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, 2013

 

¨    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 registrant as specified in its charter)

 

DELAWARE   95-4557538
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

Cross Rock Place Executive Suites No. 102

3600 NW 138 th St., 

Oklahoma City, OK 73134

USA

(Address of principal executive offices)(Zip Code)

 

+ 1 (405) 301-6774

(Registrant's telephone number, including area code)

 

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

 

Common Stock, $0.00001 par value per
share
  NYSE MKT LLC
(Title of Class)   (Name of each exchange on which
registered)

 

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.   Yes   ¨   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ¨   No  x

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR 229.405) 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 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 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $59 million based on the closing sale price of the Company’s common stock on such date of U.S. $0.59 per share, as reported by the NYSE MKT LLC.

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 28, 2014, there were 141,201,742 shares of Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information contained in the Proxy Statement for the 2014 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III of this Form 10-K.

 

 
 

 

Elephant Talk Communications Corp.

 

Form 10-K

For the fiscal year ended December 31, 2013

 

TABLE OF CONTENTS

 

Note on Forward-Looking Statements

Explanatory  Note

 

PART I    
     
Item 1. Description of Business. 4
Item 1A. Risk Factors. 12
Item 1B. Unresolved Staff Comments. 22
Item 2. Description of Property. 22
Item 3. Legal Proceedings. 23
Item 4. Mine Safety Disclosure. 23
     
PART II    
     
Item 5. Market for Common Equity and Related Stockholder Matters. 23
Item 6. Selected Financial Data. 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 38
Item 8. Financial Statements. 39
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 73
Item 9A. Controls and Procedures. 74
Item 9B. Other Information. 77
     
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance. 77
Item 11. Executive Compensation. 77
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 77
Item 13. Certain Relationships and Related Transactions, and Director Independence. 77
Item 14. Principal Accountant Fees and Services. 77
     
PART IV    
     
Item 15. Exhibits, Financial Statement Schedules. 78

 

 

 

2
 

 

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,” “should,” “will,” “would” and other similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other “forward-looking” information. Elephant Talk Communications Corp., believes that it is important to communicate our future expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or control. 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 regain compliance with the listing standards of the NYSE MKT LLC (“the Exchange”);

 

· our potential inability to continue as a going concern;

 

· 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

 

3
 

 

· 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.

 

AVAILABLE INFORMATION

 

We maintain a corporate website with the address  www.elephanttalk.com . We intend to use our website as a regular means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD promulgated by the Securities and Exchange Commission (the “SEC”). Such disclosures will be included on the website under the heading “News” and “Investors – Press Releases”. Accordingly, investors should monitor such portions of the website, in addition to following the Company’s press releases, SEC filings and public conference calls and the webcasts.

 

We are not incorporating information contained in the website by reference into this Annual Report on Form 10-K. We make available, free of charge, through the website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after electronically filing such material with, or furnishing such material to, the SEC.

 

Materials filed with the SEC can be read and copies made at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC also maintains a website,  www.sec.gov  containing the reports, proxy and other information filed with the SEC.

 

PART I 

Item 1.  Business

 

Business overview

 

As a mobile S oftware Defined Network Architecture (Software DNA™) vendor Elephant Talk Communications Corp. and its subsidiaries (also referred to as “Elephant Talk”, “ET” and “the Company”) provide a one stop solution for a full suite of mobile, fixed and convergent telecommunications software services. We also provide layered security services for mission critical applications in the cloud, through our wholly owned subsidiary, ValidSoft UK Limited (“ValidSoft”).

 

Over the last decade, Elephant Talk has developed a comprehensive Mobile Enabling Platform, capable of hosting an integrated IT/BackOffice and Core Network for Mobile Network Operators (MNO’s) and Mobile Virtual Network Operators (MVNO’s), Enablers (MVNE’s) and Aggregators (MVNA’s) on a fully outsourced basis. Our mobile enabling platform is either made available as an on premise solution or as a fully hosted service in ‘the cloud’, depending on the individual needs of our MNO and MVNO/MVNE/MVNA partners. Our mobile security services supply telecommunications-based multi-factor mutual authentication, identity and transaction verification solutions for all electronic transaction channels. This integrated suite of security services provides mission critical applications in the cloud to customers in industries such as financial services, government benefits, and insurance, as well as electronic medical record providers and MNOs. Our company provides customers the means to effectively combat a variety of electronic fraud while at the same time protecting consumer privacy.

 

4
 

 

Overall business strategy

 

The core of our business strategy is developing, or acquiring and maintaining, preferably ring-fenced and company-owned software technologies in the field of communication management, cloud based applications and security concepts, positioning ourselves to be the preferred global outsourcing partner for these types of managed services. We focus on managing and securing the (mobile) cloud for any relevant mission critical application, and more specifically in the following areas, whereby each area may be addressed by a separately managed, majority owned operating entity, coordinated through our listed holding company:

 

· Comprehensive mobile platform services;

· Electronic transaction support services, e.g. for the financial services industry;

· Secure cloud access services, e.g. for electronic medical record providers;

· Cloud transaction infrastructure and execution services, e.g. for international remittances.

 

Execution and operational focus of ET business strategy

 

Management’s attention is fully dedicated to the scalability of our platform, excellence in our operations, and the build-out of our sales, marketing and service and support organization. Our geographical strategic focus is currently aimed primarily at Europe, the Middle East & Africa, and the Americas, usually with the support of local partners in each of those regions. Next to platforms servicing the Netherlands and Belgium, we intend to build out our existing MVNO outsourcing platforms in Spain and Saudi Arabia and the in early 2013 contracted MNO outsourcing platform in Mexico. The Mexican MNO platform will have an initial capacity to host 10 million subscribers and over time will have the dimensions to grow to a 20 million subscriber platform.

 

Electronic fraud within financial services amounts to a cost of more than $250 billion 1 in the US alone, and as such, our security services for mission critical applications in the cloud are of major interest to banks, credit card companies and the public sector. The growing importance and awareness of customer’s privacy and data protection is putting additional pressures on those industries to look for fully compliant solutions. In response to these challenges, ValidSoft is regarded as one of the few providers offering security applications of the highest standards in a highly competitive environment. ValidSoft has not only been rewarded with three European Privacy Seals by the European Privacy Seal System (“EuroPrise”) but has also been selected by major financial institutions to provide its mission critical applications.

 

Global developments in telecommunications industries

 

A number of relevant factors in the converging global telecommunications industries, along with the increasing adoption by consumers and businesses of mobile and wireless based applications, drive our investments and services. We believe the mobile phone and tablet will become the channel of choice for consumers and 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 communciations for cashless payments, couponing, cashless tickets, vending machine payments, grocery store payments;

· Credit card applications;

· Customer profiling and data mining to support one-on-one marketing;

· Security and trust sensitive applications; the mobile phone as authenticator.

  

 

1 Sources: McAfee Inc and /Symantic Corp. 2012

 

5
 

 

MNO telecommunications markets

 

On a global scale there are currently more than 800 MNOs worldwide. Over the next couple of years we expect that as many new entrants will start offering mobile broadband services to their customers. As Elephant Talk’s Software Defined Architecture Network (“Software DNA™”) Platform is currently able to service up to 20 million customers, we are positioned to service almost all of the existing MNO’s, except the 20 to 30 largest mobile operations. Over time, with the capacity of the Software DNA™ platform being expanded and its functionality extended, we should be able to cover the requirements of the whole markets. As these MNO’s face issues regarding their legacy systems in a rapidly and deeply changing market, these MNOs will need to look for alternatives, typically in the form of an integrated solution like the one Elephant Talk has spent years building and offers. Currently, we service five MNOs in five different countries.

 

Due to the fast growing demand for data services and increasing competitive and regulatory pressure, along with an increasing cost base, and slipping Average Revenue Per User (“ARPU”) and margins.

 

MNO’s are faced with the challenge of rationalizing their cost base, and can do so by streamlining the way they conduct business within three main areas of operation:

 

  · RAN (Radio Access Network) and Core Network: As all vendors in this domain have access to the same patent pools, driven by the standardization of technologies, each vendor provides almost interchangeable products and services. Because of this, MNO’s can outsource this part of their operation to one or a combination of vendors relatively easily.

 

  · Sales, Marketing, Distribution and Channel Management: Most MNO’s are trying to rationalize this part of their business, mostly by recognizing the fact that one single brand usually cannot fit all specific market demand in all market segments. Therefore many MNO’s are launching second brands, co-branding with well established consumer brands, and are partnering with a variety of channel partners, or contracting with a whole range of third parties, for example MVNOs.

 

  · Service Control, Real-time Rating, Billing and IT/Back Office: The third major area of operations concerns all hardware and software that is required to effectively manage, deploy, support, bill and collect payment for any specific service, to both wholesale as well as to individual customers. In this domain there are few standards, and there are basically no overall patent pools to which vendors and suppliers have common access. Many suppliers, regional or even locally based, are offering their services in these domains, mostly aimed at a very specific and limited part of the overall required solution. Due to this fragmentation, most MNO’s currently have dozens of suppliers serving this domain. Due to the absence of coordination, the subsequent lack of overall design, and de-facto interfacing and processing standards, most MNO’s currently have 20 to 40 different operating and mediation platforms in their IT/Back Office. These platforms seldom communicate properly between each other which results in platforms operating in isolated silos. This  undermines any management capability and service provisioning flexibility needed by MNO´s to address a changing market. In the meantime costs increase due to these complex structures and interdependencies. As each of these vendors and suppliers usually retains source code on their own solution (thereby preventing any competitor from controlling their software and equipment) it becomes virtually impossible for the MNO to fully outsource this whole area to a single vendor or supplier. Some MNO’s have tried to relieve their management and performance headaches by outsourcing management of the whole or parts of their IT/Back Office systems to large system integrators like IBM, Accenture, Cap Gemini or Atos Origin, displacing the issue and usually at a steep cost. Elephant Talk´s management believes that it can respond to this issue with its single platform solution, that encompasses the overall needs of an MNO in this domain.  We believe we are well positioned to become a preferred outsourcing partner for a growing number of MNO’s that want to combine a flexible, integrated and low cost outsourced single platform solution that could result in higher service level standards as measured through relevant industry standards.

 

MNO’s will soon have to manage new upgrades in technology involving 10B handset and mobile broadband connections, next to the anticipated 50+B so called Internet of Things (Machine2Machine or M2M), providing a substantial addressable market for Elephant Talk. (Multiple sources: e.g. Gartner, Ovum and several MNOs).

 

6
 

 

MVNO telecommunications markets

 

By Informa 2

 

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. We expect that the global MVNO market will reach 270 million subscriptions by the end of 2018 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 Ovum 3

 

Ovum forecasts that MVNO connections will grow from 98.6 million in 2012 to 408,2 million in 2018 and will then account for 5% of all global mobile connections. Revenues are expected to be $ 42,3 billion in 2018. 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. Ovum expects the bulk of MVNO connections and revenue growth from 2013–17 will come from established MVNO markets in Western Europe, Asia-Pacific, and North America.

 

Established MVNO markets

 

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 MVNO’s) for many years, and this is not expected to change over the foreseeable future, especially as both markets are regarded as good testing grounds for MVNO’s looking to trial new business models. Due to aggressive pricing from MNO’s to avoid losing market share, there is substantial pressure on these MVNO markets. In due course only larger, established MVNO’s and niche market participants may survive in the competitive market. This market development is the main reason why Elephant Talk is focused on the MNO outsourcing market.

 

Emerging markets warming to MVNO’s

 

While currently there are very few MVNO’s in emerging markets, more markets are expected to introduce MVNO’s in the future. MVNO’s are expected to move into markets in Brazil, Chile, Central America and other countries in Latin America, plus Turkey, the Middle East, India, Pakistan, and Vietnam in Asia-Pacific. Markets such as Africa and India present an attractive opportunity for MVNO’s, but there are still a number of obstacles impacting MVNO development in these markets including a lack of cooperation from MNO’s and a lack of regulation to facilitate new MVNO entrants. The Company expects the majority of new MVNO markets to be relatively small and have limited impact on global MVNO connections and revenues. In markets where changes in regulation may be imminent, market opportunities may increase.

 

MVNO revenues to remain steady

 

Global revenues are estimated to remain steady over the next five years through 2019. Currently, Western Europe and the U.S. 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 Ovum estimates  that this will increase to 6% by 2015.

 

2 Extract Global MVNO Forecast to 2018, © 2013 Informa Telecom & Media, Publication

 

3 Reference Code: Ovum 2013/18, Publication Date 17 December 2013

 

7
 

 

Global developments in electronic payments and credit card fraud

 

The solutions from ValidSoft are targeted to combat electronic fraud and false positives across card, internet and telephone channels. According to industry leaders such as Symantec Corp. and McAfee Inc., which both sell software to protect computers from hackers, theft of intellectual property costs American companies $250 billion a year. McAfee estimates that the global cost of cybercrime is $1 trillion per annum 4 . Utilizing the ValidSoft’s solutions and technology enables companies to tackle this endemic problem, reducing fraud, and operating costs while improving the customer experience.

 

ValidSoft entered into a strategic partnering agreement with FICO, the leading company providing analytics and decision making services, in late 2011, for the provision of its solutions relating to SIM Swap fraud protection, false positive prevention, and strong authentication. FICO has an enviable commercial relationship with the largest worldwide issuing banks, and opens up a target market of over 5,000 institutions worldwide. FICO has been pressing ahead with the integration of the ValidSoft solutions into its client base and has already deployed with a leading UK bank for the provision of the ValidSoft SIM Swap technology. ValidSoft was awarded its third European Privacy Seal from EuroPrise 5 on October 30, 2012, for its technology in protecting and securing privacy data.

 

Technological execution of our strategy

 

Elephant Talk is believed to be the only managed services vendor that offers a fully integrated OSS/BSS/Core Software Defined Network Architecture platform, providing end-to-end solutions. As Gartner Analysts stated in 2012: “it will be the platforms, the middleware connecting and managing devices, users and applications throughout the cloud/networks, which will drive digital innovation for at least the next decade.”

 

As platform elements move away from specific hardware to software, we are well positioned as we own most of the required software: Elephant Talk can both deeply integrate such software and follow any future market price erosion as investments have already been mostly expensed. ValidSoft has a growing portfolio of intellectual property on the crossroads of turning raw cloud/network data and capabilities into real-time, contextual management decision info, uniquely supported by EuroPrise Privacy Seals. Again according to the same Gartner 2012 analysis: “cloud security is the ’mother’ of all mission critical applications, and will be the ultimate driver of cloud adoption.” With these network/cloud based in-house security capabilities, ET is expected to lead the next wave of platform USP’s: fully integrated (mobile) cloud management and security solutions.

 

Our focus on feasible business opportunities is leading us in the execution of our market-strategy. We have been building a full MNO outsourcing platform for the last six years and we have provided telecommunication managed services for a decade. In the last few years, we have worked with our partner/customer Vodafone to further enhance our platform..

 

We cover over a dozen high-tech hardware and an increasing number of software domains. We have both the capability and credibility to operate core network and core business IT on behalf of MNOs. This capability is the core of our business strategy today. We perceive a genuine acceptability for MNOs as an integrated service provider, illustrated by the fact that the ET Outsourcing Model for our software services has been validated by MNO’s like Vodafone.

 

The ET Outsourcing Model more specifically and detailed, includes service design and control, API design and control, Intelligent Networking, testing, provisioning, switching, real-time dynamic rating & pre/postpaid billing and customer care, call center support, reporting, managing self-care web environments, change management in active systems, SIM Management, (Data) Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems, Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations, life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning, managing and maintaining all the specific core network elements like MSC, SMSC, MMSC, USSDGW, HLR/HSS, IN-SCP, SGSN, GGSN, GMSC, VLR, OTA, etc.

 

4 Sources: McAfee Inc and /Symantic Corp. 2012

 

5 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 Libertés, 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/

 

8
 

 

Our ownership of the source code of most of the key software elements is a must for the extreme flexibility needed and to stay pricing-wise competitive. Elephant Talk owns key components such as service control/Intelligent Network, Rating and Charging of usage and events, data model, provisioning and CRM/Back-Office as well as most Middleware and protocols stacks. Source code access is an absolute requirement to facilitate a deeply embedded, single platform. Elephant Talk uses its own Research and Development department to develop and maintain the different components of the overall solution (IN, Rating, Back-Office, API/CRM/Provisioning, Protocols, Voice Mail & IVR, etc.).

 

Previously, we have stated that our security services for mission critical applications in the cloud are of major interest to banks, credit card companies, governments and the public sector as a whole. The growing importance and awareness of safeguarding customer’s privacy and data protection is putting additional pressures on those industries to look for fully compliant solutions. 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. 

 

In that market context, we have developed a portfolio of security services on a thorough foundation of Intellectual Property (patents pending, core patent granted) and very specific operating models required to obtain and maintain Privacy Seals. Moreover, we have our own technology capable of delivering five factor authentication solutions. We are regarded as industry thought leaders in countering electronic fraud and a trusted partner to leading global regulatory authorities. The ValidSoft Security Models are thoroughly reviewed by Royal Holloway University of London.

 

Market entry strategy US Cloud Security Services

 

Currently, we are active primarily in Europe. The US market offers ValidSoft a substantial opportunity for deployment of its solutions as well. The US is, at this moment, the largest market in the world, and also the largest non-EMV compliant country in the world. The EMV (Europay, MasterCard, Visa) initiative is an electronic authentication system for credit card present transactions. The US has not deployed EMV yet, although it is slated for deployment in 2015. Many questions remain concerning deployment of EMV in the US, not least the cost involved and the implications of EMV on the current payments infrastructure. In countries that have implemented the EMV initiative there has been a decrease in credit card present fraud, but credit card not present, or internet fraud, has risen significantly. We believe the increase in internet fraud provides us with opportunities to deploy ValidSoft solutions and consequently the US remains a strategic target.

 

Our people and innovation practice

 

Learning from experience and substantial investment we have now a thorough understanding of the mobile/cloud ecosystem, and all of its specific software requirements. Our highly skilled people, have a deep knowledge of the security challenges of any mission critical event in the cloud. Within our company there is a fundamental understanding of securing the cloud by creating and providing real-time and contextual information from a variety of sources, also from within the cloud, into a single data point. By a mix of highly-educated, carefully hired staff with a variety of backgrounds and nationalities, we have successfully managed to have a thorough understanding of what it takes to service MVNOs and institutions by offering mission critical services in the cloud in real-time. These capabilities have integrated these elements into a flexible, high performance, user-friendly, and powerful management & security platform available on a managed services basis.

 

Intellectual Property, Products, Research and Development

 

Since the acquisition of ValidSoft by Elephant Talk in 2010, we have submitted new patent applications for ValidSoft technologies in Brazil, China, Hong Kong, Russia, the EU and US jurisdictions. In addition, we have successfully extended the patent for VALid® in the United Kingdom, which will be effective until 2023.

 

9
 

 

In November 2013, ValidSoft was granted an UK patent (GB2494920) with a duration of 20 years for its Dual-Wireless Network (Dual SSID) Authentication System. The Dual SSID (Service Set Identifier) Authentication System authenticates a user or mobile device accessing a visible wireless network, which issues credentials to access a second, highly secure, invisible wireless network. The invention is wide in scope and is suited to the growing usage of mobile phones and personal computers in wireless environments where mobility, security and privacy are essential.

 

In November 2013, FICO, a leading predictive analytics and decision management software company, announced the availability of a new proximity correlation service for credit and debit card issuers which is aimed at improving the safety of payment card transactions. The new FICO service, which is already deployed by a United Kingdom bank, was developed in partnership with ValidSoft.

 

In 2013, ValidSoft filed three new patent applications for VALid-ZLC, VALid-BMD and a bitmap-based Man-in-the-Browser detection solution. 

 

As with our other existing patent applications, pursuant to the Patent Co-operation Treaty, ValidSoft will seek patent coverage in major relevant territories such as the EU, US, China, Russia and Brazil. ValidSoft has a number of additional inventions in the fields of fraud-prevention, biometrics and cryptography that it expects to submit patent applications during2014.

 

ValidSoft and Elephant Talk have also registered a number of trademarks in the EU and US. ValidSoft has registered trademarks for ValidSoft®, VALid®, VALid-SSD® and SMART®. Elephant Talk has registered trademarks for Elephant Talk® and ET Software DNA®. We own all the proprietary copyright-protected source code used in its solutions, and its library has grown significantly in the last three years. Trademarks do not have expiration/duration, however, in certain jurisdictions (i.e. US), the registered trademarks must be renewed every ten years, for another ten years.

