” means the date that is ninety (90) calendar days after the Closing Date or, in the event that the Initial Registration Statement is subject to a full review by the SEC, the date that is one hundred twenty (120) calendar days after the Closing Date.

 

(n)          “Initial Registrable Securities” means (i) the Conversion Shares or other Common Shares issued or issuable under the Notes and (ii) any capital stock of the Company issued or issuable, with respect to the Conversion Shares or the Notes as a result of any stock split, stock dividend, recapitalization, exchange, anti-dilution adjustment to the Notes, or similar event or otherwise, without regard to any limitations on the issuance of Common Shares under the Notes.

 

(o)          “Initial Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering the Initial Registrable Securities.

 

(p)          “Investor” means a Purchaser or any transferee or assignee thereof to whom a Purchaser assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9.

 

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(q)          “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

 

(r)          “register,” “registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415, and the declaration or ordering of effectiveness of such Registration Statement(s) by the SEC.

 

(s)          “Registrable Securities” means the Initial Registrable Securities, and the Additional Registrable Securities. Registrable Securities shall cease to be Registrable Securities upon the earlier of a sale of Registrable Securities pursuant to an effective Registration Statement or the exemption provided by Rule 144 under the 1933 Act.

 

(t)          “Registration Statement” means the Initial Registration Statement and the Additional Registration Statement, as applicable.

 

(u)          “Required Holders” means the holders of at least two-thirds of the Registrable Securities.

 

(v)          “Required Registration Amount” means 225% of the maximum number of Conversion Shares issued and issuable upon conversion of the Notes as of the Trading Day immediately preceding the applicable date of determination, without regard to any limitations on the issuance of Common Shares under the Notes. The calculation of the Required Registration Amount shall assume that the Notes are then convertible, for Common Shares at the then prevailing Conversion Price (as defined in the Notes).

 

(w)          “Rule 415” means Rule 415 promulgated under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis.

 

(x)          “SEC” means the United States Securities and Exchange Commission.

 

(y)          “Trading Day” means any day on which the Common Shares are traded on the Principal Market (as defined in the Securities Purchase Agreement), or, if the Principal Market is not the principal trading market for the Common Shares, then on the principal securities exchange or securities market on which the Common Shares are then traded; provided that “Trading Day” shall not include any day on which the Common Shares are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Shares are suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).

 

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2.          Registration.

 

(a)          Initial Mandatory Registration. The Company shall prepare and file with the SEC the Initial Registration Statement on Form S-3 covering the resale of all of the Initial Registrable Securities as soon as reasonably practicable after the Closing Date, but in no event more than thirty (30) days after the Closing Date (the “Initial Filing Deadline”), and shall cause such Initial Registration Statement to be declared effective by the SEC as soon as reasonably practicable thereafter, but in no event later than the Initial Effectiveness Deadline. In the event that Form S-3 is unavailable for such a registration, the Company shall use such other form as is available for such a registration on another appropriate form reasonably acceptable to the Required Holders, subject to the provisions of Section 2(e). The Initial Registration Statement prepared pursuant hereto shall register for resale at least the number of Common Shares equal to the Required Registration Amount determined as of the date the Initial Registration Statement is initially filed with the SEC. The Initial Registration Statement shall contain (except if otherwise directed by the Required Holders) the “Plan of Distribution” and the “Selling Shareholders” sections in substantially the forms attached hereto as Exhibit B, unless otherwise required by the SEC. The Company shall use reasonable best efforts to file with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus to be used in connection with sales pursuant to such Initial Registration Statement by 9:30 am on the Business Day following the Effective Date, but in any case no later than the deadline required by Rule 424.

 

(b)          Additional Mandatory Registrations. If during the Registration Period (as defined below) the number of Common Shares then registered in a Registration Statement is less than the Required Registration Amount or is insufficient to cover an Investor’s allocated portion of the Registrable Securities pursuant to Section 2(c) below, then the Company shall prepare, and, as soon as reasonably practicable but in no event later than the thirtieth (30th) calendar day after the day that the Company first knows, or should have known, that an Additional Registration Statement is required hereunder (the “Additional Filing Deadline”), file with the SEC an Additional Registration Statement on Form S-3 covering at least the Required Registration Amount as of the Trading Day immediately preceding the date of the filing of such amendment. In the event that Form S-3 is unavailable for such a registration, the Company shall use such other form as is available for such a registration on another appropriate form reasonably acceptable to the Required Holders, subject to the provisions of Section 2(e). Furthermore, the Company shall prepare, and, as soon as practicable but in no event later than the Additional Filing Deadline, file with the SEC an Additional Registration Statement on Form S-3 covering the resale of all Additional Registrable Securities not previously registered on a Registration Statement hereunder. Each Additional Registration Statement shall contain (except if otherwise directed by the Required Holders) the “Plan of Distribution” and the “Selling Shareholders” sections in substantially the forms attached hereto as Exhibit B section, unless otherwise required by the SEC. The Company shall cause each Additional Registration Statement declared effective by the SEC as soon as reasonably practicable, but in no event later than the Additional Effectiveness Deadline. The Company shall use reasonable best efforts to file with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus to be used in connection with sales pursuant to such Additional Registration Statement by 9:30 am on the Business Day following the Effective Date, but in any case no later than the deadline required by Rule 424.

 

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(c)          Allocation of Registrable Securities. The initial number of Registrable Securities included in any Registration Statement and any increase or decrease in the number of Registrable Securities included therein shall be allocated pro rata among the Investors based on the number of Registrable Securities held by each Investor at the time the Registration Statement covering such initial number of Registrable Securities or increase or decrease thereof is declared effective by the SEC. In the event that an Investor sells or otherwise transfers any of such Investor’s Registrable Securities, each transferee that becomes an Investor shall be allocated a pro rata portion of the then remaining number of Registrable Securities included in such Registration Statement for such transferor. Any Common Shares included in a Registration Statement and which remain allocated to any Person which ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated to the remaining Investors, pro rata based on the number of Registrable Securities then held by such Investors which are covered by such Registration Statement. The Company may not include securities other than Registrable Securities on a Registration Statement without the consent of the Required Holders.

 

(d)          Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have the right to select one legal counsel to review and oversee any registration pursuant to this Section 2 (“Legal Counsel”), which shall be Kleinberg, Kaplan, Wolff & Cohen, P.C. or such other counsel as thereafter designated by the Required Holders. The Company and Legal Counsel shall reasonably cooperate with each other in performing the Company’s obligations under this Agreement.

 

(e)          Ineligibility for Form S-3. In the event that Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form reasonably acceptable to the Required Holders and (ii) undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall use its reasonable best efforts to maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

 

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(f)          Effect of Failure to File and Obtain and Maintain Effectiveness of Registration Statement. If (i) a Registration Statement covering all of the Registrable Securities required to be covered thereby and required to be filed by the Company pursuant to this Agreement is (A) not filed with the SEC on or before the applicable Initial Filing Deadline or Additional Filing Deadline (a “Filing Failure”) or (B) not declared effective by the SEC on or before the applicable Effectiveness Deadline, (an “Effectiveness Failure”) or (ii) for five (5) consecutive calendar days after the applicable Effective Date sales of all of the Registrable Securities required to be included on such Registration Statement cannot be made (other than during an Allowable Grace Period (as defined in Section 3(q)) pursuant to such Registration Statement or otherwise (including, without limitation, because of the suspension of trading or any other limitation imposed by an Eligible Market, a failure to keep such Registration Statement effective, a failure to disclose such information as is necessary for sales to be made pursuant to such Registration Statement, a failure to register a sufficient number of Common Shares or a failure to maintain the listing or trading of the Common Shares on an Eligible Market (as defined in the Note) (a “Maintenance Failure”) then, as partial relief for the damages to any holder by reason of any such delay in or reduction of its ability to sell the underlying Common Shares (which remedy shall not be exclusive of any other remedies available at law or in equity, including, without limitation, specific performance), the Company shall pay to each holder of Registrable Securities relating to such Registration Statement: an amount in cash equal to one percent (1%) of the Purchase Price (as such term is defined in the Securities Purchase Agreement) of such Investor’s Registrable Securities required to be included in such Registration Statement, but not so included, on each of the following dates: (i) the day of a Filing Failure, (ii) the day of an Effectiveness Failure and (iii) the initial day of a Maintenance Failure; (iv) on the thirtieth day after the date of a Filing Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until such Filing Failure is cured; (v) on the thirtieth day after the date of an Effectiveness Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until such Effectiveness Failure is cured; and (vi) on the thirtieth day after the date of a Maintenance Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured. The payments to which a holder shall be entitled pursuant to this Section 2(f) are referred to herein as “Registration Delay Payments.” Registration Delay Payments shall be paid within three (3) Business Days of the earlier of (I) the dates set forth above and (II) the third Business Day after the event or failure giving rise to the Registration Delay Payments is cured. In the event the Company fails to make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear interest at the rate of three percent (3%) per month (prorated for partial months) until paid in full.

 

3.          Related Obligations.

 

At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), 2(b) or 2(e), the Company will use its reasonable best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations:

 

(a)          The Company shall prepare and file with the SEC a Registration Statement with respect to the Registrable Securities and cause such Registration Statement relating to the Registrable Securities to become effective as soon as reasonably practicable after such filing (but in no event later than the Effectiveness Deadline). The Company shall use its best efforts to keep each Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investors shall have sold all of the Registrable Securities covered by such Registration Statement (the “Registration Period”). The Company shall ensure that each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading. The Company shall submit to the SEC, within three (3) Business Days after the later of the date that (i) the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on a particular Registration Statement, as the case may be, and (ii) the approval of Legal Counsel pursuant to Section 3(c) (which approval is promptly sought), a request for acceleration of effectiveness of such Registration Statement to a time and date not later than two (2) Business Days after the submission of such request. The Company shall respond in writing to comments made by the SEC in respect of a Registration Statement as promptly as reasonably practicable after the receipt of comments by or notice from the SEC that an amendment is required in order for a Registration Statement to be declared effective.

 

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(b)          The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have incorporated such report by reference into such Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement such Registration Statement.

 

(c)          The Company shall (A) permit Legal Counsel to review and comment upon (i) a Registration Statement at least five (5) Business Days prior to its filing with the SEC and (ii) all amendments and supplements to all Registration Statements (except for Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any similar or successor reports) within a reasonable number of days prior to their filing with the SEC, and (B) not file any Registration Statement or amendment or supplement thereto in a form to which Legal Counsel reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of Legal Counsel, which consent shall not be unreasonably withheld. The Company shall furnish to Legal Counsel, without charge, (i) copies of any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (ii) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, and all exhibits and (iii) upon the effectiveness of any Registration Statement, one copy of the prospectus included in such Registration Statement and all amendments and supplements thereto. The Company shall reasonably cooperate with Legal Counsel in performing the Company’s obligations pursuant to this Section 3.

 

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(d)          The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, all exhibits and each preliminary prospectus, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor.

 

(e)          The Company shall (i) register and qualify, unless an exemption from registration and qualification applies, the resale by Investors of the Registrable Securities covered by a Registration Statement under such other securities or “blue sky” laws of all applicable jurisdictions in the United States, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify Legal Counsel and each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.

 

(f)          The Company shall notify Legal Counsel and each Investor in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and, subject to Section 3(q), promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver one (1) copies of such supplement or amendment to Legal Counsel and each Investor (or such other number of copies as Legal Counsel or such Investor may reasonably request). The Company shall also promptly notify Legal Counsel and each Investor who holds Registrable Securities being sold which has provided in writing to the Company a facsimile number or mailing address for notices in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to Legal Counsel and each Investor by facsimile no later than one trading day following the day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company’s reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. The Company shall use reasonable best efforts to file with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus to be used in connection with sales pursuant to such Registration Statement by 9:30 am on the Business Day following the Effective Date, but in any case no later than the deadline required by Rule 424.

 

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(g)          The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest practicable moment and to notify Legal Counsel and each Investor who holds Registrable Securities being sold which has provided in writing to the Company a facsimile number or mailing address for notices of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

 

(h)          If any Investor is required under applicable securities laws or otherwise to be described in the Registration Statement as an underwriter, at the reasonable request of such Investor, the Company shall furnish to such Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as an Investor may reasonably request (i) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Investors, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investors.

 

(i)          If any Investor is required under applicable securities laws or otherwise to be described in the Registration Statement as an underwriter, the Company shall make available for inspection by (i) such Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents retained by the Investors (collectively, the “Inspectors”), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this Agreement. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors’ ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.

 

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(j)          The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

 

(k)          The Company shall use its reasonable best efforts either to (i) cause all of the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or (iii) if, despite the Company’s reasonable best efforts, the Company is unsuccessful in satisfying the preceding clause (i), to secure the inclusion for quotation on, the New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market for such Registrable Securities and, without limiting the generality of the foregoing, to use its reasonable best efforts to arrange for at least two market makers to register with the Financial Industry Regulatory Authority, Inc. (“FINRA”) as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k).

 

(l)          The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investors may reasonably request and registered in such names as the Investors may request.

 

(m)          If requested by an Investor, the Company shall as soon as reasonably practicable (i) incorporate in a prospectus supplement or post-effective amendment such information as an Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement relating to the sale or distribution of Registrable Securities if reasonably requested by an Investor holding any Registrable Securities.

 

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(n)          The Company shall use its reasonable best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

 

(o)          The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

 

(p)          Within two (2) Business Days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A.

 

(q)          Notwithstanding anything to the contrary herein, at any time after the Effective Date, the Company may delay the disclosure of material, non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company and its counsel, in the best interest of the Company and, in the opinion of counsel to the Company, otherwise required (a “Grace Period”); provided, that the Company shall promptly (i) notify the Investors in writing of the existence of material, non-public information giving rise to a Grace Period (provided that in each notice the Company will not disclose the content of such material, non-public information to the Investors) and the date on which the Grace Period will begin, and (ii) notify the Investors in writing of the date on which the Grace Period ends; and, provided further, that no Grace Period shall exceed ten (10) consecutive days and during any three hundred sixty five (365) day period such Grace Periods shall not exceed an aggregate of thirty (30) days and the first day of any Grace Period must be at least five (5) Trading Days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Investors receive the notice referred to in clause (i) and shall end on and include the later of the date the Investors receive the notice referred to in clause (ii) and the date referred to in such notice. Upon expiration of the Grace Period, the Company shall again be bound by the first sentence of Section 3(f) with respect to the information giving rise thereto unless such material, non-public information is no longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended Common Shares to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale, prior to the Investor’s receipt of the notice of a Grace Period and for which the Investor has not yet settled.

 

(r)          Neither the Company nor any Subsidiary or affiliate thereof shall identify any Investor as an underwriter without its prior written consent in any public disclosure or filing with the SEC, the Principal Market (as defined in the Securities Purchase Agreement) or any Eligible Market and any Purchaser being deemed an underwriter by the SEC shall not relieve the Company of any obligations it has under this Agreement or any other Transaction Document (as defined in the Securities Purchase Agreement).

 

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4.          Obligations of the Investors.

 

(a)          At least five (5) Business Days prior to the first anticipated filing date of a Registration Statement, each Investor agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex A (the “Shareholders Questionnaire”). It shall be a condition precedent to the obligations of the Company to complete any registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such Shareholder Questionnaire, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it, and such other information, if any, as shall be reasonably required to effect and maintain the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request.

 

(b)          Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable Securities from such Registration Statement.

 

(c)          Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f) or if the Investor receives a notice from the Company that a Grace Period is in effect, such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor’s receipt of copies of the supplemented or amended prospectus as contemplated by Section 3(g) or the first sentence of 3(f) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended Common Shares to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f) and for which the Investor has not yet settled.

 

(d)          Each Investor covenants and agrees that it will comply with the prospectus delivery requirements of the 1933 Act as applicable to it or an exemption therefrom in connection with sales of Registrable Securities pursuant to the Registration Statement.

 

5.          Expenses of Registration.

 

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company. The Company shall also reimburse the Investors for the fees and disbursements of Legal Counsel in connection with registration, filing or qualification pursuant to Sections 2 and 3 of this Agreement which amount shall be limited to $20,000 for each such registration, filing or qualification.

 

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6.          Indemnification.

 

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

 

(a)          To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor, the directors, officers, partners, members, employees, agents, representatives of, and each Person, if any, who controls any Investor within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid in settlement or expenses, joint or several (collectively, “Claims”), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject to Section 6(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(d), and (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

 

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(b)          In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, its agents and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act and the directors, officers and agents of such controlling persons (each, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement. Subject to Section 6(c), such Investor will reimburse the Indemnified Party for any legal or other expenses reasonably incurred by an Indemnified Party in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

 

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(c)          Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for all such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnified party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In the case of an Indemnified Person, legal counsel referred to in the immediately preceding sentence shall be selected by the Investors holding at least a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate reasonably with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim or litigation and such settlement shall not include any admission as to fault on the part of the Indemnified Party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

 

(d)          The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when reasonably detailed and itemized bills are received or Indemnified Damages are incurred.

 

(e)          The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

 

7.          Contribution.

 

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no Person involved in the sale of Registrable Securities which Person is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in connection with such sale shall be entitled to contribution from any Person involved in such sale of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the amount of net proceeds received by such seller from the sale of such Registrable Securities pursuant to such Registration Statement.

 

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8.          Reports Under the 1934 Act.

 

With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to:

 

(a)          make and keep public information available, as those terms are understood and defined in Rule 144;

 

(b)          file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

 

(c)          furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, a copy of the most recent annual or quarterly report (if the Company files quarterly reports) of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.

 

9.          Assignment of Registration Rights.

 

The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of such Investor’s Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act or applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to assume and be bound by all of the provisions contained herein; and (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement.

 

10.         Amendment of Registration Rights.

 

Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Required Holders. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Registrable Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

 

16
 

 

11.         Miscellaneous.

 

(a)          A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from such record owner of such Registrable Securities.

 

(b)          Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

 

If to the Company:

 

Elephant Talk Communications, Corp.

19103 Centre Rose Boulevard

Lutz, FL 33558

Attention: Steve van der Velden

Telephone:    (813) 926-8920

 

With a copy (for informational purposes only) to:

 

Ellenoff Grossman & Schole LLP

150 East 42nd Street

New York, NY 10017

Attention: David Selengut, Esq.

Telephone No.:    (212) 370-1300

Facsimile No.:  (212) 370-7889

E-mail: selengut@egsllp.com

 

If to the Transfer Agent:

 

Continental Stock Transfer & Trust Company

17 Battery Place

New York, NY 10004

Attn: Monty Harry

Facsimile: (212) 616-7615

 

17
 

 

If to Legal Counsel:

 

Kleinberg, Kaplan, Wolff & Cohen, P.C.

551 Fifth Avenue

New York, New York 10176

Telephone:    (212) 986-6000

Facsimile:     (212) 986-8866

Attention:      Max Karpel, Esq.

 

If to a Purchaser, to its address and facsimile number set forth on the Schedule of Purchasers attached hereto, with copies to such Purchaser’s representatives as set forth on the Schedule of Purchasers, or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(c)          Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

 

(d)          All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

18
 

 

(e)          If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

 

(f)          This Agreement, the other Transaction Documents (as defined in the Securities Purchase Agreement) and the instruments referenced herein and therein constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the other Transaction Documents and the instruments referenced herein and therein supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

 

(g)          Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto.

 

(h)          The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

(i)          This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

 

(j)          Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(k)          All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by the Required Holders.

 

19
 

 

(l)          The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

 

(m)          This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

 

(n)          The obligations of each Investor hereunder are several and not joint with the obligations of any other Investor, and no provision of this Agreement is intended to confer any obligations on any Investor vis-à-vis any other Investor. Nothing contained herein, and no action taken by any Investor pursuant hereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated herein.

 

* * * * * *

 

[Signature Page Follows]

 

20
 

 

IN WITNESS WHEREOF, each Purchaser and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

  

  COMPANY:
   
  Elephant Talk Communications, Corp.
   
  By:  /s/ Steven van der Velden
    Name: Steven van der Velden
    Title: President and CEO

 

 
 

 

IN WITNESS WHEREOF, each Purchaser and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

  

  PURCHASERS:
     
  Hudson Bay Master Fund, Ltd.
  By: Hudson Bay Capital Management LP,
Investment Manager
     
  By: /s/Yoav Roth
  Name: Yoav Roth
  Title: Authorized Signatory
     
  Iroquois Master Fund Ltd.
     
  By: /s/ Joshua Silverman
     Name: Joshua Silverman
     Title: Authorized Signatory
     
  JGB Capital Partner,LP
     
  By: /s/ JGB Capital Partner,LP
     
  JGB Capital Offshore Ltd.
     
  By: /s/JGB Capital Offshore Ltd.
     
  JGB Partners, LP
     
  By: /s/ JGB Partners, LP

 

[Signature Page to Registration Rights Agreement]

 

 

 EX-21.1 8 v304852_ex21-1.htm EXHIBIT 21.1

 

 

1

 

 EX-23.1 9 v304852_ex23-1.htm EXHIBIT 23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

Board of Directors

 

Elephant Talk Communications Corporation.

 

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-135971) of Elephant Talk Communications Corporation of our reports dated March 30, 2012, relating to the consolidated financial statements, and the effectiveness of Elephant Talk Communications Corporation ‘s  internal controls over financial reporting , which appear in this Form 10-K . Our report on the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of Elephant Talk Communications Corporation’s internal control over financial reporting as of December 31, 2011.

 

 

 

/s/ BDO USA, LLP
 
BDO USA, LLP
 
Los Angeles, California
 
March 30, 2012

 

  

 

 EX-31.1 10 v304852_ex31-1.htm EXHIBIT 31.1

Exhibit 31.1

 

Certification Pursuant to Rule 13a-14(a)

 

I, Steven van der Velden, hereby certify that:

 

  1. I have reviewed this Annual Report on Form 10-K of Elephant Talk Communications Corp.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date:  March 30, 2012 /s/ Steven van der Velden  
  Steven van der Velden  
  President and Chief Executive Officer  

 

 

 

 EX-31.2 11 v304852_ex31-2.htm EXHIBIT 31.2

 Exhibit 31.2

 

Certification Pursuant to Rule 13a-14(a)

 

    I, Mark Nije, hereby certify that:

 

  1. I have reviewed this Annual Report on Form 10-K of Elephant Talk Communications Corp.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

  

March 30 2012 /s/ Mark Nije  
  Mark Nije, Chief Financial Officer  

 

 

 

 

 EX-32.1 12 v304852_ex32-1.htm EXHIBIT 32.1

Exhibit 32.1

 

CERTIFICATION

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(18 U.S.C. 1350)

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of (18 U.S.C. 1350), the undersigned officer of Elephant Talk Communications Corp., a Delaware corporation (the “Company”), does hereby certify, to the best of such officer’s knowledge and belief, that:

 

(1)           The Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)           The information contained in the Form 10-K fairly presents, in all materials respects, the financial condition and results of operations of the Company.

 

 

Date:  March 30, 2012  /s/ Steven van der Velden  
  Steven van der Velden, President and Chief Executive Officer  

 

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section.  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.

 

 

 

 EX-32.2 13 v304852_ex32-2.htm EXHIBIT 32.2

Exhibit 32.2

 

CERTIFICATION

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(18 U.S.C. 1350)

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), the undersigned officer of Elephant Talk CommunicationsCorp., a Delaware corporation (the “Company”), does hereby certify, to the best of such officer’s knowledge and belief, that:

 

(1)           The Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)           The information contained in the Form 10-K fairly presents, in all materials respects, the financial condition and results of operations of the Company.

 

Date: March 30, 2012 /s/ Mark Nije  
  Mark Nije, Chief Financial Officer  

 

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section.  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.

 

 

 