 

European Privacy Seal

 

One of the most significant barriers to market-entry in authentication and security solutions, particularly those using biometric and location-based data, is privacy and data protection. We have turned this threat into an opportunity and strength by investing in the EuroPriSe system. EuroPriSe is a voluntary audit and, if successful, certification of a technology solution, which tests the solution against the strictest possible European data protection standards. The EuroPriSe audit and certification is carried out by world-leading experts in technology and data protection (for example, experts from Ernst &Young). ValidSoft now has three European Privacy Seals awarded for location-based VALid-POS, biometric-based VALid-4F and VALid-SSD (SIM-swap detection).

 

Competition

 

Competition for MNO carrier grade outsourcing solutions:

 

We face competition for MNO carrier grade outsourcing solutions from traditional in-house solutions, supported by System Integrators and a wide variety of consultants. We face competition from other vendors who provide fully outsourced services like Ericsson, Huawei, IBM, Accenture, Alcatel Lucent and NSN, partially outsourced vendors, such as Atos Origin, Cap Gemini, specific functional vendors like Amdocs, Oracle, Syniverse, Telcordia and Comverse, as well as hundreds of smaller local software development and support organizations.

 

Competition for MVNO outsourcing solutions:

 

We face competition from MVNOs outsourcing solutions from very fragmented, often smaller, local organizations that act as systems integrator, usually focused on partial solutions: billing, rating; customer care and provisioning. Some larger, multi-country organizations are: Teleena (Netherlands, Poland, UK), Effortel (Belgium, Italy, Poland, Taiwan), Aspider (Netherlands, Ireland, Malta), Transatel (France, Switzerland, Luxembourg, Belgium, Netherlands) and Telogic (Denmark, Poland, Italy). Offering only partially integrated third party solutions, none of these organizations can provide the resilient, full core geo redundant platforms that Elephant Talk has developed in-house over the last decade.

 

10
 

 

Security Solutions (ValidSoft)

 

The financial services sector is highly fragmented, and subject to many different local regulations. Many different anti-fraud solutions are used today, typically including tokens, certificates, Out Of Band transmission confirmation and Biometrics. The tokens and certificates are compromised by “Man in the Middle” and “Man in the Browser” malware, while the “Out Of Band” transaction confirmation is compromised by SIM Swap and “Call Forwarding Fraud”.

 

As a result of this, and the growing cost of electronic fraud, financial services companies are looking beyond traditional providers such as RSA and are seeking new, innovative and secure solutions, such as those provided by ValidSoft. There is also a move away from relying solely on historical data and a move towards real-time processing of contextual awareness for the provision of in-transaction decision information.

 

Because the financial services industry is demanding global, comprehensive solutions, that contribute to combatting electronic fraud and, at the same time, safeguard the privacy of clients, property patents and EuroPrise Privacy Seals play an increasingly important role in the provision of such solutions.

 

In addition, ValidSoft has developed its own Voice Biometric engine, which may be used across any and all markets in order to protect access to valuable assets, be they digital, financial or emotional, restricting access to authenticated individuals only.

   

Sustainability of competitive advantages

 

Management believes that we have developed an overall understanding of the cloud´s access and transactions security concepts within the scope of a mobile services delivery platform (i.e. existing code and IP) that positions Elephant Talk and ValidSoft competitively towards imminent and future developments that will keep pace with industry requirements. As the industry requirements go beyond current defined standards, each vendor will need to develop, buy (or source code license) the whole range of different software elements, and then integrate, test and fine-tune these components in a real world, massive deployment at a major MNO. Our management believes that Elephant Talk has accrued valuable experience in this respect and is has a head-start against its competitors.

 

We may need to accelerate the roll-out of our Software DNA™ Mobile Platform and Cloud Security Technology to meet current market demand. Mobile and Cloud Management Platforms may become more commoditized over the next five to ten years. Integrating the variety of ValidSoft cloud based security layers into our Software DNA™ Platform will create another window of sustainable competitive advantages. The more we can offer a comprehensive one stop shop solution for providing managed services and the required, layered security for mission critical applications in the cloud, the more sustainable our advantages will be against multiple point-solutions and the additional integration and operations complexity they represent. As depth and breadth of solutions are important in addressing the one stop shop needs of our customers, a whole range of services should be kept under one roof. Elephant Talk may need to further invest in such services in the future, either with additional in-house development or through smaller acquisitions.

 

Corporate History

 

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

 

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 ETL, 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. 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, Elephant Talk Inc. acquired ValidSoft.  

 

11
 

 

In December 2011, we upgraded from our OTCBB listing to the NYSE MKT LLC (the “Exchange”).

In September, 2011, Elephant Talk Inc. merged into Elephant Talk Communications Corp., a Delaware corporation (the "Reincorporation"). The Reincorporation was approved by the stockholders at the annual shareholder meeting on September 14, 2011. As a result of the Reincorporation, the Company became a Delaware corporation. Elephant Talk Communications, Inc. ceased its corporate existence 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.

 

In April 2013, the Company acquired most of the assets of Telnicity, a U.S. MVNE/MVNO enabler company headquartered in Oklahoma City, Oklahoma, and formed Elephant Talk North America Corp. The Telnicity acquisition provides the Company with an in-market experienced management team with existing relationships with certain major U.S. mobile telecommunications companies.

 

Government Regulation

 

We operate in a heavily regulated industry. As a multinational telecommunications company and 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 opearte. 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 the Company offers 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, our revenue and our cash flow.

 

Employees

 

As of December 31, 2013, we employed 195 people and retained on a long term basis, the services of 48 independent contractors. We consider relations with our employees and independent contractors to be good. Each of our current employees and independent 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

 

An investment in our common stock is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.  In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.  The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all of your investment.

 

We have received notices of non-compliance from the Exchange related to the Company’s liquidity and financial impairment.

 

On May 17, 2013 we received notice from the Exchange indicating that we did not satisfy the continued listing standards of the Exchange set forth in Section 1003(a)(iv) of the Company Guide of the Exchange (the “Company Guide”) in that we have sustained losses which are so substantial in relation to our overall operations, or our existing financial resources, or our financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether we will be able to continue operations and/or meet our obligations as they mature. We were afforded an opportunity to submit our initial plan of compliance (the “Plan”) to the Exchange, and on May 31, 2013, we presented our Plan to the Exchange. On June 13, 2013, the Exchange accepted the Plan and granted us an extension until August 31, 2013 and the Exchange has granted subsequent extensions to November 30, 2013, January 31, 2014 and April 30, 2014 (the “Plan Period”).

 

12
 

 

During the Plan Period, we will be subject to periodic review by the staff of the Exchange. Failure by us to demonstrate progress consistent with the Plan during the Plan Period or to regain compliance by the end of the Plan Period could result in the Exchange initiating delisting proceedings.

 

While the Exchange’s notification of non-compliance with Section 1003(a)(iv) has had no current effect on the listing of our shares, failure to make progress consistent with the Plan or to regain compliance with the continued listing standards by the end of the Plan Period could result in our shares being delisted from the Exchange. If our Common Stock, par value $0.0001 (the “Common Stock”) is delisted from the Exchange and transferred to the over-the-counter market, the spreads between the bid and ask prices for our Common Stock may increase and the execution time for orders may be longer. The delisting of our Common Stock from the Exchange may result in decreased liquidity by making the trading of our Common Stock less efficient.

 

We have received notices of non-compliance from the Exchange related to the current composition of the Company’s board of directors and Audit Committee.

 

On December 20, 2013, we received a notice from the Exchange indicating that we no longer satisfied the continued listing standards of the Exchange set forth in Sections 802(a) and 803(B)(2)(a) of the Company Guide. These rules require that a majority of our board of directors (the “Board”) consist of independent directors, and that the Audit Committee of the Board be comprised of at least three independent members. We received the notice in connection with the resignation of Charles Levine from the Board on December 18, 2013, and non-reelection of Phil Hickman to the Board at our annual meeting of stockholders on December 18, 2013. As a result, a majority of the directors on the Board are not independent as required under Section 802(a) of the Company Guide and our Audit Committee is no longer comprised of three independent members as required under Section 803(B)(2)(a) of the Company Guide.

 

Pursuant to Sections 802(b) and 803(B)(6)(b) of the Company Guide, we will have until the earlier of our next annual meeting of stockholders or December 18, 2014 (such earlier date, the “Compliance Date”) to become compliant with those provisions. However, if were to hold our next annual meeting of stockholders before June 16, 2014, then the Compliance Date would instead be June 16, 2014. As from April 1, 2014 the Company appointed two new independent directors filling vacancies created following the 2013 annual meeting of stockholders in December 2013. As part of their appointment, the new directors, Mr. Stevens and Mr. Leland will join Mr. Rijkman Groenink as members of the Board’s Audit and Finance Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

 

While the Exchange’s notification of non-compliance with Section 802(a) and 803(B)(2)(a) has had no current effect on the listing of our shares, failure to regain compliance by the Compliance Date could result in our shares being delisted from the Exchange. If our Common Stock is delisted from the Exchange and transferred to the over-the-counter market, the spreads between the bid and ask prices for our Common Stock may increase and the execution time for orders may be longer. The delisting of our Common Stock from the Exchange may result in decreased liquidity by making the trading of our Common Stock less efficient. Furthermore, the lack of independence and independent controls over our corporate affairs may result in potential or actual conflicts of interest between our officers, directors and our stockholders, and these conflicts of interests may benefit the interests of our officers and directors over that of our minority stockholders.

  

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, 2013 because of material weaknesses identified in management’s assessment of the effectiveness of such internal control resulting from accounting for complex transactions associated with business combinations, complex financial instruments and income taxes. In addition to this, as of year-end, the Company’s board of directors did not have an adequate number of independent board members in order to have effective oversight of the Company’s control system.

 

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 as well as Subsequent events (Note 33) on recent developments on the composition of the board of directors.

 

13
 

 

The substantial and continuing losses, and significant operating expenses incurred in the past few years, may require us to change our business plan or even may cause us to be unable to pursue all of our operational objectives if sufficient financing and/or additional cash from revenues is not realized. This raises doubt as to our ability to continue as a going concern.

 

We have incurred net losses of $22,131,615 and $23,131,936 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, we had an accumulated deficit of $225,391,923 and $203,260,307, respectively.

 

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 prevention solutions as well as increase in international market development efforts. In 2013 these investments saw the continued growth whereby the revenue contribution (revenues minus cost of service) in 2013 increased by 87% in comparison with the previous year and our adjusted ebitda (a non-gaap measure) improved from a negative $9.5 million in 2012 to a negative $2.3 million in 2013. This was due to an increased customer base and growth of existing customers. However, this has not yet resulted in positive cash flow large enough to fund our capital expenditures for the longer term and accordingly, management continues to consider financing and capital leasing options on an on-going basis.

 

Although we have previously been able to attract financing as needed, such financing 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 us or existing shareholders. If we are unable to secure additional financing, as circumstances require, or do not succeed in meeting our sales objectives we may be required to change, significantly reduce our operations or ultimately may not be able to continue operations As a result of our historical net losses and cash flow deficits, and net capital deficiency, these conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

 

The current economic climate, especially in Europe, 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. The potential adverse effects of an economic downturn include:

 

  · reduced demand for services, resulting in increased price competition or deferrals of purchases, with lower revenues not fully compensated through reduced costs;

  · risk of financial difficulties or failures among our suppliers;

  · increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterparty failures;

  · risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products; and

 

14
 

 

  · increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results;

  · end user demand could also be adversely affected by reduced consumer spending on technology, changed operator pricing, security breaches and trust issues.

 

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 US, 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.

 

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.

  

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.

 

We may not be able to develop and successfully market our Software DNA™ platform and security services as planned.

 

Elephant Talk operates in an exceptionally competitive environment where there is continuous innovation and new development. We are required to be a top performer in over a dozen highly specialized domains to effectively compete with our competitors. Ongoing investments are required to stay ahead of the curve. The sales process for our Software DNA™ platform and the deployment process may be complicated and very slow. We are highly dependent on convincing MNO’s and MVNO’s to believe that outsourcing their requirements to us is the best way to go. We are exposed to business risks associated with turnkey projects and the scalability of our service and support organization. Although our policy is to avoid or minimize risks, it cannot be ruled out that in certain cases events occur that may seriously impact us and our performance.

 

ValidSoft’s operation is dependent on mobile operators for network data access. Home-routing is sometimes preventing us from capitalizing on our capability. It tends to be a slow process to enter into definitive contracts with mobile operators. In addition, it is difficult to obtain network data access which is slowing our ability to timely address current market opportunities. The current market perception about safeguarding privacy remains challenging. Both the regulatory regime and consumer awareness of privacy protection are developing very slowly.

 

15
 

 

Implementation and development of our Software DNA™ platform and mobile security businesses both depend on our ability to obtain adequate funding.

 

Both our Software DNA™ platform and ValidSoft’s mobile security services require ongoing funding to continue the current development and operations and to fund possible future acquisitions. Failure to obtain adequate financing will substantially delay our development, slow down current operations, result in loss of customers and adversely impact our results of operations.

 

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:

 

  · 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 and data 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. Strategic acquisitions in desired markets are an important part of our growth strategy for both our Software DNA™ platform and our mobile security business. We may pursue additional acquisitions in the future to further strengthen 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.

 

16
 

 

Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle 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 MNO’s. 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 mostly human capital, with attendant delays frequently associated with the allocation of substantial human resources 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 as well as financial institutions. 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 and the signing of a sales contract 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.

 

Because most of our business is conducted outside the US, fluctuations in foreign currency exchange rates versus the US Dollar could adversely affect our (reported) results of operations.

 

Currently all of our net revenue, expenses and capital expenditures are derived and incurred from sales and operations outside the US, whereas the reporting currency for our consolidated financial statements is the US 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 US, and changes in exchange rates have had and may continue to 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/Euro (EUR”), USD/Swiss Frank, USD/Hong Kong Dollar, USD/Chinese Yuan, USD/British pound, USD/Bahraini Dinar, and USD/Mexican peso.

 

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 have accounted for any adjustments resulting from currency translation as a charge or credit to accumulate other comprehensive loss within the stockholders’ 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.

   

17
 

 

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.

 

Our services related to communications software and information systems, outsourced solutions and value added communication services, including our 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.

 

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 

 

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 systems 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.

 

We could suffer adverse tax and other financial consequences if US 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-US 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 need software development specialists with in-depth knowledge of a blend of IT and telecommunications or with a blend of security and telecom. We intend to hire additional necessary employees, including software engineers, communication engineers, project managers, sales consultants, employees and operational employees, on a permanent basis. The competition for qualified technical sales, technical, and managerial personnel in the communications and software industry is intense in the markets where we operate, 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 our use, and the value, of our equity awards as incentives to employees, putting us at a competitive disadvantage or forcing us to use more cash compensation.

 

18
 

 

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. There is limited protection under patent law to protect the source codes we developed or acquired on our Software DNA™ Platform. The copyright and know-how protection may not be sufficient. Our pending patent application in ValidSoft’s technology may be challenged. 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.

 

We are dependent on two significant customers for our businesses and the loss of one of these customers could have an adverse effect on our business, results of operations and financial condition.

  

For the year ended December 31, 2013, we had two significant customers which accounted for 48% and 15%, respectively, of our revenue. Although no other customer accounted for greater than 10% of our net sales during this period, other customers may account for more than 10% of our net sales in future periods. The loss, or reduction in services to, these significant customers or other discontinuation of their relationship with us for any reason, or if either of these significant customers reduces or postpones purchases that we expect to receive, it could have an adverse impact on our business, results of operations and financial condition.

 

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 systems 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. Our insurance coverage is not sufficient to protect against all possible liability for defects or software errors. 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.

 

19
 

 

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 provider of mobile communications technology for the telecommunications and financial industry, 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.

 

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, wire line 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.

 

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, have shown a 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 in providing technology solutions to our customers. 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 into our technology platforms 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.

 

20
 

 

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 stockholders, 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 stockholders 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.

 

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 the holders of our Common Stock. .

 

Our Certificate of Incorporation authorize the issuance of capital stock including 50,000,000 undesignated preferred shares (the “Preferred Stock”), and empower our board of directors to prescribe by resolution and without stockholder approval, subject to the rules of the Exchange, 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 our company, the value of your investment, the trading price of our Common 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 140,466,801 shares of Common Stock and no shares of Preferred Stock were issued and outstanding as of December 31, 2013.

  

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 stockholders to authorize the issuance of such additional shares before undertaking the issuance. As a result, we cannot assure you that our stockholders would authorize such issuance and we could be required to seek necessary capital in an alternative manner, which may not be available on commercially reasonable terms, if at all. If we are unable to adequately fund ourselves, through our operations or equity/debt financing, this would have a material adverse effect on our ability to continue 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 stockholders 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 stockholder 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, 2013 there are 34,272,503 options, 37,247,889 warrants and convertible notes to purchase 9,635,838 shares of our Common Stock outstanding. All of the shares issuable from exercise have been registered and are freely traded. Options are exercisable at exercise prices between $0.60 and $3.39, warrants are exercisable at exercise prices between $0.887 and $2.21 and the convertible notes are convertible at the price of $0.887. If and when these securities are exercised into shares of our Common Stock, the number of our shares of Common Stock outstanding will increase. Such increase in our outstanding shares, 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.

 

21
 

 

In addition, from time to time, certain of our stockholders 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 (the “Securities Act”), subject to certain limitations. In general, pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated stockholders (or stockholders 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 stockholders may sell without such limitations, provided that 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.

    

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

 

As of December 31, 2013 Steven van der Velden, Johan Dejager, Rijkman Groenink, Martin Zuurbier, Mark Nije, and Alex Vermeulen, and certain other of our directors and executive officers, their affiliates, beneficially owned or controlled approximately 35.1% of our outstanding Common Stock. In particular, as of December 31, 2013, Rising Water Capital AG, an entity affiliated with the certain of the aforementioned individuals, beneficially owned 18.6% of our Common Stock and QAT II Investments SA, another entity affiliated with certain of our officers and directors, beneficially owned 3.6% of our outstanding stock and hold 5,095,654 warrants that upon satisfaction of various conditions can be converted into Common Stock. QAT Investments SA (“QAT”), another entity affiliated with certain of our officers and directors, is the owner of 51.3% of Rising Water Capital AG. If those stockholders act together, they will have the ability to have a substantial influence on matters submitted to our stockholders 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 stockholders may have little or no influence over matters submitted for shareholder approval. In addition, the ownership of such stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our Common Stock. These stockholders 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 Stockholders 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 $16,066, and the lease runs until June 2015. In addition the Company rents office space at Wattstraat 52, 1171 TR, Sassenheim, The Netherlands for a monthly rental of $1,898.

 

Elephant Talk Communications S.L.U. is currently renting office space at Paratge Bujonis, 17220 Sant Feliu de Guixols, (Girona) Spain, at a monthly rent of $7,694. In Guangzhou, China, we rent office space for a monthly rental of $9,590.

 

Elephant Talk North America Corp. entered on October 1, 2013 into an operational lease agreement in Oklahoma City, Oklahoma, to rent office space. The leasing agreement has a duration of one year, and it has renewal options for another 1 year term. The monthly rental amounts to $1,050 per month.

 

22
 

 

ValidSoft Limited Ireland terminated its lease obligations in Tullamore, Ireland, and consequently does not lease office space in Ireland as of January 1, 2013. ValidSoft U.K.Limited rents office space at 9 Devonshire Square, London, United Kingdom on a renewable 12 month rent for a monthly rental of $17,358.

 

We also rent space for our telecom switches, servers and IT platforms at data centers (“co-locations”) at an aggregate monthly rent of $41, 136. The various co-location spaces include: Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Vienna, Manama, Brussels and other locations where our telecommunications equipment is located.

 

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

 

Rescission of the Purchase Agreement of March 31, 2004 of New Times Navigation Limited.

 

As previously described in our 2004 Annual Report on Form 10-K, we entered into a purchase agreement with New Times Navigation Limited (“NTNL”), which we and NTNL mutually agreed to terminate. Upon the termination, we returned the received shares of NTVL to the concerned shareholders and received back 90,100 shares 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.

 

On April 28, 2006 we instituted proceedings to seek relief from the High Court of the Hong Kong Special Administrative Region against the holders of the unreturned shares to return the remaining 113,900 shares of common stock (valued at $381,565) and return the remaining 16 unsecured convertible promissory notes, representing a total amount of $1,740,000, and rescind the purchase agreement underlying the 2004 Purchase Transaction. The case is currently pending.

 

Other.

 

We are involved in various claims and lawsuits incidental to our business.  In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material effect on our financial position, liquidity, or results of operations.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

Part II

 

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

As of December 5, 2011, our Common Stock is listed for quotation on the Exchange under the symbol “ETAK.”  The following table sets forth the high and low closing prices per share for each quarterly period from January 1, 2012 through December 31, 2013 as quoted on the Exchange and published by www.nasdaq.com . 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, 2013   $ 1.40     $ 0.53  
September 30, 2013   $ 0.90     $ 0.55  
June 30, 2013   $ 1.23     $ 0.58  
March 31, 2013   $ 1.68     $ 0.92  
December 31, 2012   $ 1.57     $ 0.77  
September 30, 2012   $ 1.89     $ 0.95  
June 30, 2012   $ 2.40     $ 1.41  
March 31, 2012   $ 3.15     $ 2.00  

  

As of December 31, 2013, we had approximately 4,139 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 dividends on our Common Stock other than those generally imposed by applicable state law.

 

23
 

 

EQUITY COMPENSATION PLAN INFORMATION

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Plan Category   Number of securities to
 be issued upon exercise
 of outstanding options,
warrants and rights
  Weighted-average
exercise price of
outstanding options,
warrants and rights
    Number of securities
remaining available for
future issuance under
 the equity compensation
plans (excluding
 securities reflected in
 column (a))
 
    (a)   (b)     (c)  
Equity compensation plans approved by security holders   2006 Plan (1): 0
2008 Plan (2): 34,272,503
   

2006 Plan: n/a

2008 Plan: $1.47

     

2006 Plan: 103,450

2008 Plan: 8,454,327

 
Equity compensation plans not approved by security holders   -     -       -  
Total   34, 272,503     -       8,557,777  

 

  (1) S-8 Filed July 21, 2006.
  (2) S-8 Filed July 11, 2008. The stockholders approved the increase of the total number of shares of authorized to be issued under the 2008 Plan from 5,000,000 to 23,000,000, and the increase of the total number of shares available to be issued under the 2008 Plan from 23,000,000 to 46,000,000.

 

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 (IXTC formerly known as IXUT) for each of the five fiscal years ended December 31, 2013, assuming an investment of $100 at the beginning of such period.

 

24
 

 

 

The table below shows $100 invested on December 31, 2008 in stock or index:

 

Month/Year   ETAK     NASDAQ Comp.     NASDAQ Telecom  
12-2008   $ 100.00     $ 100.00     $ 100.00  
12-2009   $ 216.67     $ 143.89     $ 148.24  
12-2010   $ 393.33     $ 168.22     $ 154.06  
12-2011   $ 441.67     $ 165.19     $ 134.62  
12-2012   $ 166.67     $ 191.47     $ 137.31  
12-2013   $ 205.00     $ 264.84     $ 170.29  

  

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.

  

25
 

  

    2013     2012     2011     2010     2009  
Balance sheet data:                                        
TOTAL ASSETS   $ 43,317,440     $ 37,475,541     $ 44,812,103     $ 38,921,932     $ 24,426,776  
Long term Liabilities     8,201,023       3,433,095       785,218       468,756       19,963,088  
TOTAL LIABILITIES     19,582,366       17,326,055       9,717,003       10,250,664       30,554,777  
Total stockholders’ Equity     23,735,074       20,149,486       35,095,100       28,671,268       (6,128,001 )
                                         
Statement of Income Data:                                        
REVENUES   $ 22,827,261     $ 29,202,188     $ 32,232,981     $ 37,168,351     $ 43,650,957  
Cost of service     7,149,153       20,819,327       28,723,265       35,120,916       41,452,639  
      15,678,108       8,382,861       3,509,716       2,047,435       2,198,318  
                                         
LOSS FROM OPERATIONS   $ (17,456,421 )   $ (21,513,813 )   $ (25,676,272 )   $ (18,473,748 )   $ (10,539,946 )
                                         
NET LOSS   $ (22,131,615 )   $ (23,131,936 )   $ (25,310,735 )   $ (92,483,360 )   $ (17,299,884 )
                                         
COMPREHENSIVE LOSS   $ (21,129,656 )   $ (22,720,731 )   $ (25,935,010 )   $ (94,139,277 )   $ (17,109,821 )
                                         
Net loss per common share and equivalents - basic and diluted   $ (0.18 )   $ (0.21 )   $ (0.24 )   $ (1.31 )   $ (0.32 )
                                         
Other Financial data:                                        
Adjusted EBITDA   $ (2,339,784 )   $ (9,501,276 )   $ (13,079,933 )   $ (7,572,887 )   $ (5,760,615 )

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Risk Factors”

 

Overview

 

Application of Critical Accounting Policies and Estimates

 

Revenue Recognition and Deferred Revenue

 

Revenue represents amounts earned for telecommunication and security services provided to customers (net of value added tax and inter-company revenue). We derive revenue from activities as a fixed-line, security and mobile services provider with its network and its own switching technology.

 

We follow the appropriate revenue recognition rules for each type of revenue. See “Revenue Recognition” in Note 3 of the Financial Statements for more information. The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”). Revenue is recognized only when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.  Revenue is recorded as deferred revenue before all of the relevant criteria for revenue recognition are satisfied. Deferred revenue represents amounts received from the customers against future sales of services since we recognize revenue upon performing the services.

 

We report revenue on a gross basis using authoritative guidance issued by the FASB. Particularly for our landline services, we consider the following factors to determine the gross versus net presentation: if we (i) act as principal in the transaction and (ii) have risks and rewards of ownership, such as the risk of loss for collection and delivery of service.

 

Telecommunications revenues are recognized when delivery occurs based on a pre-determined rate and number of user minutes and number of calls that the Company has managed in a given month.

 

For the mobile solutions services the Company recognizes revenues from two different service offerings, namely managed services and bundled services. For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and virtual Mobile Network Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time and calculated based on a pre-determined service fee. Other revenues recognized in the mobile solutions include technical services which are recognized as the services are performed.

 

For the security solutions we recognize revenues primarily from SIM (Subscriber Identity Module) lookup services using the VALid-SSD platform. Security solutions revenue is recognized based on the number of SIM lookups performed and calculated based on a pre-determined service fee per lookup. Other revenues recognized in the security business include consulting services which are recognized as the services are performed.

 

Management’s judgment is applied regarding, among other aspects, conformance with acceptance criteria and if delivery of services has occurred to determine if revenue and costs should be recognized in the current period, the degree of completion and the customer credit standing to assess whether payment is likely or not to justify revenue recognition.

 

26
 

 

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 convertible 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.

 

For both the long term contractors and advisory board members, we recognize the guidance for stock-based compensation awards to non-employees in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees” ("ASC 505-50"). Under ASC 505-50, we determine the fair value of the options or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

Stock-based compensation (cash and non-cash) related to equity plans for employees and non-employee directors is included within our cost of revenues and operating expenses.

 

Business Combinations

 

As described in “Business Combinations,” in Note 3 of the Financial Statements, under the purchase method of accounting we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. This method also requires us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with acquisitions, these adjustments could materially decrease our operating income and net income and result in lower asset values on our balance sheet.

 

Significant estimates and assumptions that we must make in estimating the fair value of acquired technology, customer lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

 

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 350, on an annual basis, 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.

 

27
 

 

Impact of Accounting Pronouncements

 

In July 2013 the Financial Accounting Standards Board, or FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists. This guidance provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, except to the extent that carryforwards are not available to settle any additional income taxes that would result from disallowance of a tax position. The unrecognized tax benefit should be presented as a liability. This guidance is applicable for fiscal years and interim periods beginning after December 15, 2013. We are evaluating the potential impact of adopting this standard on its consolidated financial statements.

 

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We are evaluating the potential impact of this adoption on its consolidated financial statements.

 

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830)—Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. These amendments provide guidance on releasing Cumulative Translation Adjustments when a parent company sells partial equity method investments in step acquisitions. The amendments are effective on a prospective basis for fiscal years and interim reporting periods beginning after December 15, 2013. The guidance is applicable to us in principle, but since its enactment, we have not derecognized any subsidiary or group of assets as of December 31, 2013.  

 

Company milestone overview

 

Recent milestones for mobile product line:

 

· On December 13, 2013 we announced that we have signed a 5-year extension with our MNO client Vodafone Enabler España, S.L. (“VEE”). We expect to receive continuous prepayments of approximately $10 million for the duration of the contract. However, to date, we and VEE are in current discussions regarding the specific timing of prepayment. We have not yet received any portion of the prepayment.

  

· On September 10, 2013, we announced that we had begun to recognize revenue from our recently signed 5-year contract with Iusacell, an MNO in Mexico, that extends through 2018. Recently, the first 600,000 customers have been migrated, and substantial further migrations are expected over the next couple of months. The platform will ultimately be able to host between 10 million and 20 million of Iusacell subscribers and its MVNO customers.

 

  ·

On July 16 2013, NEO-SKY, a Spanish telecommunication service provider, announced that on June 21, 2013 it started marketing its Mobile Services in Spain. We are a key partner for NEO-SKY´s Mobile Services launch, providing its mobile Software DNA™ platform. NEO-SKY is the sixth MVNO in Spain powered by our network and mobile platform that is operational now, in addition to Lebara, Orbitel, BT, Eroski and HITS. NEO-SKYwill market its Mobile Services to corporate clients and expects to reach approximately 100,000 SIMs over the next few years within the high-end active mobile customers within the Virtual Private Network (VPN).

 

  · On July 11 2013, we announced a long term agreement with Axiom Telecom LLC (“Axiom”) to host Mobile  Managed Services in the Middle East. Services will start in the Kingdom of Saudi Arabia through Zain  as MNO partner as soon as Axiom has received the official MVNO license from the appropriate regulator  in Saudi Arabia. The license was bestowed on Axiom in July 2013. Currently, we manage a limited  amount of active sims on our Software DNA™ platform on behalf of  Zain’s Matrix brand.

 

· In April 2013, we purchased most of the assets of Telnicity LLC (“Telnicity”), a U.S. MVNE/MVNO enabler company headquartered in Oklahoma City, Oklahoma, and formed Elephant Talk North America.

The Telnicity acquisition provides us with an in-market experienced management team and existing relationships with certain major U.S. mobile telecommunications companies. As a consideration for this acquisition, we purchased most of the Telnicity assets for one million shares of our Common Stock.

 

28
 

 

Recent milestones for security product line (ValidSoft):

 

· In November 2013, FICO announced the launch of ValidSoft UK Ltd.’s (“ValidSoft”) proximity correlation service for credit and debit card issuers, which will be deployed with several UK banks.

 

· FICO and Santander Bank continue to increase their use of ValidSoft’s solutions and have begun to use ValidSoft’s number validation functionality.

 

· ValidSoft continues to invest in its Intellectual Property portfolio. ValidSoft has two granted patents with multiple patents pending in multiple jurisdictions including the United States, European Union and other target jurisdictions.

 

  · In October 2013 ValidSoft announced VALid-IMA™, a Voice Biometric technology custom built for the mobile environment that enables high definition Voice Biometrics without the need for a phone call. VALid-IMA is a world leader due to its ability in enabling elimination of false negatives.

 

  · In October 2013 ValidSoft announced that it had been granted a UK patent for its Dual-Wireless Authentication System (Dual SSID), an advanced security capability to enable secure wireless connectivity.

 

  · In March 2013, ValidSoft was the winner of the Jury Vote of the prestigious “The Florin Transaction Services Innovation Awards”, which recognizes innovation in the transaction services industry. The Florins, was established in 2010 by the European Payments Consulting Association and The Paypers.

 

Results of Operations

 

Our results of operations for the year ended December 31, 2013, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, ETL and its subsidiaries, Elephant Talk Europe Holding B.V. and its subsidiaries, Elephant Talk Group International B.V. , and Elephant Talk North America Corp. and ValidSoft and its subsidiaries.

 

Although the vast majority of our business activities are carried out in Euros, we report our financial statements in U.S. 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. We carry out our business activities primarily in Euros, and we do not currently engage in hedging activities.

 

The following table shows the USD equivalent of the major currencies for the year ended December 31, 2013:

 

    USD equivalent
Euro   1.3767
British Pound   1.6488

 

29
 

 

Adjusted EBITDA

 

In order to provide our stockholers with additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before provision for income taxes, depreciation and amortization, stock-based compensation, interest income and expenses, interest expense related to debt discount and conversion feature, change in the fair value of conversion feature, loss on extinguishment of debt, changes in fair value of warrant liabilities, other income & (expense), impairment of related party loans, amortization of deferred financing costs, equity in earnings of unconsolidated joint venture and intangible assets impairment charge, 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 stockholders and others to allow them to better understand and evaluate our operating results.

  

A reconciliation of Net Loss – (under) US Generally Accepted Accounting Principles (“GAAP”) to Adjusted EBITDA, the most directly comparable measure under GAAP, for each of the fiscal periods indicated, is as follows:

 

Adjusted EBITDA   2013     2012     2011  
                   
Net loss – GAAP   $ (22,131,615 )   $ (23,131,936 )   $ (25,310,735 )
Provision for income taxes     (200,301 )     289,136        
Depreciation and amortization     6,601,246       5,710,396       5,254,708  
Stock-based compensation     8,515,391       6,302,141       6,818,905  
Interest income and expenses     961,372       532,835       94,463  
Interest expense related to debt discount and conversion feature     2,069,649       1,089,126        
Change in fair value of conversion feature     (232,267 )     (2,387,326 )      
Loss on extinguishment of debt     2,005,100              
Changes in fair value of warrant liabilities     (479,322 )            
Other income & (expense)     302,112             (460,000 )
Impairment of related party loans           1,060,784        
Amortization of deferred financing costs     248,851       531,792        
Equity in earnings of unconsolidated joint venture           501,776        
Intangible assets impairment charge                 522,726  
Adjusted EBITDA   $ (2,339,784 )   $ (9,501,276 )   $ (13,079,933 )

 

Comparison of Years Ended December 31, 2013 and 2012

 

Revenue for the year ended December 31, 2013 was $22,827,261 a decrease of $6,374,927 or 22%, compared to $29,202,188 for the year ended December 31, 2012. The continued and expected market decline of landline based telecommunications caused our legacy landline business to decrease to $3,626,251, for a decrease of $13,863,491 or 79%, compared to $17,489,742 in 2012 which was partially off-set by the increase in revenues of our mobile and security solutions business to $19,201,010 compared to $11,712,446 in 2012, $7,488,564 or 64%. The increase in our mobile and security solutions business is mainly due to the increasing revenues of new and existing customers.

 

Revenue                  
    2013     2012     2011  
Landline Services   $ 3,626,251     $ 17,489,742     $ 26,454,826  
Mobile & Security Solutions     19,201,010       11,712,446       5,778,155  
Total Revenue   $ 22,827,261     $ 29,202,188     $ 32,232,981  

  

Following the increased mobile and security revenues, Revenue minus Cost of Service increased by $7,295,247 or 87% because of the revenue increase in the mobile and security business.

 

    2013     2012     2011  
Revenues   $ 22,827,261     $ 29,202,188     $ 32,232,981  
Cost of service     7,149,153       20,819,327       28,723,265  
Revenues minus Cost of Service   $ 15,678,108     $ 8,382,861     $ 3,509,716  

 

30
 

 

Cost of Service. Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunication service 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.

 

Cost of Service for the year ended December 31, 2013 was $7,149,153 a decrease of $13,670,174 or (66%), compared to $20,819,327 for the year ended December 31, 2012. The decrease in cost of service was mainly caused by the decrease in revenues in our legacy landline business. Cost of service as a percent of revenue was 31% and 71% for the years ended December 31, 2013 and 2012, respectively.

 

The following table illustrates revenues and costs of service “in millions USD” for the quarters ended:

 

    December 31,     September 30,     June 30,     March 31,  
    2013     2013     2013     2013  
Mobile & Security Revenue   $ 5.88     $ 4.99     $ 4.47     $ 3.86  
Landline Revenue     0.15       0.22       0.53       2.74  
REVENUE     6.03       5.21       5.00       6.60  
Cost of service     1.05       1.08       1.47       3.55  
Revenue minus Cost of service   $ 4.98     $ 4.13     $ 3.53     $ 3.05  

 

    December 31,     September 30,     June 30,     March 31,  
    2012     2012     2012     2012  
Mobile & Security Revenue   $ 3.56     $ 2.94     $ 2.78     $ 2.43  
Landline Revenue     3.27       3.76       4.30       6.15  
REVENUE     6.83       6.70       7.08       8.58  
Cost of service     4.14       4.60       5.19       6.89  
Revenue minus Cost of service   $ 2.69     $ 2.10     $ 1.89     $ 1.69  

 

Selling, general and administrative expenses . Selling, general and administrative (“SG&A”) expense for the years ended December 31, 2013 and 2012, were $26,533,283 and $24,186,278, respectively. SG&A expenses increased by $2,347,005 or 10% in 2013 compared to 2012.  The changes are partly due to the unfavorable impact of ($407,194) arising from a higher average USD/Euro exchange rate. The increase of SG&A was mostly due to the increase in our staffing levels as well as by higher marketing, IP and product development costs and travel due to the growth of our markets. The weighted average number of employees and long term independent contractors in the year 2013 was 161 and 50, respectively, an increase of 36 employees and 2 long term independent contractors or (29%) and (4%) respectively from the weighted average number of full-time employees of 125 and 48, respectively, from 2012. The described increases in costs and employees are mainly related to expected future revenues. As of December 31, 2013, SG&A includes the non-cash compensation to officers, directors, consultants and employees, in line with a change in presentation as explained in Note 1 of the Financial Statements. Non-cash compensation for the years ended December 31, 2013 and 2012 was $8,515,391 and $6,302,141, respectively. The increase was mainly due to additional staff.

 

Non-cash compensation is comprised of:

  · the expensing of the options granted under the 2008 Plan to employees and management;
  · the expensing of the shares issued to under the 2008 Plan to the directors and executive officers in lieu of cash compensation;
· the expensing of restricted shares issued for consultancy services;
· the expensing of the shares issued to under the 2006 Plan to the directors and executive officers in lieu of cash compensation.

 

Depreciation and Amortization . Depreciation and amortization for the years ended December 31, 2013 and 2012, was $6,601,246 and $5,710,396 respectively. Depreciation and amortization expenses increased by $890,850 or 16% in 2013 compared to 2012. The increase was caused primarily by additions to property and equipment. In addition, we had an unfavorable impact of $192,004 arising from a higher USD/Euro exchange rate compared to the prior year.

 

31
 

 

In 2013 and 2012, interest income consisted of interest received on bank balances.

 

Interest expense for the years ended December 31, 2013 and December 31, 2012 was $1,064,999 and $780,852, respectively. Interest expense increased by $284,147, or 36% in 2013 compared to 2012. Higher levels of interest expense in 2013 were the result of convertible notes issued in 2013 to an affiliate investor and an accredited investor. See Item 8, Note 15 and 16 to the Financial Statements for more information.

 

As of December 31, 2013 and 2012, interest expenses related to debt discount and conversion feature were $2,069,649 and $1,089,126, respectively. Interest expenses related to debt discount and conversion features increased by $980,523 or 90%. This increase was due to to the convertible notes issued in 2013. See Notes 15 and 16 to the Financial Statements for more information.

 

Change in Fair Value in Conversion Feature . As of December 31, 2013, the fair value changes of the conversion feature of the convertible notes was a gain of $232,267, compared to a gain of $2,387,326 as of December 31, 2012. The change in fair value of the conversion feature decreased by 2,155,059 or 90%. The decrease is because the amount recognized as a gain was the remaining amount of the conversion feature related to the 8% Senior Secured Convertible Note issued on March 29, 2012, that was extinguished when the convertible note was repaid in June 2013. See Note 18 of the Financial Statements for more information.

 

Change in Fair Value of Warrant Liabilities . As of December 31, 2013, the change in the fair value of the remaining outstanding warrants related to a registered direct public offering by us on June 2013, which amounted to $479,322. The fair value of the remaining warrants was determined using a Monte-Carlo Simulation model.