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MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 5.&#xA0;Financial Investment in Joint Venture</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> On December 31, 2011 the company recorded an amount of $323,708 as financial investment for acquiring one third (33.33%) ownership of a company. This financial investment is related to the purchase, from a Dutch liquidator, of various assets and liabilities from a bankrupt Dutch company together with two other parties. In order to formalize the structure, the three parties&#x2019; set-up a new company called Elephant Security I. The investment was recorded at cost and is accounted for using the equity method.</p> </div> 271915 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 19. Stockholders&#x2019; equity</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>(A) Common Stock</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company is presently authorized to issue 250,000,000 shares common stock. The Company had 110,525,229 shares of common shares issued and outstanding as of December 31, 2011, an increase of 21,864,381 shares since December 31, 2010, largely due to the shares issued in connection with the mandatory exercise of warrants (18,063,551), shares issued as consideration for management and board compensation (500,287), conversion of 12% secured convertible promissory notes (2,210,367), shares issued to employees as a result of exercised employee stock options (786,672), shares issued to consultants or other suppliers for services/goods delivered (279,718) and shares delivered to an employee who was entitled to receive salary for the period he was working for ValidSoft and before ValidSoft was acquired by Elephant Talk. The employee agreed in settling this backpay in shares.</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">The following table summarizes the shares issued for the year ended December 31, 2011:</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <table style="WIDTH: 95%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">Computation of Full Dilution - December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap"> <p style="TEXT-ALIGN: center; MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt"> <b>Number of shares</b></p> <p style="TEXT-ALIGN: center; MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt"> <b>issued</b></p> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td>&#xA0;</td> <td colspan="2">&#xA0;</td> <td>&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 82%; FONT-WEIGHT: bold">December 31, 2010 Total number of shares issued</td> <td style="WIDTH: 1%; FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-WEIGHT: bold"> &#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 15%; FONT-WEIGHT: bold"> 88,660,848</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-WEIGHT: bold"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued to consultants</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">279,718</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for management compensation</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">500,287</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for warrant exercises</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">18,063,551</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for acquisitions</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for financing</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for note conversions</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">2,210,367</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for employee stock option exercises</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">786,672</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Shares issued for settlement with employee</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">23,788</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Elimination of rounding</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">(2</td> <td style="TEXT-ALIGN: left">)</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="FONT-WEIGHT: bold">December 31, 2011 Total number of shares issued</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-WEIGHT: bold">110,525,229</td> <td style="TEXT-ALIGN: left; FONT-WEIGHT: bold">&#xA0;</td> </tr> </table> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>Reconciliation with stock transfer agent records:</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The number of 110,525,229 excludes the 245,900 unreturned and the 2,558,938 escrowed contingent shares (see below). T<font style="FONT-FAMILY: Times New Roman, Times, Serif">he shares issued and outstanding as per December 31, 2011 according to the stock transfer agent&#x2019;s records are 113,330,067, include 2,558,938 contingent shares for the ValidSoft acquisition and include 245,900 shares which were cancelled by the Company prior to 2006. However, the 245,900 shares were not returned to the stock transfer agent and never cancelled on the Company&#x2019;s records. These shares have been blocked for trading by the Stock Transfer Agent. Finally, in the above table we included the elimination of a rounding difference of two shares between the Company&#x2019;s shares issued and the stock transfer agent&#x2019;s records.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>(B) Class B Preferred Stock</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company&#x2019;s Articles of Incorporation (&#x201C;Articles&#x201D;) authorize the issuance of 50,000,000 shares of $ 0.00001 par value Class B Preferred Stock. No shares of Preferred Stock are currently issued and outstanding. Under the Company&#x2019;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.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> During 2010 or 2011 the Company did not issue any shares of Preferred Stock.</p> </div> -1587264 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <font style="color: black"><b><u>Note 24.&#xA0;&#xA0;Commitments</u></b></font><font style="font-family: Times New Roman, Times, Serif">&#xA0;</font></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> Commitments of the Company relating to co-location, network and office rents, regulatory and interconnection fees are as follows:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: #FF0066"> &#xA0;&#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <table cellpadding="0" cellspacing="0" style="width: 95%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Year</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Office</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Co-location</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Interconnect</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Service/Support</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Network</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> <td style="font-size: 10pt; font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" style="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Total</td> <td style="padding-bottom: 1pt; font-size: 10pt; font-weight: bold"> &#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 16%; font-size: 10pt; text-align: right; padding-left: 5.4pt"> 2012</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 683,643</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 513,616</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 2,332,157</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 141,525</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 392,907</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="width: 1%; font-size: 10pt">&#xA0;</td> <td style="width: 1%; font-size: 10pt; text-align: left">$</td> <td style="width: 11%; font-size: 10pt; text-align: right"> 4,063,849</td> <td style="width: 1%; font-size: 10pt; text-align: left"> &#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="font-size: 10pt; text-align: right; padding-left: 5.4pt">2013</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">440,479</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">253,751</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">1,532,507</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">199,151</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">2,425,887</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="font-size: 10pt; text-align: right; padding-left: 5.4pt">2014</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">440,479</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">253,751</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">64,572</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">197,379</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">956,181</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="font-size: 10pt; text-align: right; padding-left: 5.4pt">2015</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">241,591</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">51,612</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">182,709</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">475,912</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="font-size: 10pt; text-align: right; padding-bottom: 1pt; padding-left: 5.4pt"> 2016</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right; padding-left: 5.4pt"> 241,591</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right">12,732</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right">0</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right">116,211</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> <td style="font-size: 10pt; padding-bottom: 1pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: right"> 370,535</td> <td style="padding-bottom: 1pt; font-size: 10pt; text-align: left"> &#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="font-size: 10pt; padding-left: 5.4pt">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt; text-align: right">&#xA0;</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> <td style="font-size: 10pt">&#xA0;</td> <td style="font-size: 10pt; text-align: left">$</td> <td style="font-size: 10pt; text-align: right">8,292,364</td> <td style="font-size: 10pt; text-align: left">&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> As of December 31, 2011 the commitments of the Company relating to purchase orders are valued at cost of $372,287.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 16.&#xA0;Loan from related party</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company&#x2019;s 51% owned subsidiary ET-UTS N.V. has received $513,303 in interest bearing (8% per annum) unsecured loans from United Telecommunication Services N.V., the 49% shareholder in the subsidiary. No maturity date has been fixed.</p> </div> -8517211 106721 460000 1372719 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b><u>Note 23.&#xA0;&#xA0;Non-controlling Interest</u></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: #FF0066"> <b>&#xA0;</b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b><font style="color: black">The Company had non-controlling interests in several of its subsidiaries. The balance of the non-controlling interests as of December 31, 2011 and December 31, 2010 were as follows:</font><font style="color: #FF0066">&#xA0;</font></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b>&#xA0;</b></p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="font-weight: bold; text-align: justify"> &#xA0;</td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: justify">&#xA0;</td> <td nowrap="nowrap" style="padding-bottom: 1pt; font-weight: bold"> &#xA0;</td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="6" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> Non-controlling interest Balance at</td> <td nowrap="nowrap" style="padding-bottom: 1pt; font-weight: bold"> &#xA0;</td> </tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="font-weight: bold; text-align: justify; border-bottom: Black 1pt solid"> Subsidiary</td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; border-bottom: Black 1pt solid; text-align: center"> Non-controlling<br /> Interest %</td> <td nowrap="nowrap" style="padding-bottom: 1pt; font-weight: bold"> &#xA0;</td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> December 31, 2011</td> <td nowrap="nowrap" style="padding-bottom: 1pt; font-weight: bold"> &#xA0;</td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> &#xA0;</td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> December 31, 2010</td> <td nowrap="nowrap" style="padding-bottom: 1pt; font-weight: bold"> &#xA0;</td> </tr> <tr style="vertical-align: bottom"> <td style="font-weight: bold; text-align: justify">&#xA0;</td> <td style="font-weight: bold">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: justify"> &#xA0;</td> <td style="font-weight: bold">&#xA0;</td> <td style="font-weight: bold">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center"> &#xA0;</td> <td style="font-weight: bold">&#xA0;</td> <td style="font-weight: bold">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center"> &#xA0;</td> <td style="font-weight: bold">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 55%; text-align: justify">ETC PRS UK</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 12%; text-align: right">49</td> <td style="width: 1%; text-align: left">%</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 12%; text-align: right">9,500</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 12%; text-align: right">9,723</td> <td style="width: 1%; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: justify">ETC PRS Netherlands</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">49</td> <td style="text-align: left">%</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">126,894</td> <td style="text-align: left">&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">129,870</td> <td style="text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: justify">ET Bahrain WLL</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">1</td> <td style="text-align: left">%</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">4,382</td> <td style="text-align: left">&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">6,385</td> <td style="text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: justify; padding-bottom: 1pt">ET ME&amp;A FZ LLC</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="text-align: right">49.46</td> <td style="text-align: left; padding-bottom: 1pt">%</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 37,091</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 37,081</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: justify; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="padding-bottom: 1pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="padding-bottom: 1pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="padding-bottom: 1pt; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="padding-bottom: 2.5pt; text-indent: 20pt">Total</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> 177,867</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> 183,059</td> </tr> </table> </div> 32232981 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> <b><u>Note 26. Geographic Information</u></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;&#xA0;&#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> <b>Twelve months ended December 31, 2011</b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="font-weight: bold"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="18" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">EUROPE</font></td> <td style="font-weight: bold"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center"><font style="font-size: 6pt">Far East</font></td> <td nowrap="nowrap" style="font-weight: bold"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: right"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-bottom: 1pt"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; 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padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">Others</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">Total</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; 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padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">TOTAL</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; 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text-align: right"><font style="font-size: 6pt">7,909,544</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">712,527</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">32,094,975</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; 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text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; 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text-align: center"><font style="font-size: 6pt">Hong Kong /</font></td> <td nowrap="nowrap" style="font-weight: bold"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: center"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: center"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="text-align: center"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-bottom: 1pt"><font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; 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padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">Others</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">Total</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">China</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">Middle East</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">The Americas</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2" nowrap="nowrap" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> <font style="font-size: 6pt">TOTAL</font></td> <td nowrap="nowrap" style="font-weight: bold; padding-bottom: 1pt"> <font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td colspan="2"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 19%; text-align: left"><font style="font-size: 6pt">Revenues from unaffiliated customers:</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">27,623,380</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">1,752,470</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">6,653,139</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">461,742</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">36,490,732</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">-</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">622,813</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">54,806</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%"><font style="font-size: 6pt">&#xA0;</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">$</font></td> <td style="width: 6%; text-align: right"><font style="font-size: 6pt">37,168,351</font></td> <td style="width: 1%; text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: left"><font style="font-size: 6pt">Identifiable assets</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">6,469,979</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">1,202,064</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">11,012,075</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">18,379,628</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">37,063,745</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">223,329</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">552,100</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">1,082,758</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">$</font></td> <td style="text-align: right"><font style="font-size: 6pt">38,921,932</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: right"><font style="font-size: 6pt">&#xA0;</font></td> <td style="text-align: left"><font style="font-size: 6pt">&#xA0;</font></td> </tr> </table> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 21.&#xA0;Non-Qualified Stock and Option Compensation Plan and Long Term Incentive Plan</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>2006 Non-Qualified Stock and Option Compensation Plan</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Under this plan there are, as of December 31, 2011, 75,000 stock options outstanding. There are remaining 600,000 shares and 14,490 stock options available for grant.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Options granted generally vest over a 3 year period. 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FONT-WEIGHT: bold" colspan="2">Average<br /> Exercise<br /> Price</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Initial<br /> Black<br /> Scholes<br /> Value</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; FONT-WEIGHT: bold">Options:</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; PADDING-BOTTOM: 1pt; WIDTH: 61%"> Outstanding as of December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 10%"> 307,742</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 10%"> 2.25</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; WIDTH: 10%"> 398,608</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; WIDTH: 1%"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">Granted in 2011</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">81,422</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2.65</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">25,371</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">Exercised/Shares delivered or to be delivered</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">301,100</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2.32</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">359,390</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt"> Cancelled/Forfeited/Returned to reserve</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 13,064</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 2.25</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 11,147</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; PADDING-BOTTOM: 1pt">Outstanding as of December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 75,000</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 2.25</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 53,441</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Most options were granted with an exercise price of $2.25, the share closing price as of September 26, 2007. All options have vested already. During 2011, with approval of the board/compensation committee, we granted 81,422 options to some of our employees offering them to make use of a special tax friendly saving scheme. These options were issued with an exercise price of $2.65.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The remaining options will expire in 2013 with various expiration dates.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The &#x2018;cancelled/forfeited/returned to reserve&#x2019; options during 2011 of 13,064 were all granted in 2008 and were returned in connection with the cashless exercise of 18,000 initial options which resulted in the delivery of 4,936 shares.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Following is a summary of the status of options outstanding at December 31, 2011:</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td nowrap="nowrap">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="10" nowrap="nowrap">Options&#xA0;outstanding</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="6" nowrap="nowrap">Options&#xA0;exercisable</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">Range&#xA0;of&#xA0;Exercise&#xA0;Prices</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Total<br /> Options<br /> Outstanding</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Weighted<br /> Average<br /> Remaining<br /> Contractual&#xA0;<br /> Life&#xA0;<br /> (Years)</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Weighted<br /> Average<br /> Exercise<br /> Price</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Options<br /> Exercisable</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Weighted<br /> Average<br /> Exercise<br /> Price</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: #ccffcc; VERTICAL-ALIGN: bottom"> <td style="WIDTH: 30%">$&#xA0; 2.25&#xA0; -&#xA0; $&#xA0; 2.65</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">75,000</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 12%">1.73 years</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2.25</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 11%">75,000</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2.25</td> <td style="WIDTH: 1%">&#xA0;</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> At December 31, 2011, the total compensation cost related to unvested stock-based awards granted to employees under the provisions of ASC 718 and the Company&#x2019;s 2006 stock award plan, but not yet recognized was $0.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>2008 Long-Term Incentive Plan</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The 2008 plan was adopted on January 15, 2008, and approved by our shareholders on the same date as our annual meeting. This incentive plan authorizes awards of up to 5,000,000 shares of common stock, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of common stock underlying the awards to be granted remained the same after the 25 to one reverse stock-split that was effectuated on June 11, 2008.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> On October 6, 2011 the company filed, after approval of the shareholders, an &#x201C;<font style="BACKGROUND-COLOR: white; COLOR: black">Amended and Restated 2008 Long-Term Incentive Compensation Plan&#x201D; which basically provided in the increase of the existing 5,000,000 shares of common stock into 23,000,000 shares of common stock in order to cover future grants under this Plan.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <font style="BACKGROUND-COLOR: white">&#xA0;</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> As of December 31, 2011, a total of 7,793,989 stock options are outstanding under the Plan and 325,000 shares of restricted common stock together with 507,300 shares of common stock had been granted under this plan. Options granted generally begin vesting over a three-year period after grant date although options have been granted with a shorter period than three years. Options granted in the beginning expire two years from the date of vesting but the latest in 2010&#xA0;issued options remain exercisable for nine years from the date of vesting. It is expected that future options will be awarded with the nine-year exercise period after first&#xA0;vesting.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>Common stock purchase options and warrants consisted of the following as of December 31, 2011:</b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Number<br /> of<br /> shares</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Average<br /> Exercise<br /> Price</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">Initial&#xA0;Fair&#xA0;<br /> Market&#xA0;<br /> Value</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="FONT-WEIGHT: bold">Options:</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 61%">Outstanding as of December 31, 2010</td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> &#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 10%"> 4,083,100</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> &#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 10%"> 1.35</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> &#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt; WIDTH: 1%">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; WIDTH: 1%"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; WIDTH: 10%"> 5,002,238</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; WIDTH: 1%"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Granted in 2011</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">4,644,883</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">2.52</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">6,312,781</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Exercised/Shares delivered or to be delivered</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">510,095</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">1.14</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">626,179</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt"> Cancelled/Forfeited/Returned to reserve</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 423,899</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 1.62</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 493,361</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Outstanding as of December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 7,793,989</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 1.78</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 10,195,479</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> </table> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The options granted in 2011 were granted with an average exercise price of $2.52. The initial fair market value of the options granted using the Black-Sholes options model for these options has been valued at $6,312,781 at their initial grant-date.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Following is a summary of the status of options outstanding at December 31, 2011:</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold"> 2008&#xA0;Plan</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="14">Options&#xA0;outstanding</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="6">Options&#xA0;exercisable</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td style="FONT-WEIGHT: bold">Range&#xA0;of<br /> Exercise<br /> Prices</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Total<br /> Options<br /> Outstanding</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Weighted<br /> Average<br /> Remaining<br /> Contractual<br /> Life&#xA0;(Years)</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Weighted<br /> Average<br /> Remaining<br /> Expected<br /> Life&#xA0;<br /> (Years)</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Weighted<br /> Average<br /> Exercise<br /> Price</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Options<br /> Exercisable</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> Weighted<br /> Average<br /> Exercise<br /> Price</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 22%">$0.60 <font style="FONT-FAMILY: Times New Roman, Times, Serif">-</font> $3.39</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">7,793,989</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">8.06</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">6.93</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">1.777</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">1,284,547</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">1.12</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The weighted average assumptions used for the options granted in 2011 using the Black-Scholes options model are: cumulative volatility of 152%, expected option life 5.60 years (using the simplified method) and a Risk Free Interest Rate of 1.899%. The expected dividend yield is zero.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> At December 31, 2011 the not yet recognized expense portion of stock-based awards granted to employees under the&#xA0;provisions of ASC 718 and the Company&#x2019;s 2008 stock award plan, was approximately $3,109,478. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate has been adjusted from 4.21% to 6.50% and the corresponding profit and loss effect has been accounted for in 2011.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Stock-Based Compensation Expense</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Under the provisions of ASC 718, the Company recorded for the year ended December 31, 2011, $6,818,905 in stock-based compensation expense for management shares, Non-Qualified Stock and Option Compensation Plan and shares issued for consultancy and employee compensation. For the comparable period in 2010 the expensing was $5,588,392. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123(R).</p> </div> 57909253 -14570936 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 20. Basic and diluted net loss per share</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Net loss per share is calculated in accordance with ASC 260, Earnings per Share, (formerly SFAS No.128). 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.</p> </div> 522726 -25310735 6319314 -624275 1052897 201184 -49 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 29. Subsequent Events</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff0066"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company&#x2019;s management evaluated subsequent events through March 30, 2011, the date the financial statements were issued and filed with the Securities and Exchange Commission.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> On January 1st, 2012 the subsidiaries ET Caribbean BV, Moba Consulting Partners BV and Elephant Talk Global Holding BV were merged into the surviving entity Elephant Talk Europe Holding BV.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"><i>Loan agreements</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <font style="COLOR: black">On March 29<sup>th</sup> 2012, a number of investors (&#x201C;Holders&#x201D;) entered into a senior secured convertible loan agreement (&#x201C;Note&#x201D;) in the principal amount of $8,800,000 with the Company whereby the Holders will provide the company with gross proceeds of $8,000,000, after the $800,000 Original Issue Discount. According to the terms, the Note will bear an interest rate of 8% of the principal amount and mature May 1<sup>st</sup> 2014. The monthly installment payments (constituting interest and amortization) total $ 2,273,718 for the first year and $ 7,180,000 for the second year. Of the $ 8,000,000, the amount equal to the first year installments, being $ 2,273,718, will be placed in escrow and will be applied on a monthly basis for the payment of the monthly installments. At the election of the Company the Company can decide on a monthly basis to pay the full installment amount or parts thereof in common stock of the Company at an amount equal to 90% of the average of the five lowest volume weighted average (&#x201C;VWAP|&#x201D;)</font> <font style="COLOR: black">of the common stock</font> during the twenty (20) Trading Days immediately prior to such installment <font style="COLOR: black">on the trading day payment date. The remaining amount of $ 5,726,282 has been made available to the Company immediately at closing of the transaction. In the first year, when the company elects to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow and becomes available to the Company. The Notes are convertible at the option of the Holder into our common stock at a fixed conversion price conversion price equal to 115% of the trailing 30 day closing price prior to closing of the transaction. After a period of 12 months the Note automatically converts at the Fixed Conversion Price, if the shares of the Company, for any consecutive 30 days, close at or above 150% of the Fixed Conversion Price. The Notes are secured by a first priority security interest in all of the assets of the Company. In the event the company (in partnership with Adeptra) fails to announce that it has entered into and operationalized a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the company receives certain amount of net compensation, the Holders may declare all of the then outstanding principal amount of the Note to be due and payable immediately. In addition in such event, the Holders may convert the Notes into our common stock at the lowest of (a) the fixed conversion price in effect prior to such failure, (b) 90% of the average of the 5 lowest VWAPs for the 20 days prior to that day (c) 90% of the lowest reported trade price for the common stock as reported by Bloomberg on such date. Upon occurrence thereof the Company has the option to redeem a portion or the entire outstanding amount of this Note at a redemption price of 100% thereof.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company is obligated to register the shares of Common Stock underlying the Notes pursuant to certain mandatory registration rights granted to the Holders.</p> </div> 1255237 -25310735 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 6.&#xA0;Note receivable</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> As of December 31, 2011 the company recorded $417,199 of notes receivable, compared to $0 as of December 31, 2010. Notes receivable as of December 31, 2011 represent a loan of&#xA0;$378,354 to Morodo Ltd, from the U.K and $38,845 to Elephant Security I from the Netherlands. The loans to both companies are interim loans prior to the intended acquisition.</p> </div> 365537 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b><u>Note 25.&#xA0;&#xA0;Litigation</u></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> <b>(a) Manu Ohri Litigation</b></p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> In March 2009, Manu Ohri (Ohri), the Company&#x2019;s former Chief Financial Officer from 2002 to 2006, commenced a lawsuit against the Company in the California Orange County Superior Court entitled <i>Manu Ohri v. Elephant Talk Communications, Inc</i>., Case No. 30-20009-00120609. Ohri alleged that the Company breached a 2006 written employment contract, a 2007 oral consulting contract, and otherwise owed him the reasonable value of consulting services rendered. The Company denied Ohri's allegations and commenced a cross-complaint against Ohri to, among other things, invalidate his alleged 2006 employment contract and stock bonus, and to recover the stock bonus or its fair market value.</p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> The Company and Ohri, without any admissions of fault or liability, agreed in December 2011 to compromise, resolve and extinguish all of their respective claims in consideration for mutual general releases and Ohri's conveyance of 300,000 shares of common stock to the Company. The lawsuit was dismissed in its entirety with prejudice without any final determination by the court on the merits of the parties&#x2019; respective claims.</p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b>&#xA0;</b></p> <p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b>(b) Chong Hing Bank Litigation</b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <br /> In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called <i>Chong Hing Bank Limited v. Elephant Talk Communications, Inc</i>., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank&#x2019;s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that</p> <p style="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.25in"> &#xA0;</p> <table cellpadding="0" cellspacing="0" width="100%" style="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"> <tr style="vertical-align: top"> <td style="width: 0.75in"></td> <td style="width: 0.25in"><font style="font-family: Symbol">&#xB7;</font></td> <td>The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;</td> </tr> </table> <p style="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.25in"> &#xA0;</p> <table cellpadding="0" cellspacing="0" width="100%" style="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"> <tr style="vertical-align: top"> <td style="width: 0.75in"></td> <td style="width: 0.25in"><font style="font-family: Symbol">&#xB7;</font></td> <td>The Company was not liable on the Bank&#x2019;s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and</td> </tr> </table> <p style="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.25in"> &#xA0;</p> <table cellpadding="0" cellspacing="0" width="100%" style="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"> <tr style="vertical-align: top"> <td style="width: 0.75in"></td> <td style="width: 0.25in"><font style="font-family: Symbol">&#xB7;</font></td> <td>The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b>(c) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.</b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> As previously described in our 2004 Annual Report we and New Times Navigation Limited mutually agreed to terminate this purchase agreement. We returned the received shares of New Times Navigation Limited to the concerned shareholders and received back 90,100 of our common stock out of the 204,000 issued by us for the purchase. In addition we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> We are 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 113,900 common shares (valued at $381,565) and also to have them return the remaining 18 unsecured convertible promissory notes representing a total amount of $1,740,000 and rescind the purchase agreement. The case is currently pending.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 3. Significant Accounting Policies</u></b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Principles of Consolidation</u></b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The accompanying consolidated financial statements for December 31, 2011 and December 31, 2010 include the accounts of Elephant Talk Communications Corp., including:</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">its wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Communication Austria GmbH, Elephant Talk Telekom GmbH (formerly Vocalis Austria GmbH), Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication (Europe) GmbH, Elephant Talk Communication Schweiz GmbH, Moba Consulting Partners B.V., Elephant Talk Communications France S.A.S.,its majority owned (51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V., its majority owned (51%) subsidiary Elephant Talk Communications PRS U.K. Limited, its wholly-owned subsidiary Elephant Talk Communications Luxembourg SA;</td> </tr> </table> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">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 Guangzhou Elephant Talk Information Technology Limited., its wholly-owned Elephant Talk Caribbean B.V., its majority owned (51%) subsidiary ET-UTS N.V.;</td> </tr> </table> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">its wholly-owned subsidiary Elephant Talk Limited, its majority owned (60%) subsidiary Elephant Talk Middle East &amp; Africa (Holding) W.L.L., its majority owned (51%) subsidiary Elephant Talk Middle East &amp; Africa (Holding) Jordan L.L.C., its majority owned (99%) subsidiary Elephant Talk Middle East &amp; Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk Middle East &amp; Africa FZ-LLC; and</td> </tr> </table> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">its wholly-owned subsidiary ValidSoft Ltd and its wholly-owned subsidiaries ValidSoft (UK) Ltd &amp; ValidSoft (Australia) Pty Ltd.</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> All intercompany balances are eliminated in consolidation.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Foreign Currency Translation</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The functional currency is Euros for the Company&#x2019;s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries, and Euros for its wholly-owned subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned subsidiary Elephant Talk Limited and the British Pound Sterling for its wholly-owned subsidiary ValidSoft (UK) Ltd. The financial statements of the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with Accounting Standard Codification (&#x201C;ASC&#x201D;) 830, Foreign Currency Matters, net gains and losses resulting from translation of foreign currency financial statements are included in the statements of shareholder&#x2019;s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss). <font style="COLOR: black">The accumulated other comprehensive income (loss) as of December 31, 2011 and December 31, 2010 was ($1,143,295) and ($519,020), respectively. The foreign currency translation gain/(loss) for the years ended December 31, 2011 and 2010 was ($624,275) and ($1,655,917), respectively.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Use of Estimates</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> 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.&#xA0;Actual results could differ materially from those estimates and assumptions.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Cash and Cash Equivalents</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> For purposes of the cash flow statements, the Company would normally consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The company has full access to the whole balance of cash and cash equivalents on a daily basis without any delay.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;&#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Restricted Cash</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Restricted cash represents cash deposited as bank guarantee for national interconnection agreements with telecom operators.</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Accounts Receivables, net</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company&#x2019;s customer base consists of a geographically dispersed customer base. The Company maintains an allowance 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 allowances. Allowances are recorded primarily on a specific identification basis. <font style="COLOR: black">As of December 31, 2011 and 2010, the allowance for doubtful accounts was $436,546 and $119,044, respectively.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Revenue Recognition and Deferred Revenue</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company&#x2019;s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (&#x201C;ASC 605&#x201D;), (formerly, Staff Accounting Bulletin (&#x201C;SAB104&#x201D;). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a landline and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). For its security solutions under the ValidSoft brand name and technologies revenue represents amounts earned for consultancy services, outsourcing, maintenance and licenses (net of value added tax and inter-company revenue).</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company recognizes revenue from prepaid calling cards as the services are provided.&#xA0;&#xA0;Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services. Deferred revenue was $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Cost of Service</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility costs of hosting network and equipment, and costs of providing resale arrangements with long distance service providers, costs of leasing transmission facilities and international gateway switches for voice and data transmission services.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Reporting Segments</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> ASC 280, Segment Reporting, 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. Based on these criteria the Company has determined that they operate in one reporting segment. The Company allocates its resources and assesses the performance of its sales activities based upon geographic locations of its subsidiaries.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Stock-based Compensation</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Effective January 1, 2006, we adopted the provisions of ASC 718 &#x201C;Compensation-Stock Compensation&#x201D;, (&#x201C;ASC 718&#x201D;) (formerly SFAS No. 123(R)), using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules&#xA0;of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee&#x2019;s requisite service period (the vesting period, generally up to three years), which we have elected to amortize on a straight-line basis.</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><i>&#xA0;</i></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> To determine the value of our stock options at grant date under our employee stock option plan, we currently use the Black-Scholes option-pricing model. The use of this model requires us to make a number of subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each assumption:</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Expected Life</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The expected life represents the period that the stock option awards are expected to be outstanding. We use the simplified method for estimating the expected life of the option, by taking the average between time to vesting and the contract life of the award. Therefore, the expected term assumption was estimated for each individual grant using the simplified method as an average between time to vesting and the contractual term of the award.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Cumulative Volatility</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> We estimate expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using the continuously compounded return calculated by using the last 252 closing prices of the share price (= one year trading). The annual volatility is used to determine the generalized (cumulative) volatility of our common stock preceding the grant. (= annual volatility x SQRT(expected life)).</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Risk-Free Interest Rate</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> We estimate the risk-free interest rate using the &#x201C;Daily Treasury Yield Curve Rates&#x201D; from the U.S. Treasury Department, or the nearest available rate, with a remaining term equal or near to the expected life of the award.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Expected Dividend Yield</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections. We do not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Income Taxes</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>&#xA0;</b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company accounts for income taxes under ASC 740, &#x201C;Accounting for Income Taxes&#x201D; (&#x201C;ASC 740&#x201D;). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company&#x2019;s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company&#x2019;s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of&#xA0;revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. We also assess temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting differences. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome and in assessing the need for the valuation allowance, there is no assurance that the final tax outcome and the valuation allowance will not be different than those that are reflected in our historical income tax provisions and accruals.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> ASC 740 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would &#x201C;more likely than not&#x201D; be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company has filed or is in the process of filing tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome is unknown, we believe that any adjustments that may result from tax return audits are not likely to have a material, adverse effect on our consolidated results of operations, financial condition or cash flows.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Comprehensive Income/(Loss)</u></b></p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Comprehensive income/(loss) includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders&#x2019; equity but are excluded from net income. For the years ended December 31, 2011 and 2010, the Company&#x2019;s comprehensive income/(loss) consisted of its net loss and foreign currency translation adjustments.</p> <p style="TEXT-ALIGN: justify; TEXT-INDENT: 0.5in; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;&#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Intangible Assets</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, Property and Equipment, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; TEXT-INDENT: 0.5in; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Property and Equipment, Internally Developed and Third Party Software</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company&#x2019;s internally developed software technology platform. The Company has adopted the provisions of ASC 985, Software.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Depreciation applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Once a new functionality or improvement is released for operational use, the asset is moved from the property and equipment category &#x201C;projects under construction&#x201D; to a property and equipment asset subject to depreciation in accordance with the principle <font style="COLOR: black">described in the previous sentence.</font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Recently Issued Accounting Pronouncements</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;&#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance on disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company does not expect this to have a material impact on its financial statements.</p> </div> 6818905 7721307 <div> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 1. Organization</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Elephant Talk Communications Corp. also referred to as &#x201C;we&#x201D;, &#x201C;us&#x201D;, &#x201C;Elephant Talk&#x201D; and &#x201C;the Company&#x201D; is an international provider of business software and services to the telecommunications and financial services industry. The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Converged telecommunication services &#x2013; full MVNE solutions.</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company is a niche player in the converged telecommunications market, providing traffic and network services as a licensed operator, and specializing in carrier grade mobile enabling platforms to provide outsourced solutions to the various players in the telecommunications&#x2019; value chain, including MNOs, MVNOs and non-operator companies in need of both mobile as well as specialized land-line telecommunication services. In this chain we position ourselves as a Full Mobile Virtual Network Enabler, including also customized mobile services such as our network integrated ValidSoft security and fraud prevention solutions.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>ValidSoft &#x2013; Fraud Prevention and Security Software Solutions</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>&#xA0;</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world&#x2019;s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques.</p> </div> -624275 5254708 499591 -25676272 -25935010 1185741 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 8.&#xA0;Property &amp; Equipment</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT: 10pt Symbol">&#xB7;</font></td> <td><font style="FONT-SIZE: 10pt">Intelligent Network (IN) platform</font></td> </tr> </table> <p style="TEXT-INDENT: -0.25in; MARGIN: 0pt 0px 0pt 0.5in; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT: 10pt Symbol">&#xB7;</font></td> <td><font style="FONT-SIZE: 10pt">CRM software</font></td> </tr> </table> <p style="TEXT-INDENT: -0.25in; MARGIN: 0pt 0px 0pt 0.5in; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT: 10pt Symbol">&#xB7;</font></td> <td><font style="FONT-SIZE: 10pt">Mediation, Rating &amp; Pricing engine</font></td> </tr> </table> <p style="TEXT-INDENT: -0.25in; MARGIN: 0pt 0px 0pt 0.5in; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT: 10pt Symbol">&#xB7;</font></td> <td><font style="FONT-SIZE: 10pt">Operations and Business Support software</font></td> </tr> </table> <p style="TEXT-INDENT: -0.25in; MARGIN: 0pt 0px 0pt 0.5in; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT: 10pt Symbol">&#xB7;</font></td> <td><font style="FONT-SIZE: 10pt">Network management tools</font></td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Property and equipment at December 31, 2011 and December 31, 2010 consist of:</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: justify; FONT-WEIGHT: bold" colspan="2"> Average<br /> Estimated<br /> Useful</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> December&#xA0;31,</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> <td style="TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2"> December&#xA0;31,</td> <td style="FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: justify; FONT-WEIGHT: bold" colspan="2">Lifetime</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">2011</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">2010</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; WIDTH: 61%">Furniture and fixtures</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: center; WIDTH: 10%">5</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">290,058</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">215,905</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">Computer, communication and network equipment</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: center">3 - 10</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">15,247,060</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">9,724,189</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">Software</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: center">5</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">4,752,070</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">4,187,523</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">Automobiles</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: center">5</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">98,416</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">125,241</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; PADDING-BOTTOM: 1pt">Construction in progress</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 2,516,476</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 1,984,674</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; PADDING-LEFT: 9pt">Total property and equipment</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">22,904,080</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">16,237,531</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: justify; PADDING-BOTTOM: 1pt">Less: accumulated depreciation</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> (9,588,393</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">)</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> (7,784,943</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">)</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; PADDING-LEFT: 0.25in"> Total property and equipment, Net</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 13,315,687</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 8,452,588</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff33cc"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Construction in progress consists of software projects in development that have not yet been completed. Total depreciation expense for the year ended December 31, 2011 totaled $2,231,799 compared to $2,260,489 and 2,246,669 for the same period 2010 and 2009, respectively.</p> </div> 16589649 3763879 -782920 957785 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b><u>Note 22.&#xA0;&#xA0;Income taxes</u></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> Income tax expense (benefit) for the year ended December 31, 2011 and 2010 is summarized as follows:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td>&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="border-bottom: Black 1pt solid; text-align: center"> December&#xA0;31,<br /> 2011</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="border-bottom: Black 1pt solid; text-align: center"> December&#xA0;31,<br /> 2010</td> <td style="padding-bottom: 1pt">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td>Current:</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="width: 74%; padding-left: 9pt">Federal</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 10%; text-align: right">(8,605,649</td> <td style="width: 1%; text-align: left">)</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 10%; text-align: right">(7,894,958</td> <td style="width: 1%; text-align: left">)</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="padding-left: 9pt">State</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">(1,518,644</td> <td style="text-align: left">)</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">(1,393,228</td> <td style="text-align: left">)</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Deferred Taxes</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> 10,124,293</td> <td style="padding-bottom: 1pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> 9,288,986</td> <td style="padding-bottom: 1pt; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td>&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-bottom: 2.5pt">Income tax expense</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> &#x2014;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> 800</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> 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, 2011:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td>&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2011</td> <td style="padding-bottom: 1pt; font-weight: bold">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2010</td> <td style="padding-bottom: 1pt; font-weight: bold">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 74%; text-align: left">Tax expense (credit) at statutory rate-federal</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 10%; text-align: right">(34</td> <td style="width: 1%; text-align: left">)%</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 10%; text-align: right">(34</td> <td style="width: 1%; text-align: left">)%</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left">State tax expense net of federal tax</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">(6</td> <td style="text-align: left">)%</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">(6</td> <td style="text-align: left">)%</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: left">Foreign income tax rate difference</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">10.2</td> <td style="text-align: left">%</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">12.8</td> <td style="text-align: left">%</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-bottom: 1pt">Change in valuation allowance</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> 29.8</td> <td style="padding-bottom: 1pt; text-align: left">%</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> 27.2</td> <td style="padding-bottom: 1pt; text-align: left">%</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: left; padding-bottom: 2.5pt">Tax expense at actual rate</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> &#x2014;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> &#x2014;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2011 are as follows:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td>Deferred tax assets:</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2011</td> <td style="padding-bottom: 1pt; font-weight: bold">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2010</td> <td style="padding-bottom: 1pt; font-weight: bold">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 74%; text-align: left; padding-left: 9pt"> Deferred Tax Asset</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 10%; text-align: right">44,347,310</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 10%; text-align: right">34,223,016</td> <td style="width: 1%; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-left: 9pt">Total gross deferred tax assets</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">44,347,310</td> <td style="text-align: left">&#xA0;</td> <td>&#xA0;</td> <td style="text-align: left">&#xA0;</td> <td style="text-align: right">34,223,016</td> <td style="text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="text-align: left; padding-bottom: 1pt; padding-left: 9pt"> Less:&#xA0;&#xA0;Valuation allowance</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> (44,347,310</td> <td style="padding-bottom: 1pt; text-align: left">)</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: left"> &#xA0;</td> <td style="border-bottom: Black 1pt solid; text-align: right"> (34,223,016</td> <td style="padding-bottom: 1pt; text-align: left">)</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-bottom: 2.5pt">Net deferred tax assets</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> &#x2014;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="border-bottom: Black 2.5pt double; text-align: left"> $</td> <td style="border-bottom: Black 2.5pt double; text-align: right"> &#x2014;</td> <td style="padding-bottom: 2.5pt; text-align: left">&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> At December 31, 2011, the Company had accumulated deficit carry forwards of approximately $110,866,274. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $10,124,293.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> At December 31, 2010, the Company had accumulated deficit carry forwards of approximately $85,555,541. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $9,288,986.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> A valuation allowance of approximately $44.3 million and $34.2 million at December 31, 2011 and 2010, respectively, has been recorded against deferred tax assets as the Company was unable to conclude that it is more likely than not that such deferred tax assets will be realized.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> As of December 31, 2011, we had net federal operating loss carry forwards and state operating loss carry forwards of approximately $44.3 million. The net federal operating loss carry forwards begin to expire in 2018 and the net state operating loss carry forwards begin to expire in 2012. The net operating loss carry forwards for foreign countries amounts to approximately $69.0 million. In all foreign countries various periods of expiration dates are applicable.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> Section 382 of the Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur in the stock ownership of a company.&#xA0; In the event we have a change in ownership, utilization of the carry forward could be restricted.&#x201D;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> In June&#xA0;2006, the FASB issued ASC Topic 740-10 &#x201C;Uncertain Tax Positions&#x201D; (ASC 740-10) which clarifies the accounting for uncertainty in income taxes. ASC 740-10 requires that companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for years beginning after December 15, 2006. We adopted ASC 740-10 on January 1, 2007 with no impact to our consolidated financial statements. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open for tax examination.</p> </div> 39560 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff33cc"> <font style="COLOR: black"><b><u>Note 10.&#xA0;Acquisition of ValidSoft Ltd</u></b></font></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> On March 17, 2010 we issued 10,235,739 shares and 3,829,487 warrants as purchase price consideration following the completion of the acquisition of ValidSoft of which 2,558,937 shares and 957,373 warrants are contingent upon meeting specific targets following a stepped earn-out agreement. &#xA0;Based upon a number material&#xA0;contracts not having been&#xA0;concluded yet as of the date of this report, the Company does not expect that the targets set forth in the earn-out agreement, will be met at this point in time. Consequently, the total value for the consideration is $16,033,688 comprising the fair market value for the non-contingent shares of $12,129,352 and non-contingent warrants of $3,904,336. The contingent consideration is held in escrow. The Company will continue to monitor the progress made and determine quarterly to what extent&#xA0;the stepped targets are likely to be met.&#xA0;</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="BORDER-BOTTOM: black 1pt solid; FONT-WEIGHT: bold" nowrap="nowrap">Consideration&#xA0;paid</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Total&#xA0;<br /> Consideration</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Non-<br /> Contingent<br /> Consideration</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2" nowrap="nowrap">Contingent<br /> Consideration</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold" nowrap="nowrap"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="WIDTH: 61%">Number of shares</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">10,235,739</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">7,676,805</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">2,558,934</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Fair value (share price at 17 March 2010)</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">1.58</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">$</td> <td style="TEXT-ALIGN: right">12,129,352</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">-</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>Numer of warrants</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">3,829,487</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">2,872,114</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">957,373</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Fair Value (black-scholes)</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left">$</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 3,904,336</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">Total Consideration Paid</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 16,033,688</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> </tr> </table> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Following the valuation of ValidSoft, we allocated the above purchase price to the identifiable assets and liabilities of ValidSoft.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> A summary of the assets acquired and liabilities assumed for ValidSoft are:</p> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Estimated fair values:</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; WIDTH: 87%">Assets acquired</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">16,677,323</td> <td style="TEXT-ALIGN: left; WIDTH: 1%">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Liabilities assumed</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 4,077,467</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left">Net assets acquired</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">12,599,856</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">Consideration paid inclusive of contingent consideration valued at zero</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 16,033,688</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> <td style="TEXT-ALIGN: right">&#xA0;</td> <td style="TEXT-ALIGN: left">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt">Goodwill</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right"> 3,433,832</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt">&#xA0;</td> </tr> </table> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The operating results of ValidSoft have been consolidated with those of the Company starting April 1, 2010.</p> </div> <div> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 27. Concentrations</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> For the year ended December 31, 2011, the Company had a customer in the Netherlands, which accounted for revenue of $18,670,810. For the same periods in 2010, this same customer accounted for $22,439,478.</p> </div> 142309 <div> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> <b><u>Note 9.&#xA0;Intangible Assets - Customer Contracts, Licenses and Interconnects</u></b></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as ValidSoft Intellectual Property, including but not limited to software source codes, applications, customer list &amp; pipeline, registration &amp; licenses, patents and trademark/brands.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: #FF33CC"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> Intangible assets as of December 31, 2011 and 2010 consisted of the following:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"> <tr style="vertical-align: bottom"> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap">&#xA0;</td> <td style="font-weight: bold; text-align: justify">Estimated</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="font-weight: bold; text-align: center">December&#xA0;31,</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="font-weight: bold; text-align: center">December&#xA0;31,</td> <td>&#xA0;</td> </tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap">&#xA0;</td> <td style="border-bottom: windowtext 1pt solid; font-weight: bold; text-align: justify"> Useful&#xA0;Lives</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="border-bottom: windowtext 1pt solid; font-weight: bold; text-align: center"> 2011</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="border-bottom: windowtext 1pt solid; font-weight: bold; text-align: center"> 2010</td> <td>&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="width: 62%; text-align: left">Customer Contracts, Licenses , Interconnect &amp; Technology</td> <td style="width: 1%; text-align: justify">&#xA0;</td> <td style="width: 10%; text-align: center">5-10</td> <td style="width: 1%; text-align: justify">&#xA0;</td> <td style="width: 1%; text-align: justify">$</td> <td style="width: 11%; text-align: right">11,480,653</td> <td style="width: 1%; text-align: justify">&#xA0;</td> <td style="width: 1%; text-align: justify">$</td> <td style="width: 11%; text-align: right">11,615,700</td> <td style="width: 1%">&#xA0;</td> </tr> <tr style="background-color: White"> <td style="text-align: left">ValidSoft IP &amp; Technology</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: center">1-10</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">15,428,182</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">15,639,154</td> <td>&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="padding-left: 9pt; text-align: left">Total intangible assets</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; text-align: justify"> &#xA0;</td> <td style="border-top: windowtext 1pt solid; text-align: right"> 26,908,835</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; text-align: justify"> &#xA0;</td> <td style="border-top: windowtext 1pt solid; text-align: right"> 27,254,854</td> <td>&#xA0;</td> </tr> <tr style="background-color: White"> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">&#xA0;</td> <td>&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="text-align: left">Less: Accumulated Amortization and impairment charges</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(9,735,102</td> <td style="text-align: justify">)&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(8,684,964</td> <td>)&#xA0;</td> </tr> <tr style="background-color: White"> <td style="text-align: left">Less: Accumulated Amortization ValidSoft IP &amp; Technology</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(4,389,533</td> <td style="text-align: justify">)&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(2,316,303</td> <td>)&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="padding-left: 9pt; text-align: left">Total intangible assets, Net</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: justify"> $</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: right"> 12,784,199</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: justify"> $</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: right"> 16,253,587</td> <td>&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> Total amortization expense for the year ended December 31, 2011 totaled $3,022,909 compared to $3,051,980 and $804,792 for the same period 2010 and 2009, respectively. In 2011 an impairment charge was recorded for ($522,726) in the Profit &amp; Loss and ($486,575) in the balance sheet. The assets impaired pertained primarily to the acquired two-stage dialing business, which is part of the landline business. In 2010 and 2009 the company did not record any impairment.</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 80%; border-collapse: collapse"> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="font-weight: bold">&#xA0;</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="font-weight: bold; text-align: center">December&#xA0;31,</td> <td nowrap="nowrap">&#xA0;</td> <td nowrap="nowrap" colspan="2" style="font-weight: bold; text-align: center">December&#xA0;31,</td> <td nowrap="nowrap">&#xA0;</td> </tr> <tr style="vertical-align: bottom"> <td style="font-weight: bold">Goodwill</td> <td>&#xA0;</td> <td nowrap="nowrap" colspan="2" style="border-bottom: windowtext 1pt solid; font-weight: bold; text-align: center"> 2011</td> <td>&#xA0;</td> <td nowrap="nowrap" colspan="2" style="border-bottom: windowtext 1pt solid; font-weight: bold; text-align: center"> 2010</td> <td>&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="width: 71%; text-align: justify">Goodwill at acquisition of ValidSoft Ltd</td> <td style="width: 1%; text-align: justify">&#xA0;</td> <td style="width: 1%; text-align: justify">$</td> <td style="width: 12%; text-align: right">3,433,833</td> <td style="width: 1%; text-align: justify">&#xA0;</td> <td style="width: 1%; text-align: justify">$</td> <td style="width: 12%; text-align: right">3,433,833</td> <td style="width: 1%">&#xA0;</td> </tr> <tr style="background-color: White"> <td style="text-align: justify">End of period exchange rate translation</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(278,862</td> <td style="text-align: justify">)&#xA0;</td> <td style="text-align: justify">&#xA0;</td> <td style="text-align: right">(203,047</td> <td>)&#xA0;</td> </tr> <tr style="background-color: rgb(204,255,204)"> <td style="padding-left: 9pt; text-align: justify">Total</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: justify"> $</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: right"> 3,154,971</td> <td style="text-align: justify">&#xA0;</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: justify"> $</td> <td style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; text-align: right"> 3,230,786</td> <td>&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> Estimated future amortization expense related to our intangible assets is:</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> </p> <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2012</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2013</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2014</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2015</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2016</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> <td colspan="2" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"> 2017<br /> thereafter</td> <td style="font-weight: bold; padding-bottom: 1pt">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="width: 28%; text-align: left">Interconnect licenses and contracts</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">584,079</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">553,511</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">475,418</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">104,990</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">4,382</td> <td style="width: 1%; text-align: left">&#xA0;</td> <td style="width: 1%">&#xA0;</td> <td style="width: 1%; text-align: left">$</td> <td style="width: 9%; text-align: right">0</td> <td style="width: 1%; text-align: left">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: White"> <td style="text-align: left; padding-bottom: 1pt">ValidSoft IP &amp; Technology</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 2,253,379</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 2,253,379</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 2,253,379</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 2,102,949</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 2,052,805</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> <td style="padding-bottom: 1pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 1pt solid"> &#xA0;</td> <td style="text-align: right; border-bottom: Black 1pt solid"> 787,556</td> <td style="text-align: left; padding-bottom: 1pt">&#xA0;</td> </tr> <tr style="vertical-align: bottom; background-color: rgb(204,255,204)"> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 2,837,458</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 2,806,890</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 2,728,798</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 2,207,939</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 2,057,187</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> <td style="padding-bottom: 2.5pt">&#xA0;</td> <td style="text-align: left; border-bottom: Black 2.5pt double"> $</td> <td style="text-align: right; border-bottom: Black 2.5pt double"> 787,556</td> <td style="text-align: left; padding-bottom: 2.5pt">&#xA0;</td> </tr> </table> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> </p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> &#xA0;&#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"> <i>Intangible Assets Impairment charge</i></p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> &#xA0;</p> <p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"> The Company assessed the carrying value of its intangible assets as of December 31, 2011. As a result of this assessment, the Company determined that the value of certain specific intangible assets was higher than the estimated recoverable value and therefore an impairment charge of $522,726 was recorded during 2011. In the evaluation of its Intangible Assets, the Company estimated the discounted future cash flows directly associated with the asset and compared these to the asset&#x2019;s carrying amount.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 18.&#xA0;&#xA0;Related Party Transactions</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> During 2011 Quercus Management Group (&#x2018;QMG&#x2019;) an entity affiliated with certain officers and directors of the Company received for providing throughout the full year office space, back office support and car travel expenses invoices for the total amount of &#x20AC; 28,363&#xA0;($36,725).</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> During 2011 the company issued 89,433 shares to QAT II Investments, SA (&#x201C;QAT II&#x201D;) an entity affiliated with certain officers and directors of the Company as a result of the cashless exercise of 167,400 warrants issued in 2010 as part of their activities in raising funds under the &#x201C;2010 Bridge SPA&#x201D;. Although the transaction did not result in any cash proceed, the transaction&#xA0;can be valued at $209,250 as the exercise price of the warrants has been $1.25.</p> </div> <div> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 12.&#xA0;Deferred Revenue</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> 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 $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.</p> </div> 347758 25894241 28723265 -25310735 -0.24 4697305 25489729 26808067 104326066 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 15.&#xA0;Trade note payable</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The company entered into an arrangement with a vendor for the supply of telecommunication equipment whereby extended credit terms were agreed over and above normal credit terms. The extended credit terms stipulate a repayment of the outstanding purchase price consideration over a period of 24 months starting October 2011. The trade note payable amount relates to the portion of this outstanding price consideration due after one year.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 14.</u></b><u>&#xA0;<b>Loans Payable</b></u></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Loans payable at December 31, 2011 and 2010 are summarized as follows:</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff33cc"> </p> <table style="WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-WEIGHT: bold" colspan="2">December 31<br /> 2011</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid" colspan="2"> <p style="TEXT-ALIGN: center; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>December 31</b></p> <p style="TEXT-ALIGN: center; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b>2010</b></p> </td> <td style="PADDING-BOTTOM: 1pt; FONT-WEIGHT: bold">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: #ccffcc; VERTICAL-ALIGN: bottom"> <td style="WIDTH: 74%">Installment loan payable due December 24, 2006, secured by personal guarantees of two shareholders, a former director, and a third party</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">319,765</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">&#xA0;</td> <td style="WIDTH: 1%">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%">319,182</td> <td style="WIDTH: 1%">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td>Installment loan payable, bank, monthly principal and interest payments of $2,798 including interest at bank&#x2019;s prime rate plus 1.5% per annum, 8.25% at November 30, 2008, due December 24, 2011, secured by personal guarantees of three shareholders and a former director</td> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: right">254,224</td> <td>&#xA0;</td> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: right">190,716</td> <td>&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: #ccffcc; VERTICAL-ALIGN: bottom"> <td>Installment loan payable, bank, monthly principal and interest payments of $1,729 including interest at bank&#x2019;s prime rate plus 1.5% per annum, 8.25% at November 24, 2008, due June 28, 2009, secured by personal guarantees of three shareholders and a former director</td> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: right">103,704</td> <td>&#xA0;</td> <td>&#xA0;</td> <td>&#xA0;</td> <td style="TEXT-ALIGN: right">84,799</td> <td>&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt">Term loan payable, bank, monthly payments of interest at bank&#x2019;s prime rate, 7.0% at December 31, 2007</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 283,177</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right"> 282,660</td> <td style="PADDING-BOTTOM: 1pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: #ccffcc; VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 2.5pt; PADDING-LEFT: 8.65pt">Total</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.25pt double">$</td> <td style="BORDER-BOTTOM: black 2.25pt double; TEXT-ALIGN: right"> 960,870</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.25pt double">$</td> <td style="BORDER-BOTTOM: black 2.25pt double; TEXT-ALIGN: right"> 877,357</td> <td style="PADDING-BOTTOM: 2.5pt">&#xA0;</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff33cc"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif; COLOR: #ff33cc"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank&#x2019;s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that</p> <table style="MARGIN-TOP: 0pt; WIDTH: 100%; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;</td> </tr> </table> <p style="MARGIN: 0px"></p> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">The Company was not liable on the Bank&#x2019;s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and</td> </tr> </table> <table style="MARGIN-TOP: 0pt; FONT: 10pt Times New Roman, Times, Serif; MARGIN-BOTTOM: 0pt" cellspacing="0" cellpadding="0" width="100%"> <tr style="VERTICAL-ALIGN: top"> <td style="WIDTH: 0.25in"></td> <td style="WIDTH: 0.25in"><font style="FONT-FAMILY: Symbol">&#xB7;</font></td> <td style="TEXT-ALIGN: justify">The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.</td> </tr> </table> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px 0pt 0.5in; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 4.&#xA0;Prepaid Expenses and Other Current Assets</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Prepaid expenses and other current assets recorded at $1,522,461 as of December 31, 2011, compared with $2,337,914 as of December 31, 2010.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 2. Financial Condition</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> The Company has an accumulated deficit of $180,128,371 as of December 31, 2011. Historically, the Company has relied on a combination of debt and equity financings to fund our ongoing cash requirements.&#xA0;In 2011 we received a total of $26.8 million in gross proceeds from a combination of warrant and employee option exercises.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> We believe that together with our cash balance at December 31, 2011, of $6,009,576, the convertible secured loan the Company secured on March 29<sup>th</sup> 2012 for the net proceeds of US$ 5.7 million (for the coming 12 months), $1.8 million cash generated by the restored credit term with one of our recurring supplier, $590,740 cash generated by the warrants and options exercised so far in 2012 and an up to $2 million commitment from an affiliated party, the company feels that the funds available are sufficient to meet our cash needs for the next twelve months and therefore will have the ability to continue as a going concern. &#xA0; In addition, the Company believes that it could continue to attract funds, <font style="COLOR: black">through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners</font> in the form of debt, mezzanine or permanent equity. In case cash flows from operations or financing are delayed, the company will lower its capital expenditures on new developments and markets as well as reduce the hiring of new employees and contractors.</p> </div> -318443 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 28. Loans and Convertible Notes (Private Placement 2009)</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>Automatic Conversion of 2009 12% Convertible Promissory Notes</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> On November 19, 2010, the twenty day average closing price of the common stock of Elephant Talk Communications Corp. (the &#x201C;Company&#x201D;) exceeded $3.18.&#xA0;&#xA0;As a result and pursuant to their terms, all outstanding 12% convertible promissory notes (the &#x201C;Notes&#x201D;) issued in connection with the Company&#x2019;s 2009 private placement offering of units consisting of Notes and warrants to purchase shares of the Company&#x2019;s common stock, no par value (the &#x201C;Units&#x201D;), plus all interest due the holder of the Note, automatically converted into common stock at the previously established conversion price of one (1) share of common stock per each $1.35 in principal plus interest due.&#xA0;&#xA0;The Units are more fully described in the Company&#x2019;s Current Reports on Form 8-K filed with the Securities and Exchange Commission (the &#x201C;Commission&#x201D;) on August 6, 2009, August 24, 2009, September 10, 2009, October 5, 2009 and November 10, 2009 and in the Company&#x2019;s quarterly filings on Form 10-Q and annual report for the year ended December 31, 2010 filed with the Commission on March 31, 2010.</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> As per the closing of 2011 all shares falling under the Private Placement 2009 have been issued and including previous years resulted in a total number of 9,933,234 issued shares of common stock in connection with the conversion of all of the Notes including accumulated and unpaid interest paid for in shares.</p> </div> 5269 <div> <p style="MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 13.&#xA0;Accrued Expenses</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <table style="WIDTH: 90%; FONT: 10pt Times New Roman, Times, Serif" cellspacing="0" cellpadding="0"> <tr style="VERTICAL-ALIGN: bottom"> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt; FONT-WEIGHT: bold"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-SIZE: 10pt; FONT-WEIGHT: bold" colspan="2">December 31, 2011</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt; FONT-WEIGHT: bold"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt; FONT-WEIGHT: bold"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: center; FONT-SIZE: 10pt; FONT-WEIGHT: bold" colspan="2">December 31, 2010</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt; FONT-WEIGHT: bold"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-LEFT: 3.5pt; WIDTH: 74%; FONT-SIZE: 10pt"> Accrued selling, general &amp; administrative expenses</td> <td style="WIDTH: 1%; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%; FONT-SIZE: 10pt"> 1,477,463</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt"> &#xA0;</td> <td style="WIDTH: 1%; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt">$</td> <td style="TEXT-ALIGN: right; WIDTH: 10%; FONT-SIZE: 10pt"> 1,494,218</td> <td style="TEXT-ALIGN: left; WIDTH: 1%; FONT-SIZE: 10pt"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-LEFT: 3.5pt; FONT-SIZE: 10pt"> Accrued cost of sales and network</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">562,240</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">380,236</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-LEFT: 3.5pt; FONT-SIZE: 10pt"> Accrued taxes</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">294,689</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">791,128</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-LEFT: 3.5pt; FONT-SIZE: 10pt"> Accrued interest payable</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">701,366</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> <td style="TEXT-ALIGN: right; FONT-SIZE: 10pt">653,146</td> <td style="TEXT-ALIGN: left; FONT-SIZE: 10pt">&#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: rgb(204,255,204); VERTICAL-ALIGN: bottom"> <td style="PADDING-BOTTOM: 1pt; PADDING-LEFT: 3.5pt; FONT-SIZE: 10pt"> Other</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; FONT-SIZE: 10pt"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; FONT-SIZE: 10pt"> --</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> &#xA0;</td> <td style="PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: left; FONT-SIZE: 10pt"> &#xA0;</td> <td style="BORDER-BOTTOM: black 1pt solid; TEXT-ALIGN: right; FONT-SIZE: 10pt"> 525,210</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 1pt; FONT-SIZE: 10pt"> &#xA0;</td> </tr> <tr style="BACKGROUND-COLOR: white; VERTICAL-ALIGN: bottom"> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; TEXT-INDENT: 10pt; PADDING-LEFT: 3.5pt; FONT-SIZE: 10pt"> Total accrued expenses</td> <td style="PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; FONT-SIZE: 10pt"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; FONT-SIZE: 10pt"> 3,035,758</td> <td style="TEXT-ALIGN: left; PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt"> &#xA0;</td> <td style="PADDING-BOTTOM: 2.5pt; FONT-SIZE: 10pt">&#xA0;</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: left; FONT-SIZE: 10pt"> $</td> <td style="BORDER-BOTTOM: black 2.5pt double; TEXT-ALIGN: right; FONT-SIZE: 10pt"> 3,843,938</td> </tr> </table> </div> -140229 <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 7.&#xA0;Long-term Deposit</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> Long-term earnest deposits to various telecom carriers during the course of its operations and a deposit towards the French Tax Authorities for the total amount of $651,930 as at December 31, 2011 compared with $610,486 as of December 31, 2010.&#xA0;The deposits are refundable at the termination of the business relationship with the carriers.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 11.&#xA0;Overdraft</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> </p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> In 2004, Elephant Talk Ltd, a subsidiary of the Company executed a credit facility with a bank in Hong Kong pursuant to which Elephant Talk Ltd. borrowed funds. As of December 31, 2011, the overdraft balance, including accrued interest totaled, $312,236 compared to $278,637 as of December 31, 2010. The interest rate and default payment interest rate were charged at 2% and 6% per annum above the Lender&#x2019;s Hong Kong Dollar Prime Rate quoted by the Lender from time to time. The Company has not guaranteed the credit facility or is otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd. Further detail can be found in Note 25, Litigation. As of December 31, 2011, Moba Consulting Partners B.V., a subsidiary of the Company, had an overdraft of $0 compared to $78,101 as of December 31, 2010 on one of the company&#x2019;s bank accounts.</p> </div> <div> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <b><u>Note 17.&#xA0;Convertible Notes/Loans</u></b></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> <i>12% Secured Convertible Promissory Note 2009</i></p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> &#xA0;</p> <p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif"> During 2011 and following the completion of administrative processing, the company issued the remaining 2,210,367 shares due to holders of the Secured Convertible Promissory Note 2009 that were automatically converted in November 2010.</p> </div> 112229 448195 -25310735 -624275 786672 2 1052897 1255237 4697305 25489729 18063551 5269 112229 737611 303506 2210367 500287 1343208 737611 1343208 0001084384 etak:BoardAndManagementMember 2011-01-01 2011-12-31 0001084384 etak:ConsultingFeeMember 2011-01-01 2011-12-31 0001084384 us-gaap:CommonStockMemberetak:BoardAndManagementMember 2011-01-01 2011-12-31 0001084384 us-gaap:CommonStockMemberetak:ConvertibleNotesMember 2011-01-01 2011-12-31 0001084384 us-gaap:CommonStockMemberetak:ConsultingFeeMember 2011-01-01 2011-12-31 0001084384 us-gaap:CommonStockMember 2011-01-01 2011-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-01-01 2011-12-31 0001084384 us-gaap:RetainedEarningsMember 2011-01-01 2011-12-31 0001084384 2011-01-01 2011-12-31 0001084384 etak:SigInFeeMember 2010-01-01 2010-12-31 0001084384 etak:ExerciseOfWarrantsAndConversionOfNotesMember 2010-01-01 2010-12-31 0001084384 etak:AcquisitionsAndNonCashCompensationMember 2010-01-01 2010-12-31 0001084384 etak:ConsultingFeeMember 2010-01-01 2010-12-31 0001084384 etak:IssuanceDuringPeriod1stMember 2010-01-01 2010-12-31 0001084384 us-gaap:ManagementMember 2010-01-01 2010-12-31 0001084384 us-gaap:FinancingMember 2010-01-01 2010-12-31 0001084384 us-gaap:CommonStockMemberetak:SigInFeeMember 2010-01-01 2010-12-31 0001084384 us-gaap:CommonStockMemberetak:ConsultingFeeMember 2010-01-01 2010-12-31 0001084384 us-gaap:CommonStockMemberus-gaap:ManagementMember 2010-01-01 2010-12-31 0001084384 us-gaap:CommonStockMemberus-gaap:FinancingMember 2010-01-01 2010-12-31 0001084384 us-gaap:CommonStockMember 2010-01-01 2010-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2010-01-01 2010-12-31 0001084384 us-gaap:RetainedEarningsMember 2010-01-01 2010-12-31 0001084384 etak:RelatedPartyBMember 2010-01-01 2010-12-31 0001084384 etak:RelatedPartyAMember 2010-01-01 2010-12-31 0001084384 2010-01-01 2010-12-31 0001084384 etak:SigInFeeMember 2009-01-01 2009-12-31 0001084384 etak:ConsultingFeeMember 2009-01-01 2009-12-31 0001084384 etak:IssuanceDuringPeriod2ndMember 2009-01-01 2009-12-31 0001084384 us-gaap:CashMember 2009-01-01 2009-12-31 0001084384 us-gaap:ManagementMember 2009-01-01 2009-12-31 0001084384 us-gaap:DirectorMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMemberetak:SigInFeeMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMemberetak:ConsultingFeeMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMemberus-gaap:CashMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMemberus-gaap:ManagementMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMemberus-gaap:DirectorMember 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMember 2009-01-01 2009-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2009-01-01 2009-12-31 0001084384 us-gaap:RetainedEarningsMember 2009-01-01 2009-12-31 0001084384 etak:AllOtherMember 2009-01-01 2009-12-31 0001084384 etak:RelatedPartyTransactionsMember 2009-01-01 2009-12-31 0001084384 2009-01-01 2009-12-31 0001084384 us-gaap:CommonStockMember 2011-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-12-31 0001084384 us-gaap:RetainedEarningsMember 2011-12-31 0001084384 2011-12-31 0001084384 us-gaap:CommonStockMember 2010-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2010-12-31 0001084384 us-gaap:RetainedEarningsMember 2010-12-31 0001084384 2010-12-31 0001084384 us-gaap:CommonStockMember 2009-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2009-12-31 0001084384 us-gaap:RetainedEarningsMember 2009-12-31 0001084384 2009-12-31 0001084384 us-gaap:CommonStockMember 2008-12-31 0001084384 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2008-12-31 0001084384 us-gaap:RetainedEarningsMember 2008-12-31 0001084384 2008-12-31 0001084384 2011-06-30 0001084384 2012-03-09 shares iso4217:USD iso4217:USD shares EX-101.SCH 17 etak-20111231.xsd XBRL TAXONOMY EXTENSION SCHEMA 101 - 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Concentrations
 12 Months Ended
Dec. 31, 2011
Concentrations