 

Loss on Extinguishment of Debt. As of December 31, 2013, we entered into a Purchase Agreement pursuant to which we purchased certain Convertible Notes we issued on March 29, 2012, and this resulted in accelerated amortization expense of the original issue discount (OID), the conversion feature and the remaining financing costs of the Convertible Note. The loss on extinguishment of debt amounted to $1,960,594. Refer to Item 8, Note 18 of the Financial Statements. Additionally, on July 14, 2013, the Company entered into an amendment to terminate the Loan Agreement and cancel the Warrant we had with a member of the board of directors. In exchange for termination of the Loan Agreement, we entered into a Stock Purchase Agreement, dated July 15, 2013, pursuant to which the Company agreed to convert the Principal Amount of the loan into restricted shares of the Company’s Common Stock. Upon conversion and termination of the loan agreement, we accelerated the debt discount amortization, which resulted in an additional loss on extinguishment of debt of $44,506 in July 2013. Refer to Item 8, Note 17 of the Financial Statements. The total amount of loss on extinguishment of debt recognized as of December 31, 2013 amounted to $2,005,100.

 

Equity in Earnings of Unconsolidated Joint Venture. As of December 31, 2012, we incurred expenses of $501,776 as a result of the loss from our equity investment in the Modale B.V. joint venture. This expense follows a full impairment of the investment in this joint venture following the bankruptcy of Modale B.V. on January 30, 2013.

 

Impairment of Related Party Loans . As of December 31, 2013 and December 31, 2012, we had impaired loans with a value of $0 and $1,060,784, respectively. These loans were provided in 2012 to Elephant Security B.V., which filed for bankruptcy on December 19, 2012. Elephant Security B.V. was a related party since it was majority owned by QAT, one of our affiliates.

 

Provision for income taxes . Provision for income taxes for the years ended December 31, 2013 and December 31, 2012 was $200,301 and ($289,136), respectively. In the ordinary course of our business there are transactions where the ultimate income tax determination is uncertain. We believe that we have adequately provided for income tax issues not yet resolved with federal, state, local and foreign tax authorities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an additional expense would be recorded.

 

32
 

 

Net Loss. Net loss for the year ended December 31, 2013, net loss was $22,131,615, a decrease of $1,000,321 or 4%, compared to $23,131,936 from the year ended December 31, 2012. The decrease in loss was due to the loss from operations of $4,057,392 or 19%, which was partially offset by the increased revenues from our mobile and security business. SG&A for the year ended December 31, 2013 increased by $2,347,005 or 10%, compared to $24,186,278 for the year ended December 31, 2012. Depreciation and amortization of intangibles assets for the year ended December 31, 2013 increased by $890,850 or 16%, from $5,710,396 for the year ended December 31, 2012. The equity in earnings of unconsolidated joint venture amounted to $0 and $501,776 for the years ended December 31, 2013 and December 31, 2012, respectively. Other expenses for the year ended December 31, 2013 increased by $4,048,284 or 489%, compared to $827,211 for the year ended December 31, 2012. The reason for the increase was due to higher interest expense, higher interest expense related to debt discount and conversion feature, revaluation of euro based loans and the loss on extinguishment of debt.

 

Other Comprehensive (Loss). We record foreign currency translation gains and losses as other comprehensive income or loss, which amounted to gains of $1,001,959 and $411,205 for the years ended December 31, 2013 and December 31, 2012, respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

 

Comparison of Years Ended December 31, 2012 and 2011

 

Revenue for the year ended December 31, 2012 was $29,202,188, a decrease of $3,030,793 or 9.40%, compared to $32,232,981 for the year ending December 31, 2011. The decrease in revenue was mainly the result of the unfavorable impact of $2,445,331 arising from a lower USD/Euro exchange rate. Moreover, the continued and expected market decline of landline based telecommunications caused our legacy landline business to decrease by $8,965,084 (or 33.89%), which was partly off-set by the increase in revenues of our mobile and security solutions business of $5,934,291 (or 102.70%) compared to 2011. The increase in our mobile and security solutions business is mainly due to the increasing revenues of existing customers.

 

Revenue            
    2012     2011  
Landline Services   $ 17,489,742     $ 26,454,826  
Mobile & Security Solutions     11,712,446       5,778,155  
Total Revenue   $ 29,202,188     $ 32,232,981  

  

Following the increased mobile and security revenues, Revenue minus Cost of Service increased by 4,873,145 (or 138.85%) because of the revenue increase in the mobile and security business.

 

    2012     2011  
Revenues   $ 29,202,188     $ 32,232,981  
Cost of service     20,819,327       28,723,265  
Revenues minus Cost of Service   $ 8,382,861     $ 3,509,716  

 

Cost of Service. Cost of service includes origination, termination, network and billing charges from telecommunications operators, costs of telecommunication service 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.

  

Cost of Service for the year ended December 31, 2012 was $20,819,327, a decrease of $7,903,983 or 27.52%, compared to $28,723,265 for the year ended December 31, 2011. The decrease in cost of service was mainly caused by the decrease in revenues in our legacy landline business. Cost of service as a percent of revenue was 71.3% and 89.1% for the years ended December 31, 2012 and 2011, respectively.

 

The following table illustrates revenues and costs of service “in millions USD” for the quarters ended:

 

    December 31,     September 30,     June 30,     March 31,  
    2012     2012     2012     2012  
Mobile & Security Revenue   $ 3.56     $ 2.94     $ 2.78     $ 2.43  
Landline Revenue     3.27       3.76       4.30       6.15  
REVENUE     6.83       6.70       7.08       8.58  
Cost of service     4.14       4.60       5.19       6.89  
Revenue minus Cost of service   $ 2.69     $ 2.10     $ 1.89     $ 1.69  

 

    December 31,     September 30,     June 30,     March 31,  
    2011     2011     2011     2011  
Mobile & Security Revenue   $ 1.91     $ 1.41     $ 0.95     $ 1.51  
Landline Revenue     6.23       6.39       6.84       7.00  
REVENUE     8.14       7.80       7.79       8.51  
Cost of service     6.67       7.00       7.49       7.56  
Revenue minus Cost of service   $ 1.47     $ 0.80     $ 0.30     $ 0.95  

  

33
 

 

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 and security services, which have a substantially lower cost of service than our traditional landline business.

 

Selling, general and administrative expenses . SG&A expense for the years ended December 31, 2012 and 2011, were $17,884,137 and $16,589,649, respectively. A s of December 31, 2013, SG&A includes the non-cash compensation to officers, directors, consultants and employees, in line with a change in presentation as explained in Note 1 of the Financial Statements, and we have reclassified the figures of 2012 and 2011 for comparability purposes. SG&A expenses increased by $1,294,488 or 7.80%, in 2012 compared to 2011. This was impacted by the favorable impact of $813,629 arising from a lower USD/Euro exchange rate. The increase of SG&A was led by the increase in staffing levels, largely from European hires, as well as by higher marketing and product development costs. The weighted average number of full-time employees in the year 2012 was 173, an increase of 20 full-time employees or 13.09% from the weighted average number of full-time employees of 153 in 2011. The described increases in costs and employees are mainly related to expected future revenues. Non-cash compensation for the years ended December 31, 2012 and 2011 was $6,302,141 and $6,818,905, respectively. The decrease was mainly due to shorter contractual lifes of the newly issued options under the 2008 Plan.

 

Non-cash compensation is comprised of:

  · the expensing of the options granted under the 2008 Plan to employees and management;
  · the expensing of the shares issued to under the 2008 Plan to the directors and executive officers in lieu of cash compensation;
· the expensing of restricted shares issued for consultancy services;
· the expensing of the shares issued to under the 2006 Plan to the directors and executive officers in lieu of cash compensation.

  

Depreciation and Amortization . Depreciation and amortization for the years ended December 31, 2012 and 2011, was $5,710,396 and $5,254,708 respectively. Depreciation and amortization expenses increased by $455,688 or 8.67% in 2012 compared to 2011. This was impacted by the favorable impact of $372,730 arising from a lower USD/Euro exchange rate. During the fourth quarter of 2012, we shortened the estimated useful lives of certain assets expected to be abandoned. The change in estimate increased depreciation expense by approximately $512,000 for the year ended December 31, 2012.

 

Intangible Assets Impairment Charge . The Consolidated Balance Sheet as of December 31, 2012 includes: $10,503,026 of intangible assets, net, and $13,088,271 of fixed assets, net. As of December 31, 2011, our net intangible assets had a value of $12,784,199 and the net property and equipment had a value of $13,315,687. In 2011, we incurred an impairment charge of $522,726. We updated our analysis of intangible assets and long lived assets as of December 31, 2012 and we determined that for the year end ed 2012 no asset impairment charges are necessary.

  

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

 

Other Income and Expenses . Interest income for the year ended December 31, 2012 was $248,017, an increase of $141,296 or 132%, from $106,721 for the year ended December 31, 2011. Interest income was interest received on bank balances.

 

Interest expense for the year 2012 and 2011 was $780,852 and $201,184, respectively. Higher levels of interest expense in 2012 were the result of the Convertible Note agreements the Company issued in March 2012.

 

In 2012, interest expenses related to debt discount and amortization of deferred financing costs were $1,089,126 and $531,792, respectively. In 2011 we did not incur these costs, as they are related to the Convertible Note we issued in March 2012.

 

34
 

 

Other income was $0 and $460,000 for the years ended December 31, 2012 and 2011, respectively. Other income in 2011 was the result of the release of the ASC 740-10 provision following a successful abatement request with the IRS for the year 2007. Following this abatement, we decided to release a similar provision it had made for a potential IRS fine for the year 2008.

 

Change in fair value in conversion feature . In 2012, the income related to the fair value changes of conversion feature of convertible notes was $2,387,326, compared to $0 from 2011.

 

Equity in earnings of unconsolidated joint venture. In 2012, we incurred expenses of $501,776 as a result of our equity share in the losses of our financial investment in Modale B.V. joint venture. This expense follows a full impairment of the investment in this joint venture following the bankruptcy of Modale B.V. on January 30, 2013.

 

Impairment of related party loans . In 2012 we impaired loans in the value of $1,060,784. These loans were provided in 2012 to Elephant Security B.V., which went bankrupt on January 30, 2013. Elephant Security B.V. was a related party since it was majority owned by QAT Investments SA, one of our affiliates.

 

Provision for income taxes . Provision for income taxes for the year ended December 31, 2012 and 2011 was $289,136 and $0, respectively. In the ordinary course of our business there are transactions where the ultimate income tax determination is uncertain, we believe that we have adequately provided for unresolved income tax issues with federal, state, local and foreign tax authorities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an additional expense would be recorded.

 

Net Loss . Net loss for 2012 was $23,131,936, a decrease of $2,178,799 (or 8.61%), compared to $25,310,735 in 2011. The decrease in loss was led by the decrease in the loss from operations by $4,162,459. Loss from operations reduced because of increased revenues from our mobile and security business as well as due to lower non-cash compensation expenses. On the other hand, in 2012, the provision for income taxes of $289,136, the equity in earnings of unconsolidated joint venture of $501,776 and total other expense of $827,211 worsened net loss.

 

Other Comprehensive (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, 2012 and 2011 was $411,205 and ($624,275) 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 $225,391,923 and $203,260,307 as of December 31, 2013 and 2012, respectively. Historically, we have relied on a combination of debt and equity financings to fund our on-going cash requirements. The consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

 

With cash and cash equivalents at December 31, 2013 of $1,252,315, proceeds from warrant and option exercises through March 14, 2014 of $350,903, the net proceeds of $3,732,668 following the exercise of a Warrant on March 17, 2014 and the improvement of net cash used in operating activities, we believe that we can carry out our operational plans for the coming 12 months. For our longer term growth, we believe we will continue to attract financing in order to finance or lease our capital expenditures. If we are unable to achieve the anticipated revenues or if proceeds from financing arrangement with our major vendors, we will need to attract further debt or equity financing. Although we have been successful in the past in meeting our cash needs, there can be no assurance that proceeds from additional revenues, vendor financings or debt and equity financing where required will be received in the necessary time frames. If this occurs, we may, therefore, be unable to continue our operations. As of December 31, 2013, these conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

35
 

 

Operating activities

  

    Dec 31,
2013
    Dec 31,
2012
    Dec 31,
2011
 
                   
Net loss   $ (22,131,615 )   $ (23,131,936 )   $ (25,310,735 )
Adjustments to reconcile net loss to net cash used in operating activities:     19,052,765       12,926,083       12,914,782  
      (3,078,850 )     (10,205,853 )     (12,395,953 )
                         
Changes in operating assets and liabilities:     (2,888,836 )     1,406,581       (2,174,983 )
Net cash used in operating activities     (5,967,686 )     (8,799,272 )     (14,570,936 )

 

Before changes in operating assets and liabilities, net cash used reduced from $10,205,853 to $3,078,850, which is a decrease of $7,127,003 or 69.8%, largely driven by the increased revenues in the mobile and security revenues.

 

Changes in operating assets and liabilities were primarily negatively affected by reducing the accounts payable debt that was built-up in earlier periods. This impacted cash used by $ 3,415,032 which combined with the other working capital changes, resulted in cash used by changes in operating assets and liabilities of $2,888,836 for 2013.

 

In total, net cash used for operating activities decreased by $2,831,586, or 32% from $8,799,272 in 2012 to $5,967,686 in 2013. Net cash used for operating activities in 2011 was $14,570,936.

 

Investing activities

 

Net cash used in investing activities for year ended December 31, 2013 was $6,061,711 an increase of $2,554,673 or 73%, compared to $3,507,038 in 2012. Net cash used in investing activities for year ended December 31, 2012 decreased by $5,010,173, or 59%, compared to $8,517,211 in 2011. The higher net cash used in investing activities in 2013, in comparison with 2012, was primarily attributable to a higher level of equipment and software purchase in 2013 following the increased revenues.

 

Financing activities

  

Net cash received by financing activities for the year ended December 31, 2013 was $12,280,154 compared to $7,481,061 and $25,894,241 for the year ended December 31, 2012 and December 31, 2011, respectively. See Notes 15, 16, 17, 18 and 19 of the Financial Statements for more information.

  

As a result of the above activities, we had a cash and cash equivalents balance of $1,252,315 as of December 31, 2013, a net increase in cash and cash equivalents of $19,047 since December 31, 2012.

 

Off- Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have either 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, nor we have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

36
 

 

Contractual obligations

 

The following table summarizes the payments due by fiscal year for our outstanding commercial obligations as of December 31, 2013.

 

Contractual obligations   Payments due by period (USD)  
    Total     Less than a
year
    1-3 years     3-5 years     More than
5 years
 
Long-term debt (a)   $ 8,259,911     $ 2,753,304     $ 5,506,608       -       -  
Capital lease (b)   $ 2,148,367     $ 1,302,838     $ 845,529       -       -  
Operating lease (c)   $ 468,216     $ 361,717     $ 106,499       -       -  
Purchase obligations (d)   $ 247,517     $ 247,517       -       -       -  
Other long-term liabilities (e)   $ 2,542,331     $ 1,880,294     $ 662,036       -       -  
Total   $ 13,666,342     $ 6,545,670     $ 7,120,672       -       -  

 

  (a) See Notes 15 and 16 of the Financial Statements for more information;

  (b) These amounts represent financing arrangements with vendors to acquire equipment and licenses. These trade arrangements contain maturity periods ranging from two to three years, and interest rates between 8.65% and Euribor (3M) +1.5% at different foreign exchange rates. See Note 20 of the Financial Statements for more information.

  (c) These amounts represent undiscounted future minimum rental commitments under non-cancelleable facilities leases.

  (d) These amounts represent purchase commitments that have not been recorded yet in the general ledger.

  (e) These amounts represent rental expense for co-locations, interconnect and Network, service and support agreements.

 

37
 

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

Foreign currency exchange rate

Although the vast majority of our business activities are carried out in Euros, we report its financial statements in 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. We carry out our business activities primarily in Euros, and we do not currently engage in hedging activities. As the vast majority of our business activities are carried out in Euros and we report our financial statements in USD, 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 USD. Since we carry out our business activities primarily in Euros, we do not currently engage in hedging activities.

 

We do not believe that we have currently material exposure to interest rate or other market risks.

 

38
 

 

Item 8.  Financial Statements and Supplementary Data

 

ELEPHANT TALK COMMUNICATIONS CORP.

AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

  PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, BDO USA, LLP 33-34
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2012 35
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 36
   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 37
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 38
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39-57

 

39
 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders

Elephant Talk Communications Corp.

 

We have audited the accompanying consolidated balance sheets of Elephant Talk Communications Corp. (“Company”) as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also 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 presentation of the financial statements. 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 Communications Corp. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013 , in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $225.4 million and continues to generate negative cash flows. These factors, among others discussed in Note 2, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elephant Talk Communication Corp.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 31, 2014 expressed an adverse opinion thereon.

 

/s/ BDO USA, LLP

 

Los Angeles, California

 

March 31, 2014

 

 

 

40
 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders

Elephant Talk Communications Corp.

 

We have audited Elephant Talk Communications Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Elephant Talk Communication Corp.’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 Item 9A, Management’s Annual 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. Management has identified material weaknesses in internal controls over financial reporting relating to accounting for complex transactions associated with business combinations, complex financial instruments, and income taxes. In addition to this, as of year-end, the Company’s Board of Director’s did not have an adequate number of independent Board members in order to have effective oversight of the Company’s internal control system.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 financial statements, and this report does not affect our report dated March 31, 2014 on those financial statements.

In our opinion, Elephant Talk Communications Corp. did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2013, 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 Corp. as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated March 31, 2014 expressed an unqualified opinion thereon and included an explanatory paragraph regarding the Company’s ability to continue as a going concern.

 

 

/s/ BDO USA, LLP

 

Los Angeles, California

 

March 31, 2014

 

 

 

 

 

41
 

 

ELEPHANT TALK COMMUNICATION CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS AT DECEMBER 31, 2013 AND 2012

 

    2013     2012  
ASSETS                
                 
CURRENT ASSETS                
                 
Cash and cash equivalents   $ 1,252,315     $ 1,233,268  
Restricted cash     191,600       1,230,918  
Accounts receivable, net of an allowance for doubtful accounts of $7,693 and $559,120 at December 31, 2013 and December 31, 2012 respectively     5,976,879       5,123,803  
Prepaid expenses and other current assets     2,254,213       1,821,218  
Total current assets     9,675,007       9,409,207  
                 
NON-CURRENT ASSETS                
                 
OTHER ASSETS     1,412,408       1,038,306  
                 
PROPERTY AND EQUIPMENT, NET     19,786,122       13,088,271  
                 
INTANGIBLE ASSETS, NET     8,670,677       10,503,026  
                 
GOODWILL     3,773,226       3,436,731  
                 
TOTAL ASSETS   $ 43,317,440     $ 37,475,541  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
CURRENT LIABILITIES                
Overdraft   $ 391,436     $ 350,114  
Accounts payable and customer deposits     2,586,662       5,139,292  
Obligations under capital leases (current portion)     1,302,838       -  
Deferred Revenue     142,731       252,551  
Accrued expenses and other payables     4,961,303       4,120,536  
8% Convertible Notes (current portion)     -       3,067,416  
Loans payable     962,654       963,051  
10% Related Party Loan (net of Debt Discount of $1,719,585)     1,033,719       -  
Total current liabilities     11,381,343       13,892,960  
                 
LONG TERM LIABILITIES                
8% Convertible Notes, net of current portion     -       2,565,202  
10% 3rd Party Loan (net of Debt Discount of $726,695)     4,779,913       -  
Warrant liabilities     1,973,534       -  
Conversion feature     -       311,986  
Non-current portion of obligation under capital leases     845,529       -  
Loan from joint venture partner     602,047       555,907  
Total long term liabilities     8,201,023       3,433,095  
                 
Total liabilities     19,582,366       17,326,055  
Commitments and Contingencies (See Note 28)     -       -  
STOCKHOLDERS' EQUITY                
Preferred Stock 0.00001 par value, 50,000 shares authorized, 0 issued and outstanding     -       -  
Common Stock, .00001 par value, 250,000,000 shares authorized, 140,466,801 issued and outstanding  as of December 31, 2013 and 111,918,386 shares issued and outstanding as of December 31, 2012     248,712,321       223,965,907  
Accumulated other comprehensive income (loss)     269,869       (732,090 )
Accumulated deficit     (225,391,922 )     (203,260,307 )
Elephant Talk Communications Corp. stockholders' equity     23,590,268       19,973,510  
NON-CONTROLLING INTEREST     144,806       175,976  
Total stockholders' equity     23,735,074       20,149,486  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 43,317,440     $ 37,475,541  

 

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

 

42
 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

 

    2013     2012     2011  
                   
REVENUES   $ 22,827,261     $ 29,202,188     $ 32,232,981  
                         
COST AND OPERATING EXPENSES                        
Cost of service     7,149,153       20,819,327       28,723,265  
Selling, general and administrative expenses     26,533,283       24,186,278       23,408,554  
Depreciation and amortization     6,601,246       5,710,396       5,254,708  
Intangible assets impairment charge     -       -       522,726  
  Total cost and operating expenses     40,283,682       50,716,001       57,909,253  
                         
LOSS FROM OPERATIONS     (17,456,421 )     (21,513,813 )     (25,676,272 )
                         
OTHER INCOME (EXPENSE)                        
Interest income     103,627       248,017       106,721  
Interest expense     (1,064,999 )     (780,852 )     (201,184 )
Interest expense related to Debt Discount and conversion feature     (2,069,649 )     (1,089,126 )     -  
Change in fair value of conversion feature     232,267       2,387,326       -  
Loss on extinguishment of debt     (2,005,100 )     -       -  
Change in fair value of warrant liabilities     479,322       -       -  
Other Income & (expense)     (302,112 )     -       460,000  
  Impairment of related party loans     -       (1,060,784 )     -  
  Amortization of deferred financing costs     (248,851 )     (531,792 )     -  
  Net loss from joint venture             (501,776 )        
    Total other income (expense)     (4,875,495 )     (1,328,987 )     365,537  
                         
  LOSS BEFORE PROVISION FOR INCOME TAXES     (22,331,916 )     (22,842,800 )     (25,310,735 )
   (Benefit)/ provision for income taxes     200,301       (289,136 )     -  
NET LOSS     (22,131,615 )     (23,131,936 )     (25,310,735 )
                         
OTHER COMPREHENSIVE (LOSS) INCOME                        
Foreign currency translation gain (loss)     1,001,959       411,205       (624,275 )
      1,001,959       411,205       (624,275 )
COMPREHENSIVE LOSS   $ (21,129,656 )   $ (22,720,731 )   $ (25,935,010 )
                         
Net loss per common share and equivalents - basic and diluted   $ (0.18 )   $ (0.21 )   $ (0.24 )
                         
Weighted average shares outstanding during the period - basic and diluted     126,259,634       111,322,029       104,326,066  

 

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

 

43
 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

 

Description   Common
Shares
    Common
Amount
    Other
compre-
hensive
income
(loss)
    Accum-
mulated
Deficit
    Total
stock-
holders
Equity
 
Balance - December 31, 2010     88,660,848     $ 183,825,664     $ (519,020 )   $ (154,818,436 )   $ 28,488,208  
                                         
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 )
Stock Options compensation expense     -       4,697,305       -       -       4,697,305  
Expenses attributable to share issuances     -       (112,227 )     -       -       (112,227 )
Other comprehensive loss due to foreign exchange rate translation net of tax     -       -       (624,275 )     -       (624,275 )
Other                             800       800  
Net Loss     -       -       -       (25,310,735 )     (25,310,735 )
Balance - December 31, 2011- VINTAGE PLEASE UNDERLINE!!     110,525,231       216,188,899       (1,143,295 )     (180,128,371 )     34,917,233  
                                         
Shares issued for warrant exercises     595,000       650,000       -       -       650,000  
Shares issued for employee stock option exercises     464,972       519,425       -       -       519,425  
Shares issued for board & management compensation     499,121       1,144,498       -       -       1,144,498  
Shares issued for acquisitions     134,046       300,272       -       -       300,272  
Shares returned by former CFO     (300,000 )     -       -       -       -  
Shares to be issued     -       50,100       -       -       50,100  
Stock Options compensation expense     -       5,220,793       -       -       5,220,793  
Expenses attributable to share issuances     -       (79,642 )     -       -       (79,642 )
Warrant solicitation fee     -       (28,438 )     -       -       (28,438 )
Other comprehensive loss due to foreign exchange rate translation net of tax     -       -       411,205       -       411,205  
Net Loss     -       -       -       (23,131,936 )     (23,131,936 )
Balance - December 31, 2012     111,918,368     $ 223,965,907     $ (732,090 )   $ (203,260,307 )   $ 19,973,510  
Shares issued for warrant exercises     5,596,459       3,200,590       -       -       3,200,590  
Shares issued for employee stock option exercises     809,737       529,648       -       -       529,648  
Shares issued for board & management compensation     775,985       758,964       -       -       758,964  
Shares issued for acquisitions     1,250,000       1,455,000       -       -       1,455,000  
Shares issued to consultants     200,000       152,000       -       -       152,000  
Shares issued for rental termination settlement     400,000       468,000       -       -       468,000  
Shares issued for 2013 SPA     17,425,621       12,000,000       -       -       12,000,000  
Shares issued for small SPA     250,000       225,000       -       -       225,000  
Shares issued for conversion of cancelled loan     1,840,631       1,306,848       -       -       1,306,848  
Shares to be issued     -       (323,987 )     -       -       (323,987 )
Amortization of Stock Options expense     -       7,764,830       -       -       7,764,830  
Expenses attributable to share issuances     -       (790,498 )     -       -       (790,498 )
FMV Warrants issued in relation to SPA closings and issued as Warrant liability     -       (5,636,315 )     -       -       (5,636,315 )
FMV of Warrants issued classified as Debt Discount     -       1,398,121       -       -       1,398,121  
FMV of Beneficial Conversion Feature classified as Debt Discount     -       1,105,809       -       -       1,105,809  
FMV of Beneficial Conversion Feature classified as debt discount     -       1,132,404       -       -       1,132,404  
Other comprehensive loss due to foreign exchange rate translation net of tax     -       -       1,001,959       -       1,001,959  
Net Loss     -       -       -       (22,131,615 )     (22,131,615 )
Balance - December 31, 2013     140,466,801       248,712,321       269,869       (225,391,922 )     23,590,268  

 

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

 

44
 

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

  

    2013     2012     2011  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net loss   $ (22,131,615 )   $ (23,131,936 )   $ (25,310,735 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     6,601,246       5,710,396       5,254,708  
Provision for doubtful accounts     22,005       117,394       318,443  
Stock based compensation     8,515,391       6,302,141       6,319,314  
Loss on Extinguishment of Debt     2,005,100       -       -  
Net loss from joint venture     -       501,776       -  
Amortization of shares issued for consultancy     -       -       499,591  
Change in fair value of conversion feature     (232,267 )     (2,387,326 )     -  
Change in fair value of warrant liability     (479,322 )     -       -  
Amortization of deferred financing costs     248,851       531,792       -  
Interest expense relating to debt discount and conversion feature     2,069,649       1,089,126       -  
Loans to related party impairment charge     -       1,060,784       -  
Unrealized foreign currency translation gain (loss)     302,112       -       -  
Intangible assets impairment charge     -       -       522,726  
Changes in operating assets and liabilities:                        
Decrease (increase) in restricted cash     1,052,257       (1,040,074 )     -  
Decrease (increase) in accounts receivable     (82,763 )     1,292,883       (1,372,719 )
Decrease (increase)  in prepaid expenses, deposits and other assets     (465,026 )     (247,443 )     782,920  
Increase (decrease) in accounts payable, proceeds from related parties and customer deposits     (3,415,032 )     272,500       (140,229 )
Increase (decrease) in deferred revenue     (118,786 )     114,673       142,309  
Increase (decrease) in accrued expenses and other payables     140,514       1,014,042       (1,587,264 )
Net cash used in operating activities     (5,967,686 )     (8,799,272 )     (14,570,936 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchases of property and equipment     (5,898,169 )     (2,224,923 )     (7,721,307 )
Restricted cash     -       -       49  
Cash received from acquisition of subsidiary     -       36,188       -  
Impairment of related party loans     -       (1,060,784 )     -  
Payments for acquisition     -       -       (347,758 )
Loan to joint venture party     -       (146,496 )     -  
Loan to third party     (163,542 )     (111,023 )     (448,195 )
Net cash used in investing activities     (6,061,711 )     (3,507,038 )     (8,517,211 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from 12% Unsecured Loan from Related Party     1,290,790       -       -  
Proceeds from Share Purchase Agreement – unregistered securities     225,000       -       -  
Proceeds from Share Purchase Agreement – Registered Direct     7,500,000       -       -  
Proceeds from Share Purchase Agreement – Related Party     4,500,000       -       -  
Proceeds from 10% Affiliate Loan     2,652,600       -       -  
Proceeds from 10% 3 rd Party Loan     5,305,200       -       -  
Deferred financing costs     -       (543,437 )     -  
Proceeds from 8% Convertible Note, net of OID     -       8,000,000       -  
Restricted cash     -       (2,273,720 )     -  
(Payments on) proceeds from convertible note installment payments and interest     (8,642,149 )     1,531,293       -  
Cash from Escrow account for principal and interest payments on 8% Convertible Notes     742,427       -       -  
Trade note payable     (512,732 )     (315,000 )     271,915  
Proceeds from exercise of warrants & options     581,142       1,081,925       26,808,067  
Payment of placement & solicitation fees     (1,362,124 )     -       (1,185,741 )
 Net cash provided by financing activities     12,280,154       7,481,061       25,894,241  
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS     (231,711 )     48,941       957,785  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     19,047       (4,776,308 )     3,763,879  
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD     1,233,268       6,009,576       2,245,697  
CASH AND CASH EQUIVALENTS, END OF THE PERIOD   $ 1,252,315     $ 1,233,268     $ 6,009,576  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                        
                         
Cash paid during the period for interest   $ 745,096     $ 504,718     $ 39,460  
Non-cash rent termination settlement   $ 468,000     $ 342,006     $ -  
Share capital issued to acquire Telnicity   $ 1,180,000     $ 578,357     $ -  
Purchase of property and equipment under capital lease agreements   $ 2,620,182       15,858       -  
       Amount of cash paid in taxes   $ 45,930     $ 15,858     $ 31,701  

 

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

 

45
 

 

Note 1. Reclassification of changes to prior year information

 

Certain reclassifications have been made to the 2012 Financial Statements to conform to the current year presentation. Prior to June 30, 2013, the Company presented the stock-based compensation as one line item in the Company’s Consolidated Statement of Comprehensive Loss. The Company now includes the stock-based compensation of $8,515,391, $6,302,141, and $6,818,905 for 2013, 2012 and 2011, respectively, within Selling, General & Administrative expenses in the Consolidated Statement of Comprehensive Loss. These reclassifications had no effect on previously reported results of operations or retained earnings.

 

Note 2. Financial Condition

 

As reflected in the accompanying consolidated financial statements the Company incurred net losses of $22,131,615 and cash flow deficits from operations of $5,967,686 for the year ended December 31, 2013, and had an accumulated deficit of $225,391,923 as of December 31, 2013.

 

With cash and cash equivalents at December 31, 2013 of $1,252,315, proceeds from option exercises through March 14, 2014 of $350,903 and the net proceeds of $3,732,668 following the exercise of warrants on March 17, 2014 and the improvement of net cash used in operating activities, the Company believes that it can carry out our operational plans for the coming 12 months. For the longer term growth of the Company it will need to continue to attract financing in order to finance or lease our capital expenditures.

 

If the Company is uable to achieve the anticipated revenues or financing arrangement with its major vendors, the Company will need to attract further debt or equity financing. Although the Company has been succesful in the past in meeting its cash needs, there can be no assurance that proceeds from additional revenues, vendor financings or debt and equity financings, where required, will be received in the required time frames. If this occurs, the Company may, therefore, be unable to continue its operations. As of December 31, 2013, these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 3. Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements for December 31, 2013 and December 31, 2012 include the accounts of Elephant Talk Communications Corp., including:

 

  · its wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its wholly owned subsidiaries Elephant Talk North America Corp., Elephant Talk Communications Luxembourg SA, Elephant Talk Communications France S.A.S., Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Business Services W.L.L., Guangzhou Elephant Talk Information Technology Limited, Elephant Talk Deutschland GmbH, Morodo Group Ltd., Elephant Talk Belgium BVBA, and the majority owned (51%) subsidiaries Elephant Talk Communications PRS U.K. Limited and (51%) ET-UTS NV;
  · Elephant Talk Europe Holding B.V.’s wholly-owned subsidiary Elephant Talk Communication Holding AG and its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Telekom GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication Schweiz GmbH, Elephant Talk Communication (Europe) GmbH and the majority owned (51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V.;

 

46
 

 

  · Elephant Talk Telecomunicação do Brasil LTDA, owned 90% by Elephant Talk Europe Holding B.V. and 10% by Elephant Talk Communication Holding AG;
  · Elephant Talk Europe Holding B.V.’s majority (60%) owned subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its wholly owned (100%) and its majority owned (99%) subsidiaries Elephant Talk Middle East & Africa (Holding) Jordan L.L.C. and Elephant Talk Middle East & Africa Bahrain W.L.L.;
  · its wholly-owned subsidiary Elephant Talk Limited (“ETL”) and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC;
  · its wholly-owned subsidiary ValidSoft Ltd and its wholly-owned subsidiaries ValidSoft and ValidSoft (Australia) Pty Ltd.; and
  · its wholly-owned subsidiary Elephant Talk Group International B.V., based in The Netherlands.

 

Business combinations :

 

On April 1, 2013, the Company, through its subsidiary Elephant Talk North America Corp, entered into an asset purchase agreement to acquire most of the assets of Telnicity LLC, a company established in the US. The assets and operations are consolidated into the financials of the Company as of April 1, 2013. Refer to Note 11 of the Financial Statements for more information.

 

All intercompany balances and transactions 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, Euros for its wholly-owned subsidiary Elephant Talk Global Holding B.V., the Hong Kong Dollar for its wholly-owned subsidiary ETL and the British Pound Sterling for its wholly-owned subsidiary ValidSoft. 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 ASC 830, Foreign Currency Matters, net gains and losses resulting from translation of foreign currency financial statements are included in the statement of stockholder’s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss), under the line item ‘Other income/(expense)’.

 

Use of Estimates

 

The preparation of the accompanying financial statements conforms with accounting principles generally accepted in the U.S. 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. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant areas of estimates include bad debt allowance, valuation of of financial instruments, useful lives and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions.

 

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 as of December 31, 2013 and 2012 was $191,600 and $1,230,918 respectively, and consists of cash deposited in blocked accounts as bank guarantees for national interconnection and wholesale agreements with telecom operators. The decrease in 2013 is due to the extinguishment of debt, as described in this section, under Notes 17 and 18 of the Financial Statements.

 

47
 

  

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. The Company makes ongoing assumptions relating to the collectibility of our accounts receivable. The accounts receivable amounts presented on our balance sheets include reserves for accounts that might not be collected. In determining the amount of these reserves, the Company considers its historical level of credit losses. The Company also makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and the Company assesses current economic trends that might impact the level of credit losses in the future. The Company’s reserves have generally been adequate to cover its actual credit losses. However, since the Company cannot reliably predict future changes in the financial stability of its customers, it cannot guarantee that its reserves will continue to be adequate. If actual credit losses are significantly greater than the reserves, the Company has established that it would increase its general and administrative expenses and reduce its reported net losses. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease the Company’s general and administrative expenses and decrease its reported net losses. Allowances are recorded primarily on a specific identification basis. See Note 4 of the Financial Statements for more information.

 

Leasing Arrangements

 

At the inception of a lease covering equipment or real estate, the lease agreement is evaluated under the criteria of ASC 840, Leases. Leases meeting one of the four key criteria are accounted for as capital leases and all others are treated as operating leases. Under a capital lease, the discounted value of future lease payments becomes the basis for recognizing an asset and a borrowing, and lease payments are allocated between debt reduction and interest. For operating leases, payments are recorded as rent expense. Criteria for a capital lease include (i) transfer of ownership during the lease term; (ii) existence of a bargain purchase option under terms that make it likely to be exercised; (iii) a lease term equal to 75 percent or more of the economic life of the leased equipment; and (iv) minimum lease payments that equal or exceed 90 percent of the fair value of the property. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset. The assets are amortized as per our accounting policy for property & equipment, and intangibles, as applicable.

 

Revenue Recognition and Deferred Revenue

 

The Company derives revenue from outsourced services in telecommunications based activities by deploying its operational management services, network, switching technology and mobile enabling platform. Revenue represents amounts earned for these services provided to customers (net of value added tax).

 

The Company follows ASC 605, Revenue Recognition (“ASC 605”) and recognizes revenue when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. Revenues are recognized on a gross basis as the Company acts as principal in the transaction and has risk of loss for collection and delivery of service.

 

In the landline business, and specifically in the Premium Rate Services (PRS), the Company provides technical, operational and financial telecom infrastructure to telecommunication service providersprovidersRevenues are recognized when delivery occurs based on a pre-determined rate, number of calls and number of user minutes that the Company has managed in a given month.

 

For the mobile solutions the Company recognizes revenues from two different service offerings, namely managed services and bundled services. For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO). Managed service revenues are recognized monthly based on an average number of end-users managed and calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time and calculated based on a pre-determined service fee.

 

For the security solutions we recognize revenues primarily from SIM lookup services using the VALid-SSD platform. Security solutions revenue is recognized based on the number of SIM lookups performed and calculated based on a pre-determined service fee per lookup. Other revenues recognized in the security business include consulting services which are recognized as the services are performed.

 

48
 

 

Cost of Revenues and Operating Expenses

 

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.

 

Within the caption “total costs and operating expenses” in line item selling, general and administrative expenses (“SG&A”) in the accompanying statement of comprehensive loss, the Company presents the costs incurred in the development of the Company’s services which are expensed as incurred. Costs incurred during the application development stage of internal-use software projects, such as those used in the Company’s network operations, are capitalized in accordance with the accounting guidance for costs of computer software developed for internal use.

 

Reporting Segments

 

ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The business operates as one single segment and discrete financial information is based on the whole, not segregted; and is used by the chief decision maker accordingly.

 

Financial Instruments

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and customer deposits approximate their fair values based on their short-term nature. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. The Company's conversion feature, a derivative instrument, is recognized in the balance sheet at its fair values with changes in fair market value reported in earnings.

 

Fair Value Measurements

 

In accordance with ASC 820 Fair Value Measurement (ASC 820), the Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

 

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but are traded less frequently, derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

Level 3 – Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

49
 

 

The degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement.

 

Stock-based Compensation

 

The Company follows the provisions of ASC 718, Compensation-Stock Compensation, (“ASC 718”). Under ASC 718, stock-based awards are recorded at fair value as of the grant date and recognized as expense with an adjustment for forfeiture over the employee’s requisite service period (the vesting period, generally up to three years). The stock-based compensation cost based on the grant date fair value is amortized over the period in which the related services are received.

 

To determine the value of our stock options at grant date under our employee stock option plan, the Company uses the Black-Scholes option-pricing model. The use of this model requires the Company 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. The Company uses 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.

 

Expected Volatility

 

The Company estimates 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 share closing prices of an equal number of days prior to the grant-date (reference period). The annual volatility is used to determine the (cumulative) volatility of its Common Stock (= annual volatility x square root (expected life)).

 

Forfeiture rate

 

The Company is using the aggregate forfeiture rate. The aggregate forfeiture rate is the ratio of pre-vesting forfeitures over the awards granted (pre-vesting forfeitures/grants). The forfeiture discount (additional loss) is released into the profit and loss in the same period as the option vesting-date. The forfeiture rate is actualized every reporting period.

 

Risk-Free Interest Rate

 

The Company estimates the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department with a term equal to the reported rate, or derived by using both spread in intermediate term and rates, to the expected life of the award.

 

Expected Dividend Yield

 

The Company estimates 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. The Company does not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.

 

50
 

 

Income Taxes

 

The Company accounts for income taxes under the provisions of ASC 740, Accounting for Income Taxes (“ASC 740”). Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the income or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are recognized for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. Establishment of a valuation allowance is provided when the likelihood of realization of deferred tax assets it is more –likely –than-not to be realized. Deferred taxes are recorded at tax rates for each respective tax jurisdiction in which the Company operates.

 

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.

 

The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a quarterly basis. The Company’s evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which the Company makes the change, which could have a material impact on our effective tax rate and operating results. The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various foreign jurisdictions. The Company's income tax returns are open to examination by federal, state and foreign tax authorities, generally for the years ended December 31, 2008 and later, with certain state jurisdictions open for audit for earlier years. The Company had an amount of zero and $289,136 recorded for unrecognized tax benefits at December 31, 2013 and 2012, respectively. The Company's policy is to record estimated interest and penalties on unrecognized tax benefits as part of its income tax provision. During the years ended 2013, 2012 and 2011, the Company did not recognize any interest or penalties in its statements of operations and there are no accruals for interest or penalties at December 31, 2013 or 2012.