Note 27. Concentrations

 

For the year ended December 31, 2011, the Company had a customer in the Netherlands, which accounted for revenue of $18,670,810. For the same periods in 2010, this same customer accounted for $22,439,478.
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Stockholders' equity
 12 Months Ended
Dec. 31, 2011
Stockholders' equity

Note 19. Stockholders’ equity

 

(A) Common Stock

 

The Company is presently authorized to issue 250,000,000 shares common stock. The Company had 110,525,229 shares of common shares issued and outstanding as of December 31, 2011, an increase of 21,864,381 shares since December 31, 2010, largely due to the shares issued in connection with the mandatory exercise of warrants (18,063,551), shares issued as consideration for management and board compensation (500,287), conversion of 12% secured convertible promissory notes (2,210,367), shares issued to employees as a result of exercised employee stock options (786,672), shares issued to consultants or other suppliers for services/goods delivered (279,718) and shares delivered to an employee who was entitled to receive salary for the period he was working for ValidSoft and before ValidSoft was acquired by Elephant Talk. The employee agreed in settling this backpay in shares.

 

The following table summarizes the shares issued for the year ended December 31, 2011:

 

Computation of Full Dilution - December 31, 2011  

Number of shares

issued

  
       
December 31, 2010 Total number of shares issued     88,660,848  
         
Shares issued to consultants     279,718  
Shares issued for management compensation     500,287  
Shares issued for warrant exercises     18,063,551  
Shares issued for acquisitions     -  
Shares issued for financing     -  
Shares issued for note conversions     2,210,367  
Shares issued for employee stock option exercises     786,672  
Shares issued for settlement with employee     23,788  
Elimination of rounding     (2 )
December 31, 2011 Total number of shares issued     110,525,229  

 

Reconciliation with stock transfer agent records:

 

The number of 110,525,229 excludes the 245,900 unreturned and the 2,558,938 escrowed contingent shares (see below). The shares issued and outstanding as per December 31, 2011 according to the stock transfer agent’s records are 113,330,067, include 2,558,938 contingent shares for the ValidSoft acquisition and include 245,900 shares which were cancelled by the Company prior to 2006. However, the 245,900 shares were not returned to the stock transfer agent and never cancelled on the Company’s records. These shares have been blocked for trading by the Stock Transfer Agent. Finally, in the above table we included the elimination of a rounding difference of two shares between the Company’s shares issued and the stock transfer agent’s records.