 

Comprehensive Income/ (Loss)

 

Comprehensive income/ (loss) include all changes in equity during a period from non-owner sources. For the years ended December 31, 2013 and 2012, the Company’s comprehensive income/ (loss) consisted of its net loss and foreign currency translation adjustments.

 

Business Combinations

 

The acquisition method of accounting for business combinations as per ASC 805, Business Combinations (“ASC 805”), requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a business combination).

 

Under the acquisition method of accounting, the identifiable assets acquired, the liabilities assumed, and any non-controlling interests acquired in the acquisition are recognized as of the closing date for purposes of determining fair value. The Company measures goodwill as of the acquisition date as the excess of consideration transferred, over the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and the Company charges them to general and administrative expense as they are incurred.

 

During the measurement period, the Company adjusts the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are reflected retrospectively in all periods being presented in the financial statements.

  

Goodwill

 

The Company records goodwill when the fair value of consideration transferred in a business combination exceeds the fair value of the identifiable assets acquired and liabilities assumed. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but the Company tests them for impairment annually during its fourth fiscal quarter and whenever an event or change in circumstances indicates that the carrying value of the asset is impaired.

 

51
 

 

The authoritative guidance for the goodwill impairment model includes a two-step process. First, it requires a comparison of the carrying value of the reporting unit to its fair value. If the fair value is determined to be less than the carrying value, a second step is performed. In the second step, the Company compares the implied fair value of goodwill to its carrying value in the reporting unit. The shortfall of the fair value below carrying value, if any, would represent the amount of goodwill impairment charge. We are using the criteria in ASU no. 2011-08 Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits the Company to make a qualitative assessment of whether it is more likely than not than not that a reporting unit’s fair value is less than the carrying amount before applying the two-step goodwill impairment test. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less that its carrying amount, it would not need to perform the two-step impairment test for that reporting unit.

 

The Company tests goodwill for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment as per ASC 350, Intangibles – Goodwill and Other. The Company periodically analyzes whether any such indicators of impairment exist. Such indicators include a sustained, significant decline in the Company’s stock price and market capitalization, a decline in the Company’s expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, and/or slower growth rate, among others. In the Company’s case, the indicator is the continuing losses.

 

Long-lived Assets and Intangible Assets

  

In accordance with ASC 350, Intangibles – Goodwill and Other (“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 indefinite life intangible assets are reviewed for impairment in accordance with ASC 350, on an annual basis, 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 amortizing intangible assets that management expects to hold and use is tested for impairment when amounts may not be recoverable. Impairment is measured based on the amount of the carrying value that exceeds the fair value of the asset.

  

Property and Equipment, Internal Use Software 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 350-40, Accounting for the Costs of Computer Software developed or obtained for internal use (former AICPA SOP 98-1, “ASC 350-40”), and therefore the costs incurred in the preliminary stages of development are expensed as incurred. The Company capitalizes all costs related to software developed or obtained for internal use when management commits to funding the project; the preliminary project stage is completed and when technological feasibility is established. Software developed for internal use has generally been used to deliver hosted services to our customers. 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. 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. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal use software during the years ended December 31, 2013, 2012 or 2011. Capitalized costs of internal use software included in Property & Equipment was $2,603,731 and $1,962,315 at December 31, 2013 and 2012, respectively. The capitalized amount during the years ended December 31, 2013 and 2012 amounted to $3,505,742 and $1,731,341, respectively. The difference between capitalized amounts in the balance sheet and the amount adjusted from the Consolidated Statement of Comprehensive Loss is due to the use of different exchange rates for balance sheet and income statement items.

 

52
 

 

Recent Accounting Pronouncements

 

On July of 2013 the Financial Accounting Standards Board or FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward exists. This guidance provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, except to the extent that carry forwards are not available to settle any additional income taxes that would result from disallowance of a tax position. The unrecognized tax benefit should be presented as a liability. This guidance is applicable for fiscal years and interim periods beginning after December 15, 2013. We are evaluating the potential impact of adopting this standard on our consolidated financial statements.

 

On March 4, 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We are evaluating the potential impact of this adoption on our consolidated financial statements.

 

On March of 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830)—Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. These amendments provide guidance on releasing Cumulative Translation Adjustments when a parent company sells partially equity method investments and in step acquisitions. The amendments are effective on a prospective basis for fiscal years and interim reporting periods beginning after December 15, 2013. The guidance is applicable to us in principle, but since its enactment, we have not derecognized any subsidiary or group of assets as of December 31, 2013.  

 

Note 4. Allowance for Doubtful Accounts

 

Accounts receivable are presented on the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful.  The Company recorded an allowance for doubtful accounts of $7,693 and $559,120 as of December 31, 2013 and 2012, respectively.

 

Changes in the allowance for doubtful accounts are as follows:

 

Allowance for
doubtful
accounts
  Balance
at the
beginning
of the
period
A
    Currency
revaluation
B
    Total Allowance
for doubtful
accounts
A+B
    Additions-
allowance for
doubtful
accounts
    Release for
doubtful
accounts
    Balance at
the end of
the period
 
Year ended December 31, 2013   $ 559,120     $ 8,313     $ 567,433     $ 22,005     $ (581,745 )   $ 7,693  
Year ended December 31, 2012   $ 436,546     $ 5,180     $ 441,726     $ 117,394       -     $ 559,120  
Year ended December 31, 2011   $ 119,044       -     $ 119,044     $ 318,443     $ (941 )   $ 436,546  

 

53
 

 

Note 5. Prepaid Expenses and Other Current Assets

  

Prepaid expenses and other current assets recorded at $2,254,213 as of December 31, 2013, compared with $1,821,218 as of December 31, 2012. As of December 31, 2013, $732,838 of the prepaid expenses was related to prepaid Value Added Tax (“VAT”). On December 31, 2012, prepaid VAT represented $534,327.

   

Note 6. Other Assets

 

Other assets at December 31, 2013 and December 31, 2012 are long-term in nature and were $1,412,408 and $1,038,306, respectively. Details on the composition of Other Assets are included below.

 

Due from Third Parties

 

On July 4, 2013 the Company provided a $150,000 loan to a third party at an interest rate of 5% per annum, with an option to acquire an equity interest. The loan is provided to fund the development and exploitation of applications using electronic medical health records. The loans will be repaid at the completion of the proof of concept (POC), which is a prototype that is designed to determine feasibility, which will not occur prior to 2015. The loan has a carrying value of $160,518 as of December 31, 2013.

 

Long-term Deposit

 

As of December 31, 2013, there were long-term deposits to various telecom carriers and a deposit towards the French Tax Authorities amounting to $ 771,193, compared with $657,192 as of December 31, 2012. The deposits are refundable at the termination of the business relationship with the carriers.

 

Deferred Financing Costs

 

During 2013, the Company paid financing costs of $636,624 which were related to the issuance of two convertible notes in the quarter ended September 30, 2013: a 10% Convertible Note with a nominated amount of €2,000,000 (valued at $2,753,304) and another 10% Convertible Note with a nominated amount of €4,000,000 (valued at $5,506,608). These costs are amortized using the effective interest method over the term of each applicable convertible note. The outstanding deferred financing cost balances were $477,673 as of December 31, 2013 and $381,114 as of December 31, 2012.

 

Note 7. Impairment of Related Party Loans

 

During 2012, the Company provided loans with an interest rate of 7% per annum to Elephant Security B.V., in the amount of $1,060,784. Elephant Security B.V. was a related party entity since it was majority owned and controlled by QAT, an affiliate of the Company. Following the bankruptcy of Elephant Security B.V. on January 30, 2013, all related loans and the associated accrued interest income of $57,160 have been impaired in the Consolidated Statement of Comprehensive Loss for the year ended December 31, 2012.

 

Note 8.  Property and Equipment

  

Property and equipment at December 31, 2013 and December 31, 2012 consisted of:

 

    Average
Estimated
             
    Useful
Lives
    December 31,
2013
    December 31,
2012
 
Furniture and fixtures     5       314,686       269,731  
Computer, communication and network equipment     3 – 10       24,287,111       17,056,396  
Software     5       8,473,042       6,123,371  
Automobiles     5       91,580       87,925  
Construction in progress for internal use software             2,603,731       1,962,315  
 Total property and equipment             35,770,150       25,499,738  
                         
Less: accumulated depreciation and amortization             (15,984,028 )     (12,411,467 )
 Total property and equipment, Net           $ 19,786,122     $ 13,088,271  

 

54
 

 

Computers, communications and network equipment includes the capitalization of our systems engineering and software programming activities. Typically, these investments pertain to the Company’s:

 

  · Intelligent Network (IN) platform;
  · CRM provisioning Software;
  · Mediation, Rating & Pricing engine;
  · ValidSoft security software applications;
  · Operations and business support software;
  · Network management tools.

 

Construction in progress for internal use software consists of software projects in development that have not yet been completed. Upon completion of development, the related cost is reclassified to computers, communications, network equipment and software within Property & Equipment, at which point the capitalized costs starts to amortize or depreciate. The costs capitalized for internal use software during the year 2013, 2012 and 2011 amounted to $3,972,460, $1,598,952 and $1,633,230, respectively. The total amount of capitalized costs for internal use software included in Property & Equipment was $3,377,351 and $2,414,354 at December 31, 2013 and 2012, respectively.

 

Note 9. Intangible Assets

 

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, 2013 and 2012 consisted of the following:

  

    Estimated   December 31,     December 31,  
    Useful Lives   2013     2012  
Customer Contracts, Licenses , Interconnect & Technology   5-10   $ 13,005,460     $ 12,096,592  
ValidSoft IP & Technology   1-10     16,246,291       15,597,814  
 Total intangible assets         29,251,751       27,694,406  
                     
Less: Accumulated Amortization         (11,484,600 )     (10,569,693 )
Less: Impairment charges         -       -  
Less: Accumulated Amortization ValidSoft IP & Technology         (9,096,474 )     (6,621,687 )
 Total intangible assets, Net       $ 8,670,677     $ 10,503,026  

 

The increase in intangible assets during the twelve months ended December 31, 2013 was due to the acquisition of Telnicity on April 1, 2013. See Note 11 of the Financial Statements for more information.

 

Total amortization expense for the year ended December 31, 2013 totaled $3,070,244 compared to $2,761,135 and $3,022,909 for 2012 and 2011, respectively. In 2013 and 2012, the Company did not record any impairment. In 2011 the Company recorded an impairment charge of ($522,726) in the Consolidated Statement of Comprehensive Loss and ($486,575) in the balance sheet. The assets impaired pertained primarily to the acquired two-stage dialing product offerings, which were part of the landline revenues.

 

Estimated future amortization expense related to our intangible assets is:

 

    2014     2015     2016     2017     2018     2019 and
thereafter
 
Interconnect licenses and contracts   $ 610,341     $ 266,175     $ 135,073     $ 77,556     $ 59,000     $ 32,500  
ValidSoft IP & Technology     2,365,045       2,216,170       2,132,804       528,047       110,132       137,834  
    $ 2,975,386     $ 2,482,345     $ 2,267,877     $ 605,603     $ 169,132     $ 170,334  

 

55
 

 

Note 10. Goodwill

 

The carrying value of the Company’s goodwill as of December 31, 2013 and as of December 31, 2012 was as follows:

 

Goodwill   December 31,
2013
    December 31,
2012
 
Goodwill ValidSoft Ltd   $ 3,433,833     $ 3,433,833  
Goodwill Morodo Ltd.     214,689       214,689  
Goodwill Telnicity     190,401       -  
End of period exchange rate translation     (65,697 )     (211,791 )
 Total   $ 3,773,226     $ 3,436,731  

 

The increase in goodwill during the twelve months ended December 31, 2013 was due to the acquisition of most of the assets of Telnicity. See Note 11 of the Financial Statements for more information.

 

During the fourth quarter of 2013, the Company commenced its annual goodwill impairment test for 2013 and after considering qualitative factors including our market capitalization and the Company’s 2013 outlook, management concluded that a two-step goodwill impairment test was not required. 

 

Note 11. The acquisition of assets of Telnicity

 

On April 1, 2013, the Company, through its subsidiary Elephant Talk North America Corp, entered into an asset purchase agreement to acquire most of the assets of Telnicity LLC, a company established in the U.S. The transaction was accounted for as a business combination. The assets provide access to the U.S. mobile telecommunications market through Telnicity’s relationships with several major U.S.-based mobile telecommunication companies as well as its complementary technological mobile capabilities. The net assets and operations are consolidated into the financials of the Company as of April 1, 2013.

 

Consideration paid   Total 
Consideration
 
Number of shares of Common Stock     1,000,000  
Fair value of the share price at April 1, 2013   $ 1.18  
Total Consideration Paid   $ 1,180,000  

 

Following the valuation of Telnicity, the Company allocated the above purchase price to the identifiable assets and liabilities. A summary of the assets acquired assumed for Telnicity are:

 

Estimated fair values:        
Assets acquired   $ 989,599  
Liabilities assumed     -  
         
Net assets acquired     989,599  
Consideration paid     1,180,000  
         
Goodwill   $ 190,401  

 

During the third quarter of 2013, the Company prepared a preliminary internal fair value analysis of Telnicity’s intangible assets and allocated the following values: $218,599 to relationship with customers, $366,112 to relationships with carriers and $404,888 to technology and intellectual property, which have been presented on the balance sheet in the line item “Customer Contracts, Licenses, Interconnect & Technology” totaling $989,599. The Company recorded $190,401 of goodwill, which is not deductible for income tax purposes. The intangible assets recognized have useful lives ranging from three to five years, based on estimates of the life of the customer relationship, the contractual life of contracts with carriers and government authorities/licenses. Related transaction costs (legal fees) amounted to $15,885 and were expensed as incurred.

 

56
 

 

The above mentioned amounts represent the preliminary allocation of purchase price, and are subject to revision when the purchase price adjustments are finalized, which will occur in the first quarter of 2014. We are refining the discount and attrition rates used, and the forecasts used for the valuation of the acquired intangibles.

 

The assets and operations are consolidated into the financial statements of the Company as of April 1, 2013, and amounted to $91,885 of revenues and $903,245 of losses in 2013. The amount of revenues and earnings (losses) of Telnicity in 2012 amounted to $570,223 (unaudited) of revenues and $159,784 (unaudited) of losses as of September 30, 2012 (comparative information provided as supplemental information).

 

Note 12. Overdraft and Loan Payable

  

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, 2013, the overdraft balance, including accrued interest totaled $391,436, compared to $350,114 as of December 31, 2012. The interest rate and default payment interest rate were charged at 2% and 6% per annum respectively, 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 nor is it otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd.

 

The related loans payable at December 31, 2013 and 2012 are summarized as follows:

 

    December     December  
    31, 2013     31, 2012  
Installment loan payable due December 24, 2006, secured by personal guarantees of two stockholders, a former director, and a third party   $ 320,358     $ 320,491  
Installment loan payable, 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 stockholders and a former director     254,696       254,800  
Installment loan payable, 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 stockholders and a former director     103,897       103,940  
Term loan payable, monthly payments of interest at bank’s prime rate, 7.0% at December 31, 2007     283,703       283,820  
Total   $ 962,654     $ 963,051  

  

In December 2009 Chong Hing Bank Limited, formerly known as 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 ETL, a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account. As of December 31, 2013 and 2012, the overdraft balance amounted to $391,436 and $350,114, respectively.

 

 

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;

 

57
 

 

· 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 Elephant Talk Communications Corp. and against the Bank on December 14, 2011, and awarded the Company $5,925 in costs. The judgment became final on February 16, 2012. The Company continues to accrue for these loans since its subsidiary ETL in Hong Kong, alleged by the Bank as the contractual party, may be still held liable for these loans.

 

Note 13. Deferred Revenue

 

Because the Company recognizes revenue upon performance of services, deferred revenue represents amounts received from the customers against future sales of services, such as in pre-paid mobile services, pre-paid maintenance fees  and mobile and security project work. . Deferred revenue was $142,731 and $252,551 as of December 31, 2013 and December 31, 2012, respectively.

 

Note 14. Accrued Expenses

 

As of December 31, 2013 and December 31, 2012, the accrued expenses were comprised of the following:

 

    December 31,
2013
    December 31,
2012
 
Accrued Selling, General & Administrative expenses   $ 2,271,086     $ 2,175,845  
Accrued cost of service     547,111       648,958  
Accrued taxes (including VAT)     255,577       288,651  
Accrued interest payable     1,300,101       882,181  
Other accrued expenses     587,428       124,901  
Total accrued expenses   $ 4,961,303     $ 4,120,536  

 

Within accrued taxes is income taxes payable as of December 31, 2013 amounting to $88,420. See Note 27 of the Financial Statements for more information.

 

Accrued Selling, General & Administrative expenses include social security premiums, personnel related costs such as payroll taxes, provision for holiday allowance, accruals for marketing & sales expenses, and office related expenses.

 

Note 15. 10% Related Party Loan and Convertible Note

 

The following table shows the composition of the 10% Related Party Loan and Convertible Note as shown in the Consolidated Statement of Financial Position:

 

    December 31,
2013
    December 31,
2012
 
             
10% Convertible Note (principal amount)   2,000,000     -  
Exchange rate December 31, 2013: EURO 0.7264=US$1                
10% Convertible Note   $ 2,753,304     $ -  
Less:                
Debt Discount (Beneficial Conversion Feature)     728,332       -  
Debt Discount (Extended Warrants)     849,451       -  
Debt Discount (Warrants)     141,800       -  
10% Related Party Loan and Convertible Note (Net of Debt Discount)   $ 1,033,721     $ -  

 

58
 

 

In August 17, 2013, the Company issued a Convertible Note for the amount of € 2,000,000 ($2,753,304 at December 31, 2013) to an affiliate and accredited investor at an interest rate of 10% per annum. At any time after August 17, 2013, the Convertible Note is convertible, in whole or in part, at the option of the investor, into a number of shares of Common Stock of the Company equal to the quotient of the outstanding balance under the Convertible Note by $0.887. The Convertible Note also contains default provisions, including provisions for potential acceleration of the Convertible Note. Interest is computed on the basis of the actual number of days elapsed in a 365-day year, and shall accrue from the date negotiated, and shall continue to accrue on the outstanding principal balance until paid in full or converted. The maturity date is July 2, 2014.

 

In conjunction with the issuance of the Convertible Note, on August 17, 2013, the Company issued a Warrant to the investor to purchase 1,000,000 shares of restricted Common Stock. The Warrant is exercisable at any time on or after February 17, 2014 at a price of $0.887 per share for a term of 5 years, after the issuance date. In connection with the issuance of the Convertible Note and the Warrant, the Company also issued letters of extension to certain investors holding warrants issued previously by the Company to purchase shares of Common Stock of the Company. Pursuant to the Extensions, the expiration date of these registered warrants has been extended for a period of two years from the original expiration date of these warrants, which now expire in 2015.

 

The securities underlying the Warrant and the shares of Common Stock issuable upon conversion of the Convertible Note have not been registered under the Securities Act, as amended, or any state securities laws.

 

The Company concluded that the Warrant and the extended warrants do not require liability classification and are considered equity instruments. The Warrant is recognized at the relative fair value on the issue date of the Convertible Note as a debt discount and will be amortized using the effective interest method from issuance to the maturity date of the Convertible Note. The other warrants were valued using the binomial model and a relative fair value at issuance of $1,535,656 was determined and accounted for as debt discount of which currently $544,404 has been amortized and accounted for in the Consoldiated Statement of Comprehensive Loss in 2013. At December 31, 2013, the balance of the debt discount due to warrants was $991,251. Also, a beneficial conversion feature of $1,132,404 was identified, of which $404,072 has been amortized, and the unamortized portion of the beneficial conversion feature amounted to $728,332 as of December 31, 2013. The embedded conversion feature is not required to be separated.

 

Note 16. 10% 3 rd Party Loan and Convertible Note

 

The following table shows the composition of the 10% 3 rd Party Loan and Convertible Note as shown in the Consolidated Statement of Financial Position:

 

    December 31,
2013
    December 31,
2012
 
             
10% Convertible Note (principal amount)   4,000,000     -  
Exchange rate December 31, 2013: EURO 0.7264=US$1                
10% Convertible Note   $ 5,506,608     $ -  
Less:                
Debt Discount (Warrants)     726,695       -  
10% 3rd Party Loan and Convertible Note (Net of Debt Discount)   $ 4,779,913     $ -  

 

In August 28, 2013, the Company issued a Convertible Note for the amount of €4,000,000 ($5,506,608 at December 31, 2013) to an accredited investor at an interest rate of 10% per annum with maturity date of August 28, 2015. At any time after August 28, 2013, the Convertible Note is convertible, in whole or in part, at the option of the investor, into a number of shares of Common Stock equal to the quotient of the outstanding balance under the Convertible Note divided by $0.887. The Convertible Note also contains default provisions, including provisions for potential acceleration of the Convertible Note. Interest is computed on the basis of the actual number of days elapsed in a 365-day year, and shall accrue from the date negotiated, and shall continue to accrue on the outstanding principal balance until paid in full or converted. The maturity date is August 28, 2015.