 

(B) Class B Preferred Stock

 

The Company’s Articles of Incorporation (“Articles”) authorize the issuance of 50,000,000 shares of $ 0.00001 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 2010 or 2011 the Company did not issue any shares of Preferred Stock.
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Significant Accounting Policies
 12 Months Ended
Dec. 31, 2011
Significant Accounting Policies

Note 3. Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements for December 31, 2011 and December 31, 2010 include the accounts of Elephant Talk Communications Corp., including:

 

· its wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Communication Austria GmbH, Elephant Talk Telekom GmbH (formerly Vocalis Austria GmbH), Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication (Europe) GmbH, Elephant Talk Communication Schweiz GmbH, Moba Consulting Partners B.V., Elephant Talk Communications France S.A.S.,its majority owned (51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V., its majority owned (51%) subsidiary Elephant Talk Communications PRS U.K. Limited, its wholly-owned 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 Guangzhou Elephant Talk Information Technology Limited., its wholly-owned Elephant Talk Caribbean B.V., its majority owned (51%) subsidiary ET-UTS N.V.;
· its wholly-owned subsidiary Elephant Talk Limited, its majority owned (60%) 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 (99%) subsidiary Elephant Talk Middle East & Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC; and
· its wholly-owned subsidiary ValidSoft Ltd and its wholly-owned subsidiaries ValidSoft (UK) Ltd & ValidSoft (Australia) Pty Ltd.

 

All intercompany balances are eliminated in consolidation.

 

Foreign Currency Translation

 

The functional currency is Euros for the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries, and Euros for its wholly-owned subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned subsidiary Elephant Talk Limited and the British Pound Sterling for its wholly-owned subsidiary ValidSoft (UK) Ltd. The financial statements of the Company were translated to USD using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with Accounting Standard Codification (“ASC”) 830, Foreign Currency Matters, net gains and losses resulting from translation of foreign currency financial statements are included in the statements of shareholder’s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss). The accumulated other comprehensive income (loss) as of December 31, 2011 and December 31, 2010 was ($1,143,295) and ($519,020), respectively. The foreign currency translation gain/(loss) for the years ended December 31, 2011 and 2010 was ($624,275) and ($1,655,917), respectively.

 

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 materially from those estimates and assumptions.

 

Cash and Cash Equivalents

 

For purposes of the cash flow statements, the Company would normally consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The company has full access to the whole balance of cash and cash equivalents on a daily basis without any delay.

  

Restricted Cash

 

Restricted cash represents cash deposited as bank guarantee for national interconnection agreements with telecom operators.

 

Accounts Receivables, net

 

The Company’s customer base consists of a geographically dispersed customer base. The Company maintains an allowance for potential credit losses on accounts receivable. 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 allowances. Allowances are recorded primarily on a specific identification basis. As of December 31, 2011 and 2010, the allowance for doubtful accounts was $436,546 and $119,044, respectively.

 

Revenue Recognition and Deferred Revenue

 

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”), (formerly, Staff Accounting Bulletin (“SAB104”). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a landline and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). For its security solutions under the ValidSoft brand name and technologies revenue represents amounts earned for consultancy services, outsourcing, maintenance and licenses (net of value added tax and inter-company revenue).

 

The Company recognizes revenue from prepaid calling cards as the services are provided.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services. Deferred revenue was $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.

 

Cost of Service

 

Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility costs of hosting network and equipment, and costs of providing resale arrangements with long distance service providers, costs of leasing transmission facilities and international gateway switches for voice and data transmission services.

 

Reporting Segments

 

ASC 280, Segment Reporting, 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. Based on these criteria the Company has determined that they operate in one reporting segment. The Company allocates its resources and assesses the performance of its sales activities based upon geographic locations of its subsidiaries.

 

Stock-based Compensation

 

Effective January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock Compensation”, (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally up to three years), which we have elected to amortize on a straight-line basis.

 

To determine the value of our stock options at grant date under our employee stock option plan, we currently use the Black-Scholes option-pricing model. The use of this model requires us to make a number of subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each assumption:

 

Expected Life

 

The expected life represents the period that the stock option awards are expected to be outstanding. We use the simplified method for estimating the expected life of the option, by taking the average between time to vesting and the contract life of the award. Therefore, the expected term assumption was estimated for each individual grant using the simplified method as an average between time to vesting and the contractual term of the award.

 

Cumulative Volatility

 

We estimate expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using the continuously compounded return calculated by using the last 252 closing prices of the share price (= one year trading). The annual volatility is used to determine the generalized (cumulative) volatility of our common stock preceding the grant. (= annual volatility x SQRT(expected life)).

Risk-Free Interest Rate

 

We estimate the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department, or the nearest available rate, with a remaining term equal or near to the expected life of the award.

 

Expected Dividend Yield

 

We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections. We do not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.

 

Income Taxes

 

The Company accounts for income taxes under ASC 740, “Accounting for Income Taxes” (“ASC 740”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. We also assess temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting differences. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome and in assessing the need for the valuation allowance, there is no assurance that the final tax outcome and the valuation allowance will not be different than those that are reflected in our historical income tax provisions and accruals.

 

ASC 740 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.

 

 

The Company has filed or is in the process of filing tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome is unknown, we believe that any adjustments that may result from tax return audits are not likely to have a material, adverse effect on our consolidated results of operations, financial condition or cash flows.

 

Comprehensive Income/(Loss)

 

Comprehensive income/(loss) includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders’ equity but are excluded from net income. For the years ended December 31, 2011 and 2010, the Company’s comprehensive income/(loss) consisted of its net loss and foreign currency translation adjustments.

  

Intangible Assets

 

In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, Property and Equipment, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

 

Property and Equipment, Internally Developed and Third Party Software

 

Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company’s internally developed software technology platform. The Company has adopted the provisions of ASC 985, Software.

 

The Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Depreciation applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Once a new functionality or improvement is released for operational use, the asset is moved from the property and equipment category “projects under construction” to a property and equipment asset subject to depreciation in accordance with the principle described in the previous sentence.

 

Recently Issued Accounting Pronouncements

  

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance on disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company does not expect this to have a material impact on its financial statements.
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M('-T>6QE/3-$)U1%6%0M04Q)1TXZ(&IU#L@1D].5#H@,3!P="!4:6UE3L@34%21TE..B`P<'0@,'!X.R!& M3TY4.B`Q,'!T(%1I;65S($YE=R!2;VUA;BP@5&EM97,L(%-E$$P.SPO<#X-"CQP('-T>6QE/3-$)U1%6%0M04Q)1TXZ(&IU#L@1D].5#H@,3!P="!4:6UE0T*3F]T97,\ M+VD^/"]P/@T*/'`@3L@34%2 M1TE..B`P<'0@,'!X.R!&3TY4.B`Q,'!T(%1I;65S($YE=R!2;VUA;BP@5&EM M97,L(%-E$$P.SPO<#X-"CQP('-T>6QE/3-$)U1%6%0M04Q) M1TXZ(&IU#L@1D].5#H@,3!P="!4:6UE M2!D87D@879E$$P.R8C>$$P.T%S(&$@0T*;F]T97,@*'1H92`F(W@R,#%#.TYO=&5S M)B-X,C`Q1#LI(&ES28C>#(P,3D[2!E$$P.R8C>$$P.U1H92!5;FET2!D97-C#(P,4,[0V]M;6ES#(P M,40[*0T*;VX@075G=7-T(#8L(#(P,#DL($%U9W5S="`R-"P@,C`P.2P@4V5P M=&5M8F5R(#$P+"`R,#`Y+"!/8W1O8F5R(#4L#0HR,#`Y(&%N9"!.;W9E;6)E M3L@34%21TE..B`P<'0@,'!X M.R!&3TY4.B`Q,'!T(%1I;65S($YE=R!2;VUA;BP@5&EM97,L(%-E$$P.SPO<#X-"CQP('-T>6QE/3-$)U1%6%0M04Q)1TXZ(&IU#L@1D].5#H@,3!P="!4:6UE7!E.B!T97AT+VAT;6P[(&-H M87)S970](G5S+6%S8VEI(@T*#0H\:'1M;#X-"B`@/&AE860^#0H@("`@/$U% M5$$@:'1T<"UE<75I=CTS1$-O;G1E;G0M5'EP92!C;VYT96YT/3-$)W1E>'0O M:'1M;#L@8VAA6QE M/3-$)U1%6%0M04Q)1TXZ(&IU#L@1D]. 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M.B`P<'0@,'!X.R!&3TY4.B`Q,'!T(%1I;65S($YE=R!2;VUA;BP@5&EM97,L M(%-E6QE/3-$)U1%6%0M04Q)1TXZ(&IU#L@1D].5#H@,3!P="!4:6UE3L@34%21TE..B`P<'0@,'!X M.R!&3TY4.B`Q,'!T(%1I;65S($YE=R!2;VUA;BP@5&EM97,L(%-E6EN9R!T:&4@3F]T97,@<'5R M3X-"CPO:'1M;#X-"@T*+2TM+2TM/5].97AT4&%R=%]D9F$T,60T M.%\S938T7S1C,S9?.#=B,%\R9#,Q.3=F,F0S830-"D-O;G1E;G0M3&]C871I M;VXZ(&9I;&4Z+R\O0SHO9&9A-#%D-#A?,V4V-%\T8S,V7S@W8C!?,F0S,3DW M9C)D,V$T+U=O&UL#0I#;VYT96YT+51R86YS M9F5R+45N8V]D:6YG.B!Q=6]T960M<')I;G1A8FQE#0I#;VYT96YT+51Y<&4Z M('1E>'0O:'1M;#L@8VAA&UL;G,Z M;STS1")U XML 27 R29.htm IDEA: XBRL DOCUMENT v2.4.0.6
Non-controlling Interest
 12 Months Ended
Dec. 31, 2011
Non-controlling Interest

Note 23.  Non-controlling Interest

 

The Company had non-controlling interests in several of its subsidiaries. The balance of the non-controlling interests as of December 31, 2011 and December 31, 2010 were as follows: 

 

          Non-controlling interest Balance at  
Subsidiary   Non-controlling
Interest %		     December 31, 2011     December 31, 2010  
                   
ETC PRS UK     49 %   $ 9,500     $ 9,723  
ETC PRS Netherlands     49 %     126,894       129,870  
ET Bahrain WLL     1 %     4,382       6,385  
ET ME&A FZ LLC     49.46 %     37,091       37,081  
                         
Total           $ 177,867     $ 183,059

XML 28 R28.htm IDEA: XBRL DOCUMENT v2.4.0.6
Income taxes
 12 Months Ended
Dec. 31, 2011
Income taxes

Note 22.  Income taxes

 

Income tax expense (benefit) for the year ended December 31, 2011 and 2010 is summarized as follows:

 

    December 31,
2011		     December 31,
2010		  
Current:                
Federal   $ (8,605,649 )   $ (7,894,958 )
State     (1,518,644 )     (1,393,228 )
Deferred Taxes     10,124,293       9,288,986  
                 
Income tax expense   $ —     $ 800  

 

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, 2011:

 

    2011     2010  
Tax expense (credit) at statutory rate-federal     (34 )%     (34 )%
State tax expense net of federal tax     (6 )%     (6 )%
Foreign income tax rate difference     10.2 %     12.8 %
Change in valuation allowance     29.8 %     27.2 %
Tax expense at actual rate     —       —  

 

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2011 are as follows:

 

Deferred tax assets:   2011     2010  
Deferred Tax Asset   $ 44,347,310     $ 34,223,016  
Total gross deferred tax assets     44,347,310       34,223,016  
Less:  Valuation allowance     (44,347,310 )     (34,223,016 )
Net deferred tax assets   $ —     $ —  

 

At December 31, 2011, the Company had accumulated deficit carry forwards of approximately $110,866,274. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $10,124,293.

 

At December 31, 2010, the Company had accumulated deficit carry forwards of approximately $85,555,541. The net change in the valuation allowance during the twelve months period ended December 31, 2011 was $9,288,986.

 

A valuation allowance of approximately $44.3 million and $34.2 million at December 31, 2011 and 2010, respectively, has been recorded against deferred tax assets as the Company was unable to conclude that it is more likely than not that such deferred tax assets will be realized.

 

As of December 31, 2011, we had net federal operating loss carry forwards and state operating loss carry forwards of approximately $44.3 million. The net federal operating loss carry forwards begin to expire in 2018 and the net state operating loss carry forwards begin to expire in 2012. The net operating loss carry forwards for foreign countries amounts to approximately $69.0 million. In all foreign countries various periods of expiration dates are applicable.

 

 

Section 382 of the Internal Revenue Code limits the use of net operating loss and tax credit carry forwards in certain situations where changes occur in the stock ownership of a company.  In the event we have a change in ownership, utilization of the carry forward could be restricted.”

 

In June 2006, the FASB issued ASC Topic 740-10 “Uncertain Tax Positions” (ASC 740-10) which clarifies the accounting for uncertainty in income taxes. ASC 740-10 requires that companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for years beginning after December 15, 2006. We adopted ASC 740-10 on January 1, 2007 with no impact to our consolidated financial statements. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open for tax examination.
XML 29 R30.htm IDEA: XBRL DOCUMENT v2.4.0.6
Commitments
 12 Months Ended
Dec. 31, 2011
Commitments

Note 24.  Commitments 

 

Commitments of the Company relating to co-location, network and office rents, regulatory and interconnection fees are as follows:

  

Year   Office     Co-location     Interconnect     Service/Support     Network     Total  
2012   $ 683,643     $ 513,616     $ 2,332,157     $ 141,525     $ 392,907     $ 4,063,849  
2013     440,479       253,751       1,532,507       0       199,151       2,425,887  
2014     440,479       253,751       64,572       0       197,379       956,181  
2015     241,591       0       51,612       0       182,709       475,912  
2016   $ 241,591     $ 0     $ 12,732     $ 0     $ 116,211       370,535  
                                            $ 8,292,364  

 

As of December 31, 2011 the commitments of the Company relating to purchase orders are valued at cost of $372,287.
XML 30 R31.htm IDEA: XBRL DOCUMENT v2.4.0.6
Litigation
 12 Months Ended
Dec. 31, 2011
Litigation

Note 25.  Litigation

 

(a) Manu Ohri Litigation

 

In March 2009, Manu Ohri (Ohri), the Company’s former Chief Financial Officer from 2002 to 2006, commenced a lawsuit against the Company in the California Orange County Superior Court entitled Manu Ohri v. Elephant Talk Communications, Inc., Case No. 30-20009-00120609. Ohri alleged that the Company breached a 2006 written employment contract, a 2007 oral consulting contract, and otherwise owed him the reasonable value of consulting services rendered. The Company denied Ohri's allegations and commenced a cross-complaint against Ohri to, among other things, invalidate his alleged 2006 employment contract and stock bonus, and to recover the stock bonus or its fair market value.

 

The Company and Ohri, without any admissions of fault or liability, agreed in December 2011 to compromise, resolve and extinguish all of their respective claims in consideration for mutual general releases and Ohri's conveyance of 300,000 shares of common stock to the Company. The lawsuit was dismissed in its entirety with prejudice without any final determination by the court on the merits of the parties’ respective claims.

 

(b) Chong Hing Bank Litigation


In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

 

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

 

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

 

· The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

 

· The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and

 

· The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

 

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

 

(c) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.

 

As previously described in our 2004 Annual Report we and New Times Navigation Limited mutually agreed to terminate this purchase agreement. We returned the received shares of New Times Navigation Limited to the concerned shareholders and received back 90,100 of our common stock out of the 204,000 issued by us for the purchase. In addition we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.

 

We are 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 113,900 common shares (valued at $381,565) and also to have them return the remaining 18 unsecured convertible promissory notes representing a total amount of $1,740,000 and rescind the purchase agreement. The case is currently pending.
XML 31 R8.htm IDEA: XBRL DOCUMENT v2.4.0.6
Financial Condition
 12 Months Ended
Dec. 31, 2011
Financial Condition

Note 2. Financial Condition

 

The Company has an accumulated deficit of $180,128,371 as of December 31, 2011. Historically, the Company has relied on a combination of debt and equity financings to fund our ongoing cash requirements. In 2011 we received a total of $26.8 million in gross proceeds from a combination of warrant and employee option exercises.