 

59
 

 

In conjunction with the issuance of the Convertible Note, on August 28, 2013, the Company issued a Warrant to the investor to purchase 2,000,000 shares of restricted Common Stock. The Warrant is exercisable at any time on or after February 28, 2014 at a price of $0.887 per share. The Warrant has a five year term.

 

The securities underlying the Warrant and the shares of Common Stock issuable upon conversion of the Convertible Note have not been registered under the Securities Act, as amended, or any state security laws.

 

The Company concluded that the Warrant does not require liability classification and is considered an equity instrument. The Warrants is recognized at a relative fair value on the issue date of the Note as a debt discount which was amortized using the effective interest method from issuance to the maturity date of the Note. The Warrant was valued using the binomial model at $864,394 on date of issuance of the Note. The debt discount balance at December 31, 2013 was $726,695.

 

The embedded conversion feature is not required to be separated.

 

Note 17. Conversion and Termination of the May 24, 2013 Loan Agreement

 

On May 24, 2013, the Company entered into a certain loan agreement with a member of its board of directors pursuant to which the Company borrowed a principal amount of €1,000,000 at an interest rate of 12% per annum (the “May 24, 2013 Loan Agreement”) and issued a warrant (the “May 24, 2013 Warrant”) to the director to purchase 1,253,194 restricted shares of the Company’s Common Stock, exercisable at $1.03 per share for a term of 5 years, with a mandatory cash exercise after 12 months in the event the average closing bid price is $1.55 or higher for 10 consecutive trading days. The Company used the proceeds from the May 24, 2013 Loan Agreement primarily for working capital. The securities were offered and sold only in Europe to “accredited investors” (as defined in Rule 501(a) of the Securities Act) pursuant to an exemption from registration under Section 4(2) and Regulation S of the Securities Act.

 

Following ASC 470-20 Debt – Debt with Conversion and Other Options guidance, the Company allocated the fair market value, using the binomial valuation method, of the detachable warrants between equity and debt and accounted for the debt component separately, with the debt discount offset against paid-in capital. The debt discount was amortized using the effective interest method during the life of the loan.

 

On July 14, 2013, the Company entered into an amendment (the “Amendment”) to terminate the May 24, 2013 Loan Agreement and cancel the Warrant. In exchange for termination of the May 24, 2013 Loan Agreement and the cancellation of the May 24, 2013 Warrant, the Company entered into a Stock Purchase Agreement, dated July 15, 2013 (the “Purchase Agreement”) with the director pursuant to which the Company agreed to convert the principal amount of the loan into 1,840,631 restricted shares of the Company’s Common Stock, and resulting in gross proceeds amounting to $1,306,848 which were recorded in equity as of December 31, 2013. The conversion rate was calculated using the Euros (€) to USD ($) exchange rate as of July 12, 2013 which was $0.71 per share (the “Conversion”). The closing of the Conversion will occur upon satisfaction or waiver of the customary closing conditions set forth in the Purchase Agreement.

 

Upon conversion and termination of the loan agreement the Company accelerated the debt discount amortization, which resulted in a loss on extinguishment of debt of $44,506 in July 2013.

 

Note 18. 8% Senior Secured Convertible Note

 

On June 11, 2013, Elephant Talk Communications Corp. entered into a purchase agreement (together, the “2013 Purchase Agreements”) with each holder of the Company’s Senior Secured Convertible Notes issued on March 29, 2012 pursuant to which the Company purchased the Convertible Notes at the purchase price equal to 110% of the aggregate of the outstanding principal amount of the Convertible Notes and interest due. The aggregate purchase price paid to the holders of the Convertible Notes was $6,701,824 which was paid from the proceeds of the 2013 Share Purchase Agreements described in Note 19 of the Financial Statements.

 

The Purchase Agreement with the note holders resulted in the regular and accelerated amortization expenses during the second quarter of $349,639 for the original issue discount (OID), $1,179,732 for the conversion feature (CF) and $311,048 for the remaining financing costs of the note. The release of the balance of the fair market value of the conversion feature resulted in a gain of $451,779. Furthermore the 10% prepayment fee of $607,539 on the purchase price compared to the net outstanding principal was recorded as a loss in the Consolidated Statement of Comprehensive Loss as part of the Loss of Extinguishment of Debt. The total Loss on Extinguishment of Debt related to this transaction was calculated at an amount of $1,960,594.

 

60
 

 

Note 19. Registered Direct Offering and Warrant Liabilities

 

In June 11, 2013, the “Company” entered into an Amendment No. 1 (the “Amendment to SPA”) to certain Securities Purchase Agreement (the “SPA”) dated June 3, 2013 with certain institutional and other investors (“DJ Investors”) placed by Dawson James Securities Inc. (the “Placement Agent”) and Mr. Steven van der Velden, the Chief Executive Officer and Chairman of the Board (“Affiliated Investors”), relating to a registered direct public offering by the Company (the “Offering”). The gross proceeds of this SPA were $12,000,000 and resulted in net proceeds of $11,292,500 after the deduction of $707,500 for fundraising related expenses to various parties involved. The majority of the net proceeds were used to pay off the outstanding Senior 8% Secured Convertible Notes issued in 2012.

 

The number of shares issued relating to this SPA amounted to 17,425,621, the number of warrants amounted to 7,841,537 and were covered by the registration statement filed in 2012 for an amount of $75,000,000 (S-3/A Amendment No. 2, File No. 333-181738 dated June 6, 2012). The Company determined the fair value of the remaining outstanding warrants, totaling 2,892,857 using a Monte-Carlo Simulation model, which as of December 31, 2013 amounted to $1,973,534.

 

The SPA included the issuance of 7,841,537 investor warrants (“investor warrants”) and 183,284 warrants issued to the fund raise agent (“agent warrants” and together with the investor warrants, the “RD warrants”). The RD warrants have a five year term from the date of issuance, are exercisable at the price of $0.887 per share for the investor warrants and $0.853 per share for the agent warrants immediately from the date of issuance and include provisions governing the adjustments to the number of Warrant Shares issuable upon exercise of the RD warrants upon stock dividends, stock splits, and other events. The RD warrants may be transferred by a holder thereof in accordance with applicable securities laws.

 

In the event that among other things, the registration statement relating to the shares of Common Stock is not effective, a holder of RD Warrants will also have the right, in its sole discretion, to exercise its RD Warrants for a net number of RD Warrant Shares pursuant to the cashless exercise procedures specified in the RD Warrants. The RD Warrants may be exercised in whole or in part, and any portion of a RD Warrant not exercised prior to the termination date shall be and become void and of no value. The absence of an effective registration statement or applicable exemption from registration does not alleviate the Company’s obligation to deliver Common Stock issuable upon exercise of a RD Warrant.

 

Each RD Warrant also allows the holder the ability, at any time after 90 days from the issuance of the RD Warrant through its expiration, to exchange the RD Warrant with the Company for shares of Common Stock equal to the value of the RD Warrant at the time of the exchange based on a negotiated Black-Scholes formula. Under certain circumstances, the holder may receive cash in lieu of such shares of Common Stock.

 

Under certain circumstances after 90 days from the issuance of the RD Warrant, in the event that the Common Stock trades at a price that is 20% or more above the exercise price of the RD Warrants for a period of twenty consecutive trading days (with an average daily volume equal to or greater than $350,000), the Company may require the holder of the RD Warrants to exercise the RD Warrants for cash. After the 90 days waiting period some RD Warrant holders indeed did decide to use their right to exchange their RD Warrants, and subsequently, the Company did use its right to issue shares instead of paying cash. The number of RD Warrants exchanged amounted to 5,131,965 which resulted in the issuance of 4,102,792 shares of Common Stock. The exchange of the RD Warrants did not result in any cash inflow or cash outflow.

 

If, at any time a RD Warrant is outstanding, the Company consummates any fundamental transaction, as described in the RD Warrants and generally including any consolidation or merger into another corporation, or the sale of all or substantially all of our assets, or other transaction in which the Common Stock is converted into or exchanged for other securities or other consideration, the holder of any RD Warrants will thereafter receive the securities or other consideration to which a holder of the number of shares of Common Stock then deliverable upon the exercise or exchange of such RD Warrants would have been entitled upon such consolidation or merger or other transaction.

 

61
 

 

The exercisability or exchangeability of the RD Warrants may be limited in certain circumstances if, after giving effect to such exercise or exchange, the holder or any of its affiliates would beneficially own (as determined pursuant to Section 13(d) of the Securities Act, as amended, and the rules and regulations promulgated thereunder) more than 9.9% of the Common Stock issued and outstanding.

 

According to ASC 480-10 Distinguishing Liabilities from Equity, the accounting for an equity instrument with detachable warrants classified as a liability reflects the notion that the consideration received upon issuance must be allocated between the instruments issued. Proceeds from the issuance of an equity instrument with stock purchase warrants are allocated to the two elements based on the following: (i) the liability element has initially been recorded at fair market value; and (ii) the remaining portion of the consideration has been allocated to the equity element.

 

The liability instrument will be re-evaluated at each reporting period with changes in the fair value recognized through the applicable period Consolidated Statement of Comprehensive Loss.

 

Note 20. Obligations under Capital Leases

 

The Company has a number of financing arrangements with its vendors to acquire equipment and licenses. These trade arrangements contain maturity periods ranging from two to three years, and interest rates between 8.65% and Euribor (3M) +1.5% at different foreign exchange rates. The following is an analysis of the property & equipment acquired under capital leases, recorded in the Property & Equipment line item by major classes:

 

    December     December  
    31, 2013     31, 2012  
Network equipment   $ 1,642,759     $ -  
Software licenses     874,174       -  
Other     103,249       -  
Total   $ 2,620,182       -  
Less: accumulated depreciation and amortization   $ (101,209 )   $ -  
Total   $ 2,518,973       -  

 

The current portion of the Capital Leases of $1,302,838 as of December 31, 2013 is included in Current Liabilities “Obligations under capital leases” in the accompanying balance sheet and the long term portion of $845,529 is reported as “Non-current portion of obligations under capital lease” as of December 31, 2013. Accrued interest is included in ‘Accrued expenses’ in the balance sheet. Depreciation of assets recorded under the capital leases is included in depreciation expense.

 

Note 21. Loan from Joint Venture Partner

 

The Company entered into a 51% owned joint venture with ET-UTS N.V. on December 17, 2008 and received an unsecured loan with a principal amount of ANG (Antillian Guilder) 724,264 ($402,424) at an interest rate of 8% per annum, from the 49% shareholder in the joint venture, United Telecommunication Services N.V. that is the government owned incumbent telecom operator of Curaçao. No maturity date has been fixed. The amount outstanding as of December 31, 2013 and 2012 was $602,047 and $555,907, respectively, inclusive of accumulated accrued interest and is reflected as a long term liability on the accompanying balance sheets.

 

62
 

 

Note 22. Fair Value Measurements

 

The following tables summarize fair value measurements by level at December 31, 2013 for financial assets and liabilities measured at fair value on a recurring basis:

 

    December 31, 2013  
    Level 1     Level 2     Level 3     Total  
Derivative Liabilities                                
Conversion feature   $ -     $ -     $ -     $ -  
Warrant Liabilities   $ -     $ -     $ 1,973,534     $ 1,973,534  
Total Derivatives Liabilities   $ -     $ -     $ 1,973,534     $ 1,973,534  

 

The Company uses the Monte Carlo valuation model to determine the value of the remaining outstanding warrants from the Registered Direct Offering of June 2013, discussed in Note 19 under the title “Registered Direct Offering and Warrant Liabilities”. Since this model requires special software and expertise to model the assumptions to be used, the Company hired a third party valuation expert.

 

The following table summarizes fair value measurements by level at December 31, 2012 for financial assets and liabilities measured at fair value on a recurring basis:

 

    December 31, 2012  
    Level 1     Level 2     Level 3     Total  
Derivative Liabilities                                
Conversion feature   $ -     $ -     $ 311,986     $ 311,986  
Warrant Liabilities   $ -     $ -     $ -     $ -  
Total Derivative liabilities   $ -     $ -     $ 311,986     $ 311,986  

 

The Company has classified the outstanding conversion feature into level 3 due to the fact that some inputs are not published and not easily comparable to industry peers.

 

The Company determines the “Fair Market Value” using a lattice model by using the following assumptions:

 

Number of outstanding conversion rights

 

The number of outstanding conversion rights is adjusted every re-measurement date after deducting the repayment of any principal amount during the previous reporting period. The number of conversion rights is determined by dividing the principal amount by the conversion price agreed in the convertible note agreement.

 

Stock price at valuation date

 

The closing stock price at re-measurement date being the last available closing price of the reporting period taken from www.nasdaq.com.

 

Exercise Price

 

The exercise price is fixed and determined in the note agreement.

 

Remaining Term

 

The remaining term is calculated by using the contractual expiration date of the note at the moment of re-measurement.

 

63
 

 

Expected Volatility

 

We estimate expected cumulative volatility giving consideration to the expected life of the note and calculated the annual volatility by using the continuously compounded return calculated by using the share closing prices of an equal number of days prior to the maturity date of the note (reference period). The annual volatility is used to determine the (cumulative) volatility of our common stock (= 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 with a term equal to the reported rate, or derived by using both spread in intermediate term and rates, up to the maturity date of the note.

 

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.

 

Hereby we present the movements in the carrying value of the conversion feature discussed in the table above:

 

Conversion
feature
  Balance
at the
beginning
of the
period
A
    Entered into
Conversion
feature on
March 29,
2012
    Change in fair
value
    Extinguishment
of debt
(Convertible
Note)
    Balance at
the end of
the period
 
Year ended December 31, 2013   $ 311,986       -     $ (232,266 )   $ (79,720 )     -  
Year ended December 31, 2012     -     $ 2,699,312     $ (2,387,326 )     -     $ 311,986  

 

Note 23. Stockholders’ Equity

 

(A) Common Stock

 

The Company is presently authorized to issue 250,000,000 shares Common Stock. The Company had 140,466,801 shares of common stock issued and outstanding as of December 31, 2013, an increase of 28,548,433 shares from December 31, 2012, largely due to the shares issued in connection with the 2013 Registered Direct Offering (described in Note 19 of the Financial Statements) which resulted in the issuance of a total of 17,425,621 shares; another 4,102,792 shares were issued as a result of “exchanges” of warrants which had been issued under the same Registered Direct Offering; 250,000 shares were issued as a result of a share purchase agreement with a non-affiliate investor; 1,493,667 shares were issued as a result of the exercise of 5,781,597 warrants; 809,737 shares were issued to employees as a result of exercised employee stock options; 775,985 shares were issued as executive officers and directors compensation; 400,000 shares were issued after a settlement agreement with a former landlord of one of our offices after termination of the rental contract; 200,000 shares were issued as consideration for consultancy services; 1,840,631 shares were issued as a result of the conversion of convertible debt and 250,000 shares were issued for the acquisition of Morodo, and 1,000,000 shares were issued for the asset purchase agreement with Telnicity, which was concluded during the twelve months period ended December 31, 2013.

 

Reconciliation with Stock Transfer Agent Records:

 

The shares issued and outstanding as of December 31, 2013 according to the stock transfer agent’s records are 140,712,701. The difference in number of issued shares recognized by the Company of 140,466,801 amounts to 245,900 and it is the result of the exclusion of the 233,900 unreturned shares from ‘cancelled’ acquisitions (pre-2006) and 12,000 treasury shares issued under the former employee benefits plan.

 

64
 

 

(B) Preferred Stock

 

The Company’s Certificate of Incorporation (“Articles”) authorizes the issuance of 50,000,000 shares of 0.00001 par value 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, subject to the rules of the NYSE MKT LLC, 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 stockholder 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 2013 and 2012, the Company did not issue any shares of Preferred Stock, and 0 shares of Preferred Stock are outstanding.

 

(C) Warrants

 

Throughout the years, the Company has issued warrants with varying terms and conditions related to multiple funding rounds, acquisitions and other transactions. The warrants outstanding at December 31, 2013 have been recorded and classified as equity, except as of December 31, 2013 the Company has recorded $1,973,534 in the balance sheet for the warrant liabilities issued in connection with the Registered Direct Offering described in Note 19. The Weighted Average Exercise Price for the currently outstanding warrants in the table below is $1.20. The below table summarizes the warrants outstanding as per the below reporting dates.

 

Outstanding
Warrants
  Exercise/
Conversion
price(s)
 (range)
  Expiring   2013     2012     2011  
Warrants – Acquisitions   $0.63- $2.25   2013     -       3,437,953       3,879,485  
Warrants - Fundraising   $0.85- $2.00   2013 - 2018     37,229,230       46,322,101       46,867,101  
Warrants - Other   $2.21   2016     18,659       18,659       18,659  
              37,247,889       49,778,713       50,765,245  

 

Note 24.  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, 2013 and December 31, 2012 were as follows:

 

          Noncontrolling interest
Balance at
 
Subsidiary   Noncontrolling
Interest %
    December
31, 2013
    December
31, 2012
 
                   
ETC PRS UK     49 %   $ 9,894     $ 9,434  
ETC PRS Netherlands     49 %     134,912       126,013  
ET Bahrain WLL     1 %     -       3,438  
ET ME&A FZ LLC     49.46 %     -       37,091  
                         
Total           $ 144,806     $ 175,976  

 

65
 

 

Net losses attributable tot noncontrolling interest were insignificant for all the years presented.

Note 25. Basic and diluted net loss per share

 

Net loss per share is calculated in accordance with ASC 260, Earnings per Share (“ASC 260”). 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. The Company uses the if converted method for its senior secured convertible notes. 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.

 

The diluted share base for fiscal 2013, 2012 and 2011 excludes incremental shares related to convertible debt, warrants to purchase Common Stock and employee stock options as follows:

 

Dilutive Securities   2013     2012     2011  
Convertible Notes     9,635,838       2,957,855       -  
 Warrants     37,247,889       49,778,713       50,765,245  
 Employee Stock Options     34,272,503       12,280,717       7,868,989  
      81,156,230       65,017,285       58,634,234  

 

These shares were excluded due to their anti-dilutive effect on the loss per share recorded in each of the years presented. No additional securities were outstanding that could potentially dilute basic earnings per share.

 

Note 26. 2006 Non-Qualified Stock and Option Compensation Plan and 2008 Long Term Incentive Compensation Plan

 

2006 Non-Qualified Stock and Option Compensation Plan

 

The Company has a 2006 Non-Qualified Stock and Option Compensation Plan (the “2006 Plan”). Under the 2006 Plan, there are no stock options outstanding as of December 31, 2013, all remaining outstanding options expired in December 2013. There are 103,450 shares that remain available for issuance under the 2006 Plan. During 2013, there were no option grants or exercises made under the 2006 Plan. During 2013, 75,000 options issued under the 2006 Plan have expired.

 

During the second quarter of 2013, 235,947 restricted shares were issued under the 2006 Plan as non-cash compensation granted to management and board members for service during the first quarter of 2013. During the third quarter of 2013, another 180,368 restricted shares were issued under the 2006 Plan as non-cash compensation granted to management and board members for service during the second quarter of 2013. During the fourth quarter of 2013, 169,725 restricted shares were issued under the Plan as non-cash compensation granted to management and board members for service during the third quarter of 2013. The shares issued under this plan as non-cash compensation granted to management and board members have been expensed in the Consolidated Statement of Comprehensive Loss for an amount of $531,030 for 2013. These non-cash compensation shares are accounted for and valued using the share price and number of shares issued at issuance date, and they vest immediately when issued.

 

2008 Long-Term Incentive Compensation Plan

 

In 2008, the Company adopted the 2008 Plan. The 2008 Plan initially authorized total 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.

 

In 2011, the stockholders approved an increase in the shares available under the 2008 Plan from 5,000,000 to 23,000,000 shares of Common Stock. As of December 31, 2013, 34,479,773 options and/or shares were issued and outstanding under the 2008 Plan, and there were 8,247,057 remaining shares available for issuance under the 2008 Plan.