 

We believe that together with our cash balance at December 31, 2011, of $6,009,576, the convertible secured loan the Company secured on March 29th 2012 for the net proceeds of US$ 5.7 million (for the coming 12 months), $1.8 million cash generated by the restored credit term with one of our recurring supplier, $590,740 cash generated by the warrants and options exercised so far in 2012 and an up to $2 million commitment from an affiliated party, the company feels that the funds available are sufficient to meet our cash needs for the next twelve months and therefore will have the ability to continue as a going concern.   In addition, the Company believes that it could continue to attract funds, through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners in the form of debt, mezzanine or permanent equity. In case cash flows from operations or financing are delayed, the company will lower its capital expenditures on new developments and markets as well as reduce the hiring of new employees and contractors.
XML 32 R32.htm IDEA: XBRL DOCUMENT v2.4.0.6
Geographic Information
 12 Months Ended
Dec. 31, 2011
Geographic Information

Note 26. Geographic Information

   

Twelve months ended December 31, 2011

 

    EUROPE                          
                                  Far East                    
    Netherlands     Spain     Switzerland     Others     Total     Hong Kong /     Middle East     The Americas     TOTAL  
                                                       
Revenues from unaffiliated customers:   $ 22,128,044       1,344,860       7,909,544       712,527     $ 32,094,975     $ -     $ 20,507     $ 117,499     $ 32,232,981  
                                                                         
Identifiable assets   $ 5,928,797     $ 1,224,428     $ 15,732,596     $ 16,333,398     $ 39,219,219     $ 302,429       244,529       5,045,926     $ 44,812,103  
                                                                         

 

Twelve months ended December 31, 2010

 

    EUROPE                          
                                  Far East                    
                                  Hong Kong /                    
    Netherlands     Spain     Switzerland     Others     Total     China     Middle East     The Americas     TOTAL  
                                                       
Revenues from unaffiliated customers:   $ 27,623,380       1,752,470       6,653,139       461,742     $ 36,490,732     $ -     $ 622,813     $ 54,806     $ 37,168,351  
                                                                         
Identifiable assets   $ 6,469,979     $ 1,202,064     $ 11,012,075     $ 18,379,628     $ 37,063,745     $ 223,329       552,100       1,082,758     $ 38,921,932  
                                                                         
XML 33 R2.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2011
Dec. 31, 2010
CURRENT ASSETS    
Cash and cash equivalents $ 6,009,576 $ 2,245,697
Restricted cash 190,844 190,312
Accounts receivable, net of an allowance for doubtful accounts of $436,546 and $119,044 at December 31, 2011 and December 31, 2010 respectively 6,441,528 5,600,562
Prepaid expenses and other current assets 1,522,461 2,337,914
Total Current Assets 14,164,409 10,374,485
FINANCIAL INVESTMENT IN JOINT VENTURE 323,708  
NOTE RECEIVABLE 417,199  
LONG TERM DEPOSITS 651,930 610,486
PROPERTY AND EQUIPMENT, NET 13,315,687 8,452,588
INTANGIBLE ASSETS, NET 12,784,199 16,253,587
GOODWILL 3,154,971 3,230,786
TOTAL ASSETS 44,812,103 38,921,932
CURRENT LIABILITIES    
Overdraft 312,236 356,738
Accounts payable and customer deposits 4,490,455 4,703,875
Deferred Revenue 132,467  
Accrued expenses and other payables 3,035,758 3,843,938
Loans payable 960,869 877,357
Total Current Liabilities 8,931,785 9,781,908
LONG TERM LIABILITIES    
Trade note payable 271,915  
Loan from related party 513,303 468,756
Total Long term Liabilities 785,218 468,756
Total Liabilities 9,717,003 10,250,664
STOCKHOLDERS' EQUITY    
Common stock, no par value, 250,000,000 shares authorized, 110,525,233 issued and outstanding as of December 31, 2011 compared to 88,660,848 shares issued and outstanding as of December 31, 2010 216,188,899 183,825,665
Accumulated other comprehensive income (loss) (1,143,295) (519,020)
Accumulated deficit (180,128,371) (154,818,436)
Elephant Talk Communications Corp. Stockholders' Equity 34,917,233 28,488,209
NON-CONTROLLING INTEREST 177,867 183,059
Total Stockholders' Equity 35,095,100 28,671,268
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,812,103 $ 38,921,932
XML 34 R6.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
 12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss $ (25,310,735) $ (92,483,360) $ (17,299,884)
Adjustments to reconcile net loss to net cash used in operating activities:      
Depreciation and amortization 5,254,708 5,312,469 3,051,461
Provision for doubtful accounts 318,443 (584,722) 220,156
Stock based compensation 6,319,314 5,080,783 1,561,378
Noncontrolling interest   5,046 1,771
Amortization of Shares issued for Consultancy 499,591 507,609 162,501
Change in fair value of warrant liabilities   48,107,969 538,382
Amortization of deffered financing costs   3,238,602 591,710
Interest expense relating to debt discount and conversion feature   21,094,104 4,960,893
Intangible assets impairment charge 522,726    
Changes in operating assets and liabilities:      
Decrease (increase) in accounts receivable (1,372,719) (238,523) (628,082)
Decrease (Increase) in prepaid expenses, deposits and other assets 782,920 229,343 846,491
Increase (decrease) in accounts payable, proceeds from related parties and customer deposits (140,229) (1,574,761) 602,179
Increase (decrease) in deferred revenue 142,309 (131,886) (87,853)
Increase (decrease) in accrued expenses and other payables (1,587,264) (2,730,533) 740,770
Net cash used in operating activities (14,570,936) (14,107,838) (5,329,837)
CASH FLOWS FROM INVESTING ACTIVITIES:      
Purchases of property and equipment (7,721,307) (3,246,057) (3,869,149)
Restricted cash 49 42 (93)
Cash received from acquisition of subsidiary   58,253  
Payments for acquisition (347,758)    
Loan to third party (448,195)   (1,736,756)
Net cash used in investing activities (8,517,211) (3,187,762) (5,605,998)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Bank overdraft   13,769 27,125
Deferred financing costs   (205,326) (1,495,674)
Proceeds from Private Placement Offering   14,000,000  
Trade note payable 271,915    
Exercise of warrants & options 26,808,067 502,621  
Placement & Solicitation fees (1,185,741) (1,814,766) (100,000)
Net cash provided by financing activities 25,894,241 17,899,518 10,799,202
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 957,785 183,879 (62,012)
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,763,879 787,797 (198,646)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 2,245,697 1,457,900 1,656,546
CASH AND CASH EQUIVALENTS, END OF THE PERIOD 6,009,576 2,245,697 1,457,900
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid during the period for interest 39,560 1,295,298 21,965
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:      
Shares issued to convert the notes payable and accrued interest   15,461,715 532,583
Cash paid during the period for income taxes   800 800
Warrants and derivative liabilities for issuance of 12% Promissory Notes are considered as discount of the Promissory Notes     12,333,020
Acquisitions and Non-Cash Compensation
      
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:      
Increase in Share Capital   14,899,393  
Exercise of Warrants and Conversion of Notes
      
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:      
Increase in Share Capital   9,457,044  
Placement agents for services
      
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:      
Warrant issued   2,565,300  
Placement agents for services
      
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:      
Warrant issued     2,129,313
Related Party QAT Bridge Loan
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Loan from related party   2,518,220  
Related Party Bridge SPA
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Loan from related party   2,885,000  
All Other
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Loan from related party     34,736
Convertible 12% secured note     5,568,000
Related Party Transactions
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Convertible 12% secured note     $ 6,765,015
XML 35 R35.htm IDEA: XBRL DOCUMENT v2.4.0.6
Subsequent Events
 12 Months Ended
Dec. 31, 2011
Subsequent Events

Note 29. Subsequent Events

 

The Company’s management evaluated subsequent events through March 30, 2011, the date the financial statements were issued and filed with the Securities and Exchange Commission.

 

On January 1st, 2012 the subsidiaries ET Caribbean BV, Moba Consulting Partners BV and Elephant Talk Global Holding BV were merged into the surviving entity Elephant Talk Europe Holding BV.

 

Loan agreements

 

On March 29th 2012, a number of investors (“Holders”) entered into a senior secured convertible loan agreement (“Note”) in the principal amount of $8,800,000 with the Company whereby the Holders will provide the company with gross proceeds of $8,000,000, after the $800,000 Original Issue Discount. According to the terms, the Note will bear an interest rate of 8% of the principal amount and mature May 1st 2014. The monthly installment payments (constituting interest and amortization) total $ 2,273,718 for the first year and $ 7,180,000 for the second year. Of the $ 8,000,000, the amount equal to the first year installments, being $ 2,273,718, will be placed in escrow and will be applied on a monthly basis for the payment of the monthly installments. At the election of the Company the Company can decide on a monthly basis to pay the full installment amount or parts thereof in common stock of the Company at an amount equal to 90% of the average of the five lowest volume weighted average (“VWAP|”) of the common stock during the twenty (20) Trading Days immediately prior to such installment on the trading day payment date. The remaining amount of $ 5,726,282 has been made available to the Company immediately at closing of the transaction. In the first year, when the company elects to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow and becomes available to the Company. The Notes are convertible at the option of the Holder into our common stock at a fixed conversion price conversion price equal to 115% of the trailing 30 day closing price prior to closing of the transaction. After a period of 12 months the Note automatically converts at the Fixed Conversion Price, if the shares of the Company, for any consecutive 30 days, close at or above 150% of the Fixed Conversion Price. The Notes are secured by a first priority security interest in all of the assets of the Company. In the event the company (in partnership with Adeptra) fails to announce that it has entered into and operationalized a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the company receives certain amount of net compensation, the Holders may declare all of the then outstanding principal amount of the Note to be due and payable immediately. In addition in such event, the Holders may convert the Notes into our common stock at the lowest of (a) the fixed conversion price in effect prior to such failure, (b) 90% of the average of the 5 lowest VWAPs for the 20 days prior to that day (c) 90% of the lowest reported trade price for the common stock as reported by Bloomberg on such date. Upon occurrence thereof the Company has the option to redeem a portion or the entire outstanding amount of this Note at a redemption price of 100% thereof.

 

The Company is obligated to register the shares of Common Stock underlying the Notes pursuant to certain mandatory registration rights granted to the Holders.
XML 36 R22.htm IDEA: XBRL DOCUMENT v2.4.0.6
Loan from related party
 12 Months Ended
Dec. 31, 2011
Loan from related party

Note 16. Loan from related party

 

The Company’s 51% owned subsidiary ET-UTS N.V. has received $513,303 in interest bearing (8% per annum) unsecured loans from United Telecommunication Services N.V., the 49% shareholder in the subsidiary. No maturity date has been fixed.
XML 37 R24.htm IDEA: XBRL DOCUMENT v2.4.0.6
Related Party Transactions
 12 Months Ended
Dec. 31, 2011
Related Party Transactions

Note 18.  Related Party Transactions

 

During 2011 Quercus Management Group (‘QMG’) an entity affiliated with certain officers and directors of the Company received for providing throughout the full year office space, back office support and car travel expenses invoices for the total amount of € 28,363 ($36,725).

 

During 2011 the company issued 89,433 shares to QAT II Investments, SA (“QAT II”) an entity affiliated with certain officers and directors of the Company as a result of the cashless exercise of 167,400 warrants issued in 2010 as part of their activities in raising funds under the “2010 Bridge SPA”. Although the transaction did not result in any cash proceed, the transaction can be valued at $209,250 as the exercise price of the warrants has been $1.25.
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Organization
 12 Months Ended
Dec. 31, 2011
Organization

Note 1. Organization

 

Elephant Talk Communications Corp. also referred to as “we”, “us”, “Elephant Talk” and “the Company” is an international provider of business software and services to the telecommunications and financial services industry. The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

 

Converged telecommunication services – full MVNE solutions.

 

The Company is a niche player in the converged telecommunications market, providing traffic and network services as a licensed operator, and specializing in carrier grade mobile enabling platforms to provide outsourced solutions to the various players in the telecommunications’ value chain, including MNOs, MVNOs and non-operator companies in need of both mobile as well as specialized land-line telecommunication services. In this chain we position ourselves as a Full Mobile Virtual Network Enabler, including also customized mobile services such as our network integrated ValidSoft security and fraud prevention solutions.

 

ValidSoft – Fraud Prevention and Security Software Solutions

 

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

 

As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.

 

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques.
XML 40 R3.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
Accounts receivable, allowance for doubtful accounts $ 436,546 $ 119,044
Common stock, no par value      
Common stock, shares authorized 250,000,000 250,000,000
Common stock, issued 110,525,233 88,660,848
Common stock, outstanding 110,525,233 88,660,848
XML 41 R17.htm IDEA: XBRL DOCUMENT v2.4.0.6
Overdraft
 12 Months Ended
Dec. 31, 2011
Overdraft

Note 11. Overdraft

 

In 2004, Elephant Talk Ltd, a subsidiary of the Company executed a credit facility with a bank in Hong Kong pursuant to which Elephant Talk Ltd. borrowed funds. As of December 31, 2011, the overdraft balance, including accrued interest totaled, $312,236 compared to $278,637 as of December 31, 2010. 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. The Company has not guaranteed the credit facility or is otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd. Further detail can be found in Note 25, Litigation. As of December 31, 2011, Moba Consulting Partners B.V., a subsidiary of the Company, had an overdraft of $0 compared to $78,101 as of December 31, 2010 on one of the company’s bank accounts.
XML 42 R1.htm IDEA: XBRL DOCUMENT v2.4.0.6
Document and Entity Information (USD $)
 12 Months Ended
Dec. 31, 2011
Mar. 09, 2012
Jun. 30, 2011
Document Information [Line Items]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2011    
Document Fiscal Year Focus 2011    
Document Fiscal Period Focus FY    
Trading Symbol ETAK    
Entity Registrant Name ELEPHANT TALK COMMUNICATIONS CORP    
Entity Central Index Key 0001084384    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   113,807,071  
Entity Public Float     $ 188,000,000
XML 43 R18.htm IDEA: XBRL DOCUMENT v2.4.0.6
Deferred Revenue
 12 Months Ended
Dec. 31, 2011
Deferred Revenue

Note 12. Deferred Revenue

 

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 $132,467 and $0 as of December 31, 2011 and December 31, 2010, respectively.
XML 44 R4.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (USD $)
 12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
REVENUES $ 32,232,981 $ 37,168,351 $ 43,650,957
COST AND OPERATING EXPENSES      
Cost of service 28,723,265 35,120,916 41,452,639
Selling, general and administrative expenses 16,589,649 9,620,322 7,958,933
Non-cash compensation to officers, directors and employees 6,818,905 5,588,392 1,727,870
Depreciation and amortization of intangibles assets 5,254,708 5,312,469 3,051,461
Intangible assets impairment charge 522,726    
Total cost and operating expenses 57,909,253 55,642,099 54,190,903
LOSS FROM OPERATIONS (25,676,272) (18,473,748) (10,539,946)
OTHER INCOME (EXPENSE)      
Interest income 106,721 239,713 160,535
Interest expense (201,184) (1,802,804) (938,627)
Other income 460,000   (480,000)
Interest expense related to amortization of debt discount on promissory notes   (21,094,104) (4,369,183)
Change in fair value of warrant liabilities   (48,107,969) (538,382)
Amortization of deferred financing costs   (3,238,602) (591,710)
Total other income (expense) 365,537 (74,003,766) (6,757,367)
LOSS BEFORE PROVISION FOR INCOME TAXES (25,310,735) (92,477,514) (17,297,313)
Provision for income taxes   (800) (800)
NET LOSS BEFORE NONCONTROLLING INTEREST (25,310,735) (92,478,314) (17,298,113)
Net (loss) income attributable to non-controlling interest   (5,046) (1,771)
NET LOSS (25,310,735) (92,483,360) (17,299,884)
OTHER COMPREHENSIVE (LOSS) INCOME      
Foreign currency translation gain (loss) net of tax (624,275) (1,655,917) 190,063
Other Comprehensive Income (Loss), Net of Tax, Total (624,275) (1,655,917) 190,063
COMPREHENSIVE LOSS $ (25,935,010) $ (94,139,277) $ (17,109,821)
Net loss per common share and equivalents - basic and diluted $ (0.24) $ (1.31) $ (0.32)
Weighted average shares outstanding during the period - basic and diluted 104,326,066 70,670,776 53,553,354
XML 45 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note receivable
 12 Months Ended
Dec. 31, 2011
Note receivable

Note 6. Note receivable

 

As of December 31, 2011 the company recorded $417,199 of notes receivable, compared to $0 as of December 31, 2010. Notes receivable as of December 31, 2011 represent a loan of $378,354 to Morodo Ltd, from the U.K and $38,845 to Elephant Security I from the Netherlands. The loans to both companies are interim loans prior to the intended acquisition.
XML 46 R11.htm IDEA: XBRL DOCUMENT v2.4.0.6
Financial Investment in Joint Venture
 12 Months Ended
Dec. 31, 2011
Financial Investment in Joint Venture

Note 5. Financial Investment in Joint Venture

 

On December 31, 2011 the company recorded an amount of $323,708 as financial investment for acquiring one third (33.33%) ownership of a company. This financial investment is related to the purchase, from a Dutch liquidator, of various assets and liabilities from a bankrupt Dutch company together with two other parties. In order to formalize the structure, the three parties’ set-up a new company called Elephant Security I. The investment was recorded at cost and is accounted for using the equity method.
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Convertible Notes/Loans
 12 Months Ended
Dec. 31, 2011
Convertible Notes/Loans

Note 17. Convertible Notes/Loans

 

12% Secured Convertible Promissory Note 2009

 

During 2011 and following the completion of administrative processing, the company issued the remaining 2,210,367 shares due to holders of the Secured Convertible Promissory Note 2009 that were automatically converted in November 2010.
XML 48 R19.htm IDEA: XBRL DOCUMENT v2.4.0.6
Accrued Expenses
 12 Months Ended
Dec. 31, 2011
Accrued Expenses

Note 13. Accrued Expenses

 

    December 31, 2011     December 31, 2010  
Accrued selling, general & administrative expenses   $ 1,477,463     $ 1,494,218  
Accrued cost of sales and network     562,240       380,236  
Accrued taxes     294,689       791,128  
Accrued interest payable     701,366       653,146  
Other     --       525,210  
Total accrued expenses   $ 3,035,758     $ 3,843,938
XML 49 R15.htm IDEA: XBRL DOCUMENT v2.4.0.6
Intangible Assets - Customer Contracts, Licenses and Interconnects
 12 Months Ended
Dec. 31, 2011
Intangible Assets - Customer Contracts, Licenses and Interconnects

Note 9. Intangible Assets - Customer Contracts, Licenses and Interconnects

 

Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as ValidSoft Intellectual Property, including but not limited to software source codes, applications, customer list & pipeline, registration & licenses, patents and trademark/brands.

 

Intangible assets as of December 31, 2011 and 2010 consisted of the following:

 

    Estimated   December 31,   December 31,  
    Useful Lives   2011   2010  
Customer Contracts, Licenses , Interconnect & Technology   5-10   $ 11,480,653   $ 11,615,700  
ValidSoft IP & Technology   1-10     15,428,182     15,639,154  
Total intangible assets         26,908,835     27,254,854  
                   
Less: Accumulated Amortization and impairment charges         (9,735,102 )    (8,684,964 ) 
Less: Accumulated Amortization ValidSoft IP & Technology         (4,389,533 )    (2,316,303 ) 
Total intangible assets, Net       $ 12,784,199   $ 16,253,587  

 

Total amortization expense for the year ended December 31, 2011 totaled $3,022,909 compared to $3,051,980 and $804,792 for the same period 2010 and 2009, respectively. In 2011 an impairment charge was recorded for ($522,726) in the Profit & Loss and ($486,575) in the balance sheet. The assets impaired pertained primarily to the acquired two-stage dialing business, which is part of the landline business. In 2010 and 2009 the company did not record any impairment.

 

    December 31,   December 31,  
Goodwill   2011   2010  
Goodwill at acquisition of ValidSoft Ltd   $ 3,433,833   $ 3,433,833  
End of period exchange rate translation     (278,862 )    (203,047 ) 
Total   $ 3,154,971   $ 3,230,786  

 

Estimated future amortization expense related to our intangible assets is:

 

    2012     2013     2014     2015     2016     2017
thereafter		  
Interconnect licenses and contracts   $ 584,079     $ 553,511     $ 475,418     $ 104,990     $ 4,382     $ 0  
ValidSoft IP & Technology     2,253,379       2,253,379       2,253,379       2,102,949       2,052,805       787,556  
    $ 2,837,458     $ 2,806,890     $ 2,728,798     $ 2,207,939     $ 2,057,187     $ 787,556  

  

Intangible Assets Impairment charge

 

The Company assessed the carrying value of its intangible assets as of December 31, 2011. As a result of this assessment, the Company determined that the value of certain specific intangible assets was higher than the estimated recoverable value and therefore an impairment charge of $522,726 was recorded during 2011. In the evaluation of its Intangible Assets, the Company estimated the discounted future cash flows directly associated with the asset and compared these to the asset’s carrying amount.
XML 50 R13.htm IDEA: XBRL DOCUMENT v2.4.0.6
Long-term Deposit
 12 Months Ended
Dec. 31, 2011
Long-term Deposit

Note 7. Long-term Deposit

 

Long-term earnest deposits to various telecom carriers during the course of its operations and a deposit towards the French Tax Authorities for the total amount of $651,930 as at December 31, 2011 compared with $610,486 as of December 31, 2010. The deposits are refundable at the termination of the business relationship with the carriers.
XML 51 R14.htm IDEA: XBRL DOCUMENT v2.4.0.6
Property & Equipment
 12 Months Ended
Dec. 31, 2011
Property & Equipment

Note 8. Property & Equipment

 

· Intelligent Network (IN) platform

 

· CRM software

 

· Mediation, Rating & Pricing engine

 

· Operations and Business Support software

 

· Network management tools

 

Property and equipment at December 31, 2011 and December 31, 2010 consist of:

 

    Average
Estimated
Useful		     December 31,     December 31,  
    Lifetime     2011     2010  
Furniture and fixtures     5       290,058       215,905  
Computer, communication and network equipment     3 - 10       15,247,060       9,724,189  
Software     5       4,752,070       4,187,523  
Automobiles     5       98,416       125,241  
Construction in progress             2,516,476       1,984,674  
Total property and equipment             22,904,080       16,237,531  
                         
Less: accumulated depreciation             (9,588,393 )     (7,784,943 )
Total property and equipment, Net           $ 13,315,687     $ 8,452,588  

 

Construction in progress consists of software projects in development that have not yet been completed. Total depreciation expense for the year ended December 31, 2011 totaled $2,231,799 compared to $2,260,489 and 2,246,669 for the same period 2010 and 2009, respectively.
XML 52 R16.htm IDEA: XBRL DOCUMENT v2.4.0.6
Acquisition of ValidSoft Ltd
 12 Months Ended
Dec. 31, 2011
Acquisition of ValidSoft Ltd

Note 10. Acquisition of ValidSoft Ltd

 

On March 17, 2010 we issued 10,235,739 shares and 3,829,487 warrants as purchase price consideration following the completion of the acquisition of ValidSoft of which 2,558,937 shares and 957,373 warrants are contingent upon meeting specific targets following a stepped earn-out agreement.  Based upon a number material contracts not having been concluded yet as of the date of this report, the Company does not expect that the targets set forth in the earn-out agreement, will be met at this point in time. Consequently, the total value for the consideration is $16,033,688 comprising the fair market value for the non-contingent shares of $12,129,352 and non-contingent warrants of $3,904,336. The contingent consideration is held in escrow. The Company will continue to monitor the progress made and determine quarterly to what extent the stepped targets are likely to be met. 

 

Consideration paid   Total 
Consideration		     Non-
Contingent
Consideration		     Contingent
Consideration		  
Number of shares     10,235,739       7,676,805       2,558,934  
Fair value (share price at 17 March 2010)   $ 1.58     $ 12,129,352       -  
Numer of warrants     3,829,487       2,872,114       957,373  
Fair Value (black-scholes)           $ 3,904,336          
Total Consideration Paid           $ 16,033,688          

 

Following the valuation of ValidSoft, we allocated the above purchase price to the identifiable assets and liabilities of ValidSoft.

 

A summary of the assets acquired and liabilities assumed for ValidSoft are:

 

Estimated fair values:        
Assets acquired   $ 16,677,323  
Liabilities assumed     4,077,467  
         
Net assets acquired     12,599,856  
Consideration paid inclusive of contingent consideration valued at zero     16,033,688  
         
Goodwill   $ 3,433,832  

 

The operating results of ValidSoft have been consolidated with those of the Company starting April 1, 2010.
XML 53 R34.htm IDEA: XBRL DOCUMENT v2.4.0.6
Loans and Convertible Notes (Private Placement 2009)
 12 Months Ended
Dec. 31, 2011
Loans and Convertible Notes (Private Placement 2009)

Note 28. Loans and Convertible Notes (Private Placement 2009)

 

Automatic Conversion of 2009 12% Convertible Promissory Notes

 

On November 19, 2010, the twenty day average closing price of the common stock of Elephant Talk Communications Corp. (the “Company”) exceeded $3.18.  As a result and pursuant to their terms, all outstanding 12% convertible promissory notes (the “Notes”) issued in connection with the Company’s 2009 private placement offering of units consisting of Notes and warrants to purchase shares of the Company’s common stock, no par value (the “Units”), plus all interest due the holder of the Note, automatically converted into common stock at the previously established conversion price of one (1) share of common stock per each $1.35 in principal plus interest due.  The Units are more fully described in the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on August 6, 2009, August 24, 2009, September 10, 2009, October 5, 2009 and November 10, 2009 and in the Company’s quarterly filings on Form 10-Q and annual report for the year ended December 31, 2010 filed with the Commission on March 31, 2010.

 

As per the closing of 2011 all shares falling under the Private Placement 2009 have been issued and including previous years resulted in a total number of 9,933,234 issued shares of common stock in connection with the conversion of all of the Notes including accumulated and unpaid interest paid for in shares.
XML 54 R21.htm IDEA: XBRL DOCUMENT v2.4.0.6
Trade note payable
 12 Months Ended
Dec. 31, 2011
Trade note payable

Note 15. Trade note payable

 

The company entered into an arrangement with a vendor for the supply of telecommunication equipment whereby extended credit terms were agreed over and above normal credit terms. The extended credit terms stipulate a repayment of the outstanding purchase price consideration over a period of 24 months starting October 2011. The trade note payable amount relates to the portion of this outstanding price consideration due after one year.
XML 55 R26.htm IDEA: XBRL DOCUMENT v2.4.0.6
Basic and diluted net loss per share
 12 Months Ended
Dec. 31, 2011
Basic and diluted net loss per share

Note 20. Basic and diluted net loss per share

 

Net loss per share is calculated in accordance with ASC 260, Earnings per Share, (formerly SFAS No.128). 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.
XML 56 R5.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Total
USD ($)
Sold
USD ($)
Sign-in fee
USD ($)
Directors Compensation
USD ($)
Consultants
USD ($)
Management Compensation
USD ($)
Financing
USD ($)
Board and Management
USD ($)
Common Stock
USD ($)
Common Stock
Sold
USD ($)
Common Stock
Sign-in fee
USD ($)
Common Stock
Directors Compensation
USD ($)
Common Stock
Consultants
USD ($)
Common Stock
Management Compensation
USD ($)
Common Stock
Financing
USD ($)
Common Stock
Convertible Notes 2009
Common Stock
Board and Management
USD ($)
Other compre-hensive income (loss)
USD ($)
Accum-mulated Deficit
USD ($)
Beginning Balance at Dec. 31, 2008 $ 8,844,850               $ 52,933,208                 $ 946,834 $ (45,035,192)
Beginning Balance (in shares) at Dec. 31, 2008                 50,433,260                    
Shares issued (in shares)                   476 866,316   307,300            
Shares issued   500 571,074   205,389         500 571,074   205,389            
Shares issued for compensation (in shares)                       1,884,200   624,800          
Shares issued for compensation       532,583   469,880           532,583   469,880          
Shares returned by former CFO (in shares)                 (420,368)                    
Shares returned by former CFO (192,694)               (192,694)                    
Placement fees (100,000)               (100,000)                    
Amortization of Stock Options expense 460,838               460,838                    
Other comprehensive loss due to foreign exchange rate translation net of tax 190,063                                 190,063  
Net loss (17,299,884)                                   (17,299,884)
Ending Balance at Dec. 31, 2009 (6,317,401)               54,880,778                 1,136,897 (62,335,076)
Ending Balance (in shares) at Dec. 31, 2009                 53,695,984                    
Shares issued for acquisitions (in shares)                 7,682,869                    
Shares issued for acquisitions 16,008,172               16,008,172                    
Shares issued (in shares)                         195,876   16,879,342        
Shares issued     (85,974)   293,371   19,678,188       (85,974)   293,371   19,678,188        
Shares issued for note conversions (in shares)                 7,722,867                    
Shares issued for note conversions 9,759,283               9,759,283                    
Shares issued for warrant exercises (in shares)                 1,087,809                    
Shares issued for warrant exercises 2,237,897               2,237,897                    
Shares issued for employee stock option exercises (in shares)                 933                    
Shares issued for compensation (in shares)                           1,395,168          
Shares issued for compensation           2,441,541               2,441,541          
Shares to be cancelled (21,629)               (21,629)                    
Shares to be issued 3,461,865               3,461,865                    
Placement fees (1,839,765)               (1,839,765)                    
Equity warrants 49,929,012               49,929,012                    
Amortization of Stock Options expense 2,639,236               2,639,236                    
Change in fair value of warrants 24,443,689               24,443,689                    
Other comprehensive loss due to foreign exchange rate translation net of tax (1,655,917)                                 (1,655,917)  
Net loss (92,483,360)                                   (92,483,360)
Ending Balance at Dec. 31, 2010 28,488,209               183,825,664                 (519,020) (154,818,436)
Ending Balance (in shares) at Dec. 31, 2010                 88,660,848                    
Shares issued (in shares)                         303,506     2,210,367      
Shares issued         737,611               737,611            
Shares issued for warrant exercises (in shares)                 18,063,551                    
Shares issued for warrant exercises 25,489,729               25,489,729                    
Shares issued for employee stock option exercises (in shares)                 786,672                    
Shares issued for employee stock option exercises 1,255,237               1,255,237                    
Shares issued for compensation (in shares)                                 500,287    
Shares issued for compensation               1,343,208                 1,343,208    
Shares to be issued 5,269               5,269                    
Warrant solicitation fee (1,052,897)               (1,052,897)                    
Amortization of Stock Options expense 4,697,305               4,697,305                    
Expenses attributable to share issuances (112,229)               (112,229)                    
Other comprehensive loss due to foreign exchange rate translation net of tax (624,275)                                 (624,275)  
Net loss (25,310,735)                                   (25,310,735)
Elimination of rounding (in shares)                 (2)                    
Ending Balance at Dec. 31, 2011 $ 34,917,233               $ 216,188,897                 $ (1,143,295) $ (180,128,371)
Ending Balance (in shares) at Dec. 31, 2011                 110,525,229                    
XML 57 R10.htm IDEA: XBRL DOCUMENT v2.4.0.6
Prepaid Expenses and Other Current Assets
 12 Months Ended
Dec. 31, 2011
Prepaid Expenses and Other Current Assets

Note 4. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets recorded at $1,522,461 as of December 31, 2011, compared with $2,337,914 as of December 31, 2010.
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Non-Qualified Stock and Option Compensation Plan and Long Term Incentive Plan
 12 Months Ended
Dec. 31, 2011
Non-Qualified Stock and Option Compensation Plan and Long Term Incentive Plan

Note 21. Non-Qualified Stock and Option Compensation Plan and Long Term Incentive Plan

 

2006 Non-Qualified Stock and Option Compensation Plan

 

Under this plan there are, as of December 31, 2011, 75,000 stock options outstanding. There are remaining 600,000 shares and 14,490 stock options available for grant.

 

Options granted generally vest over a 3 year period. Options generally expire 2 years from the date of vesting.

 

Common stock purchase options and warrants consisted of the following as of December 31, 2011:

 

    Number of
shares		     Average
Exercise
Price		     Initial
Black
Scholes
Value		  
Options:                        
Outstanding as of December 31, 2010     307,742     $ 2.25     $ 398,608  
Granted in 2011     81,422     $ 2.65     $ 25,371  
Exercised/Shares delivered or to be delivered     301,100     $ 2.32     $ 359,390  
Cancelled/Forfeited/Returned to reserve     13,064     $ 2.25     $ 11,147  
Outstanding as of December 31, 2011     75,000     $ 2.25     $ 53,441  

 

Most options were granted with an exercise price of $2.25, the share closing price as of September 26, 2007. All options have vested already. During 2011, with approval of the board/compensation committee, we granted 81,422 options to some of our employees offering them to make use of a special tax friendly saving scheme. These options were issued with an exercise price of $2.65.

 

The remaining options will expire in 2013 with various expiration dates.

 

The ‘cancelled/forfeited/returned to reserve’ options during 2011 of 13,064 were all granted in 2008 and were returned in connection with the cashless exercise of 18,000 initial options which resulted in the delivery of 4,936 shares.

 

Following is a summary of the status of options outstanding at December 31, 2011:

 

    Options outstanding     Options exercisable  
Range of Exercise Prices   Total
Options
Outstanding		     Weighted
Average
Remaining
Contractual 
Life 
(Years)		     Weighted
Average
Exercise
Price		     Options
Exercisable		     Weighted
Average
Exercise
Price		  
$  2.25  -  $  2.65     75,000       1.73 years     $ 2.25       75,000     $ 2.25  

 

At December 31, 2011, the total compensation cost related to unvested stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2006 stock award plan, but not yet recognized was $0.

 

2008 Long-Term Incentive Plan

 

The 2008 plan was adopted on January 15, 2008, and approved by our shareholders on the same date as our annual meeting. This incentive plan authorizes awards of up to 5,000,000 shares of common stock, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of common stock underlying the awards to be granted remained the same after the 25 to one reverse stock-split that was effectuated on June 11, 2008.

 

On October 6, 2011 the company filed, after approval of the shareholders, an “Amended and Restated 2008 Long-Term Incentive Compensation Plan” which basically provided in the increase of the existing 5,000,000 shares of common stock into 23,000,000 shares of common stock in order to cover future grants under this Plan.

 

As of December 31, 2011, a total of 7,793,989 stock options are outstanding under the Plan and 325,000 shares of restricted common stock together with 507,300 shares of common stock had been granted under this plan. Options granted generally begin vesting over a three-year period after grant date although options have been granted with a shorter period than three years. Options granted in the beginning expire two years from the date of vesting but the latest in 2010 issued options remain exercisable for nine years from the date of vesting. It is expected that future options will be awarded with the nine-year exercise period after first vesting.

 

Common stock purchase options and warrants consisted of the following as of December 31, 2011:

 

    Number
of
shares		     Average
Exercise
Price		     Initial Fair 
Market 
Value		  
Options:                        
Outstanding as of December 31, 2010     4,083,100     $ 1.35     $ 5,002,238  
Granted in 2011     4,644,883     $ 2.52     $ 6,312,781  
Exercised/Shares delivered or to be delivered     510,095     $ 1.14     $ 626,179  
Cancelled/Forfeited/Returned to reserve     423,899     $ 1.62     $ 493,361  
Outstanding as of December 31, 2011     7,793,989     $ 1.78     $ 10,195,479  

 

The options granted in 2011 were granted with an average exercise price of $2.52. The initial fair market value of the options granted using the Black-Sholes options model for these options has been valued at $6,312,781 at their initial grant-date.

 

Following is a summary of the status of options outstanding at December 31, 2011:

 

2008 Plan   Options outstanding     Options exercisable  
Range of
Exercise
Prices		   Total
Options
Outstanding		     Weighted
Average
Remaining
Contractual
Life (Years)		     Weighted
Average
Remaining
Expected
Life 
(Years)		     Weighted
Average
Exercise
Price		     Options
Exercisable		     Weighted
Average
Exercise
Price		  
$0.60 - $3.39     7,793,989       8.06       6.93     $ 1.777       1,284,547     $ 1.12  

 

The weighted average assumptions used for the options granted in 2011 using the Black-Scholes options model are: cumulative volatility of 152%, expected option life 5.60 years (using the simplified method) and a Risk Free Interest Rate of 1.899%. The expected dividend yield is zero.

 

At December 31, 2011 the not yet recognized expense portion of stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2008 stock award plan, was approximately $3,109,478. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate has been adjusted from 4.21% to 6.50% and the corresponding profit and loss effect has been accounted for in 2011.

 

Stock-Based Compensation Expense

 

Under the provisions of ASC 718, the Company recorded for the year ended December 31, 2011, $6,818,905 in stock-based compensation expense for management shares, Non-Qualified Stock and Option Compensation Plan and shares issued for consultancy and employee compensation. For the comparable period in 2010 the expensing was $5,588,392. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123(R).
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Loans Payable
 12 Months Ended
Dec. 31, 2011
Loans Payable

Note 14. Loans Payable

 

Loans payable at December 31, 2011 and 2010 are summarized as follows:

 

    December 31
2011		    

December 31

2010

  
Installment loan payable due December 24, 2006, secured by personal guarantees of two shareholders, a former director, and a third party   $ 319,765     $ 319,182  
Installment loan payable, bank, monthly principal and interest payments of $2,798 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 30, 2008, due December 24, 2011, secured by personal guarantees of three shareholders and a former director     254,224       190,716  
Installment loan payable, bank, monthly principal and interest payments of $1,729 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 24, 2008, due June 28, 2009, secured by personal guarantees of three shareholders and a former director     103,704       84,799  
Term loan payable, bank, monthly payments of interest at bank’s prime rate, 7.0% at December 31, 2007     283,177       282,660  
Total   $ 960,870     $ 877,357  

 

In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Case No. 30-2009-00328467.

 

The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

 

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

 

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

· The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

· The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and
· The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

 

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.