 

In 2013, the Company’s stockholders approved the amendment and restatement of the 2008 Plan, which increased the number of authorized shares from 23,000,000 to 46,000,000 shares of Common Stock.

 

66
 

 

Reconciliation of registered and available shares and/or options as of December 31, 2013:

 

    Full Year 2013       Total  
                 
Registered 2008     -       5,000,000  
Registered 2011     -       18,000,000  
Approved increase 2013     -       23,000,000  
Total Registered under this plan             46,000,000  
Shares (issued to):                
Consultants     -       325,000  
Directors and Officers     189,945       1,196,366  
Options exercised     809,737       1,751,804  
Options (movements):                
Issued and Outstanding             34,272,503  
Available for grant at December 31, 2013:             8,454,327  

 

During 2013, no shares were issued to consultants under the 2008 Plan, although the Company issued a total number of 325,000 shares to consultants during the term of the 2008 Plan. As of December 31, 2012, the Company began to issue non-cash compensation to directors and officers under this 2008 Plan. During the first quarter of 2013, the Company issued 189,945 restricted shares to various directors and officers under the 2008 Plan, which were issued in conjunction with their willingness to receive all or part of their cash compensation for the fourth quarter of 2012 in shares of the Company. Options issued to directors and officers vested immediately upon grant.

 

During the fourth quarter of 2013, the total authorized shares under the 2008 Plan increased by 23,000,000, and the increase was approved at the Company’s shareholders meeting held at December 18, 2013. Currently a total of 34,272,503 stock options are outstanding at December 31, 2013 under the 2008 Plan. As of December 31, 2013, 325,000 shares of restricted Common Stock were issued to consultants, 1,196,366 shares of Common Stock were issued to directors and officers and another 1,751,804 shares were issued as a result of options that were exercised during the existence of this Plan.  Options awards generally vest immediately or over a three-year period after the grant date. Options generally expire between three and four years from the date of grant.

 

Common Stock purchase options consisted of the following as of the years ended December 31, 2013, 2012 and 2011:

 

 

Options:   Number of
Options
    Weighted
Average
Exercise
Price
    Initial Fair
Market
Value (Outstanding
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 (with delivery of shares)     (510,095 )   $ 1.14     $ (626,179 )
Forfeitures (Pre-vesting)     (391,618 )   $ 1.64     $ (458,144 )
Expirations (Post-vesting)     (3,000 )   $ 0.82     $ (2,076 )
Exchanged for Cashless exercise     (29,281 )   $ 1.24     $ (33,141 )
Outstanding as of December 31, 2011     7,793,989     $ 2.03     $ 10,195,479  
Granted in 2012     6,107,719     $ 2.24     $ 7,259,422  
Exercised (with delivery of shares)     (431,972 )   $ 1.00     $ (403,382 )
Forfeitures (Pre-vesting)     (1,042,071 )   $ 2.29     $ (1,404,105 )
Expirations (Post-vesting)     (281,667 )   $ 2.23     $ (398,199 )
Exchanged for Cashless exercise     (43,916 )   $ 1.66     $ (56,248 )
Outstanding as of December 31, 2012     12,102,082     $ 2.15     $ 15,192,967  
Granted in 2013     24,393,106     $ 1.12     $ 14,163,197  
Exercised (with delivery of shares)     (809,737 )   $ 0.66     $ (284,515 )
Forfeitures (Pre-vesting)     (800,351 )   $ 1.00     $ (807,662 )
Expirations (Post-vesting)     (586,026 )   $ 1.92     $ (648,529 )
Exchanged for Cashless exercise     (26,571 )   $ 0.60     $ (13,834 )
Outstanding as of December 31, 2013     34,272,503     $ 1.47     $ 27,601,624  

 

67
 

 

In 2013, options awarded had a weighted average exercise price of $1.12. The grant date fair market value of the options, in the aggregate, was $14,163,197.

 

The weighted average assumptions used for the options granted in 2013 using the Black-Scholes options model are: expected cumulative volatility of 192% based on calculated annual volatility of 89%, contractual life of 5.1 years, expected option life of 4.7 years (using the simplified method) and a Risk Free Interest Rate of 1.5%. The expected dividend yield is zero.

 

Following is a summary of the status and assumptions used of options outstanding as of the years ended December 31, 2013, 2012 and 2011:

 

    2013     2012     2011  
Grants                        
During the year     24,496,741       6,211,354       4,644,883  
Weighted Average Annual Volatility     89 %     81 %     64 %
Weighted Average Cumulative Volatility     192 %     134 %     152 %
Weighted Average Contractual Life of grants (Years)     5.11       3.84       9.66  
Weighted Average Expected Life of grants (Years)     4.73       2.69       5.60  
Weighted Average Risk Free Interest Rate     1.5017 %     0.4553 %     1.8993 %
Dividend yield     0.0000 %     0.0000 %     0.0000 %
Weighted Average Fair Value at grant-date   $ 0.58     $ 1.10     $ 1.45  
                         
Options Outstanding                        
Total Options Outstanding     34,272,503       12,205,717       7,793,989  
Weighted Average Remaining Contractual Life (Years)     4.68       5.34       7.81  
Weighted Average Remaining Expected Life (Years)     4.91       5.02       6.93  
Weighted Average Exercise Price   $ 1.47     $ 1.73     $ 2.03  
Aggregate Intrinsic Value (all options)   $ (8,189,063 )   $ (13,972,731 )   $ 6,801,540  
Aggregate Intrinsic Value (only in-the-money options)   $ 6,312,036     $ 100,611     $ 4,870,394  
                         
Options Exercisable                        
Total Options Exercisable     18,180,371       4,358,510       1,284,547  
Weighted Average Exercise Price   $ 1.62     $ 1.96     $ 1.12  
Weighted Average Remaining Contractual Life (Years)     3.79       5.97       4.89  
Aggregate Intrinsic Value (all options)   $ (7,126,025 )   $ (4,178,337 )   $ 1,966,195  
Aggregate Intrinsic Value (only in-the-money options)   $ 3,091,811     $ 100,465     $ 1,899,945  
                         
Unvested Options                        
Total Unvested Options     16,299,402       7,847,207       6,509,442  
Weighted Average Exercise Price   $ 1.21     $ 2.25     $ 2.21  
Forfeiture rate used for this period ending     11.074 %     10.673 %     6.509 %
                         
Options expected to vest                        
Number of options expected to vest corrected by forfeiture     15,553,067       7,009,645       6,085,741  
Unrecognized stock-based compensation expense   $ 8,787,636     $ 3,014,397     $ 3,109,478  
Weighted Average remaining contract life (Years)     5.68       4.99       8.69  
                         
Exercises                        
Total shares delivered/issued     809,737       431,972       510,095  
Weighted Average Exercise Price   $ 0.66     $ 1.00     $ 1.14  
Intrinsic Value of Options Exercised   $ 306,883     $ 177,547     $ 755,991  

 

68
 

 

At December 31, 2013 the unrecognized expense portion of stock-based awards granted to employees under the 2008 Plan was approximately $8,787,636, under the provisions of ASC 718. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate was adjusted from 10.74% as per closing December 2012 to 11.1% as per closing December 2013 and the corresponding profit and loss effect has been accounted for in 2013.

 

Stock-Based Compensation Expense

 

The Company recorded for the twelve months ended December 31, 2013, $8,515,391 in stock based compensation expense for the 2008 Plan. For the comparable period in 2012 the expensing was $6,302,140. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-options at grant. The main reason for the nine month increase is caused by the grant and immediate vesting and therefore expensing of bonus options granted to employees as well as the options granted to the executive officers. During 2013, the Company issued 200,000 shares to a non-affiliate consultancy firm. The shares were valued at issuance for an amount of $152,000 and will be recognized as an expense in the Consolidated Statement of Comprehensive Loss in the line “Selling, general and administrative expenses” during the 12 months when the Company receives the services. As of December 31, 2013, $76,000 has been recognized in the Consolidated Statement of Comprehensive Loss.

 

Stock-Based Compensation Expense

 

    2013     2012     2011  
Consultancy services   $ 76,000     $ -     $ 714,259  
Directors and officers (shares and options)     4,510,240       1,141,812       1,448,192  
Employee (options)     3,929,151       5,160,329       4,656,454  
    $ 8,515,391     $ 6,302,141     $ 6,818,905  

 

As explained in Note 1 to the Financial Statements, under the title “Reclassification of changes to prior year information”, certain reclassifications have been made to the 2012 and 2011 Financial Statements to conform to the current year presentation. Prior to June 30, 2013, the Company presented the stock-based compensation as one line item in the Company’s Consolidated Statement of Comprehensive Loss. The Company now includes the stock-based compensation within Selling, General & Administrative expenses line in the Consolidated Statement of Comprehensive Loss. These reclassifications had no effect on previously reported results of operations or retained earnings.

 

Note 27.  Income taxes

 

For financial statement purposes, loss before the income tax provision is divided amongst the following;

 

    December 31,
2013
    December 31,
2012
 
                 
Domestic   $ (14,759,886 )   $ (6,574,394 )
Foreign     (7,572,030 )     (16,268,406 )
Total   $ (22,331,916 )   $ (22,842,800 )

  

The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. The applicable statutory tax rates vary between none (zero) and 34%. However, because the Company and its subsidiaries have incurred annual corporate income tax losses since their inception, management has determined that it is more likely than not that the Company will not realize the benefits of its US and foreign net deferred tax assets. Therefore, the Company has recorded a full valuation allowance to reduce the net carrying amount of the deferred taxes to zero. The Company’s 2013 provision for income taxes relates to current foreign income tax amounting to $88,835 reduced by the release of the potential income tax exposure booked in 2013 and amounting to euro 225,000 ($289,136) which was settled in the current year.

 

In the ordinary course of business the Company is subject to tax examinations in the jurisdictions in which it files tax returns. The Company’s statute of limitations for tax examinations is four years for federal and state purposes and four to six years in the major foreign jurisdictions in which the company files.

 

Income tax (benefit)/expense for the period ended December 31, 2013 and December 31, 2012 is summarized as follows:

 

    December 31,
2013
    December 31,
2012
 
Current:            
Federal   $-     $-  
State   -     -  
Foreign     (200,301 )     289,136  
                 
Deferred:                
Federal     -       -  
State     -       -  
Foreign     -     $ -  
Income tax (benefit)/expense   $ (200,301 )   $ 289,136  

 

The following is a reconciliation of the provision for income taxes at the US federal statutory rate (34%) to the foreign income tax rate at December 31, 2013:

    2013     2012  
Tax expense (credit) at statutory rate-federal     34 %     34 %
State tax expense net of federal tax     -       -  
Foreign income tax rate difference     (10.1 )%     (8.4 )%
Change in valuation allowance     (24.3 )%     (25.6 )%
Other     1.2 %     (1.3 )%
Tax expense at actual rate     0.8 %     (1.3 )%

 

69
 

 

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2013 are as follows:

  

Deferred tax assets:   2013     2012  
Net Operating Losses   $ 35,701,315     $ 30,552,587  
Total gross deferred tax assets     35,701,315       30,552,587  
Less:  Valuation allowance     (35,701,315 )     (30,552,587 )
Net deferred tax assets   $ -     $ -  

 

As of December 31, 2013 and 2012, the Company had significant net operating losses carryforwards. The deferred tax assets have been offset by a full valuation allowance in 2013 and 2012 due to the uncertainty of realizing any tax benefit for such losses. Releases of the valuation allowances, if any, will be recognized through earnings.

 

As of December 31, 2013 and 2012, the Company had net federal and state operating loss carryforwards of approximately $39 million and $39 million, respectively. Federal and state net operating loss carry forwards in the US start to expire in 2018. The net operating loss carryforwards for foreign countries amounts to approximately $105 million. Losses in material foreign jurisdictions will begin to expire in 2014.

 

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 the Company has a change in ownership, utilization of the carry forward could be restricted.

 

The Company files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. Due to the net operating loss, all the tax years are open for tax examination. As of December 31, 2013 and 2012, the Company accrued an ASC 740-10 tax reserve of $0 and $289,136 for uncertain tax (benefits)/liability including interest and penalties. This provision has been released as of December 31, 2013 because the issue was effectively settled and management determined that a reserve was no longer required.

 

The Company does not currently anticipate recording any amount for unrecognized tax benefits within the next 12 months. The following table summarizes the 2012 and 2013 activity related to the unrecognized tax benefits and related tax carry forward:

 

Balance at December 31, 2011   $ 20,000  
Decreases related to prior year tax positions   $ (10,000 )
Increases related to current year tax positions   $ 279,136  
Balance at December 31, 2012   $ 289,136  
Increases related to prior year tax positions   $ -  
Decreases related to prior year tax positions   $ (289,136 )
Increases related to current year tax positions   $ -  
Balance at December 31, 2013   $ 0  

   

Note 28.  Contingencies

 

Rescission of the Purchase Agreement of March 31, 2004 of New Times Navigation Limited.

 

As previously described in our 2004 Annual Report on Form 10-K, the Company and New Times Navigation mutually agreed to terminate a purchase agreement. The Company returned the shares, on May 24, 2004, and the Company issued 5,100,000 shares of restricted Common Stock to four shareholders of New Times Navigation Limited ("NTVL") and the Company received back 90,100 of its shares of Common Stock out of the 204,000 issued under the terms of the purchase agreement. In addition, the Company issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. Upon the Company’s request 21 of the unsecured convertible promissory notes were returned for a total value of $2,040,000.

 

On April 28, 2006 the Company instituted proceedings to seek relief from the High Court of the Hong Kong Special Administrative Region against the holders of the unreturned shares to return the remaining 113,900 shares of common stock (valued at $381,565) and return the remaining 18 unsecured convertible promissory notes, representing a total amount of $1,740,000, and rescind the purchase agreement underlying the Purchase Transaction. The case is currently pending.

 

70
 

 

Other.

 

The Company is involved in various claims and lawsuits incidental to our business.  In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material effect on our financial position, liquidity, or results of operations.

 

Note 29. Geographic Information

    

Twelve months ended December 31, 2013

 

    Europe     Other foreign
countries
    Total  
Revenues from unaffiliated customers   $ 17,092,830     $ 5,734,431     $ 22,827,261  
Identifiable assets   $ 32,693,551     $ 10,623,889     $ 43,317,440  

 

Twelve months ended December 31, 2012

 

    Europe     Other foreign
countries
    Total  
Revenues from unaffiliated customers   $ 29,053,151     $ 149,037     $ 29,202,188  
Identifiable assets   $ 35,682,490     $ 1,793,051     $ 37,475,541  

 

Note 30. Concentrations

 

Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable and unbilled receivables. Those customers that comprised 10% or more of our revenue, accounts receivable and unbilled receivables are summarized as follows:

 

For the year ended December 31, 2013, the Company had two customers that accounted for 48% and 15% of total revenue. For the year ended December 31, 2012, the Company had a customer, which accounted for 42% of the revenue.

 

Note 31. Related Party Transactions

 

On May 24, 2013, the Company entered into a certain loan agreement with a member of its board of directors pursuant to which the Company borrowed a principal amount of €1,000,000 (the “Principal Amount”) at an interest rate of 12% per annum (“Loan Agreement”) and issued a warrant (“Warrant”) to the director to purchase 1,253,194 restricted shares of the Company’s Common Stock. On July 14, 2013, the Company entered into an amendment (the “Amendment”) to terminate the Loan Agreement and cancel the Warrant. In exchange for termination of the Loan Agreement and the Warrant, the Company entered into a Stock Purchase Agreement, dated July 15, 2013 (the “Purchase Agreement”) with the director pursuant to which the Company agreed to convert the Principal Amount of the loan into 1,840,631 restricted shares of the Company’s Common Stock. See Note 17 of the Financial Statements for more information.

 

On June 3, 2013, the Company closed an affiliated registered direct offering with Steven van der Velden, our Chief Executive Officer and President for the purchase of 6,428,571 shares of Common Stock, at the purchase price of $0.70, and issued warrants to initially purchase an aggregate of 2,892,857 shares of Common Stock with an exercise price of $0.887 per share (the “Affiliate Offering”). Mr. van der Velden’s participation in the Affiliate Offering was unanimously approved by our independent directors.

 

On August 17, 2013, the Company issued a Convertible Note to an accredited investor (“the Investor”), who is a director of QAT., an entity affiliated with certain officers and directors of the Company, pursuant to which the Company borrowed a principal amount of $2,652,600 (€2,000,000) at an interest rate of 10% per annum (“the Convertible Note”). At any time after August 17, 2013, the Convertible Note is convertible, in whole or in part, at the option of the investor, into a number of shares of the Company’s Common Stock, par value $0.00001, equal to the quotient of the outstanding balance under the Convertible Note including accumulated interest divided by $0.887. The accumulated interest expensed during 2013 is $96,972. The Convertible Note also contains default provisions, including provisions for potential acceleration of the Convertible Note.

 

QMG, an entity affiliated with certain officers and directors of the Company served as fundraising agent for 10% Convertible Notes of August 17 and 28, 2013, pursuant to which € 6,000,000 ($7,957,800) was raised. QMG received a selling commission of 8%, or €480,000 ($636,624).

 

71
 

 

In conjunction with the issuance of the Convertible Note, on August 17, 2013, the Company issued a warrant (“the 2013 Warrant”) to the Investor to purchase 1,000,000 shares of restricted Common Stock. The Warrant is exercisable at any time on or after February 17, 2013 at a price of $0.887 per share for a term of 5 years. In connection with the issuance of the Convertible Note and the 2013 Warrant, the Company also issued letters of extension (“the Extensions”) to certain investors holding warrants issued previously by the Company (“the Old Warrants”) to purchase shares of Common Stock of the Company. Pursuant to the Extensions, the expiration date of the Old Warrants has been extended for a period of two years from the original expiration date of the Old Warrants. The securities underlying the 2013 Warrant and the shares of Common Stock issuable upon conversion of the Convertible Note have not been registered under the Securities Act, as amended, or any state securities laws. See Note 15 of the Financial Statements for more information.

 

QMG, an entity affiliated with certain officers and directors of the Company served as fundraising agent for Stock Purchase Agreements (the “SPA”) with a non-affiliated investor pursuant to which $225,000 was raised. QMG received a selling concession of 8%, or $18,000.

 

During 2013, QMG received $32,827 for provided office space, back office support and certain automobile travel expenses.

 

During 2013, Q.A.T. III Cooperatief U.A. (“QAT III”), an entity affiliated with certain officers and directors of the Company, was charged by the Company $7,967 for the occasional usage of the office in the Netherlands.

 

During 2013, Johan Dejager, a director of the Company, and Yves van Sante, a board observer of the Company elected to receive their compensation in shares of the Company’s Common Stock for the first quarter of 2013. As such, the Company indirectly issued 21,863 shares to Mr. Dejager and 21,863 shares to Mr. van Sante, which are held directly by QAT II, and indirectly issued 21,863 shares to Mr. Dejager and 21,863 shares to Mr. van Sante, which are held directly by QAT. The value of the shares issued to QAT and QAT II was $50,544, respectively. In addition, for the second, third and fourth quarter of 2013, Messrs. Dejager and van Sante elected to receive their compensation in cash. Accordingly, cash compensation, in the aggregate, of $120,000 was paid to QAT and QAT II as compensation for Messrs. Dejager and van Sante. QAT and QAT II are both affiliated entities of the Company.

 

Note 32: Selected Quarterly Financial Data (Unaudited)

 

Selected quarterly financial data is as follows:

 

    Year ended December 31, 2013  
    Q1     Q2     Q3     Q4  
                         
REVENUES   $ 6,596,500     $ 4,994,145     $ 5,204,982     $ 6,031,634  
Cost of service     3,548,277       1,465,517       1,080,174       1,055,185  
      3,048,223       3,528,628       4,124,808       4,976,449  
Selling, general and administrative expenses – Note 32a     5,907,974       7,472,772       5,422,869       7,709,668  
LOSS FROM OPERATIONS     (4,179,739 )     (5,780,375 )     (2,861,748 )     (4,634,559 )
Adjusted EBITDA- Note 32b     (1,448,841 )     (949,095 )     (84,896 )     143,048  
NET LOSS     (5,137,923 )     (7,692,561 )     (3,225,592 )     (6,075,540 )
Net loss per common share and equivalents - basic and diluted     (0.05 )     (0.06 )     (0.07 )     (0.03 )

 

Note 32a 

Until the third quarter of 2013, the Company has showed the non-cash compensation as a line item in the Consolidated Statement of Operations and Comprehensive Loss. This presentation is not in accordance with the guidance of SAB Topic 14.F, which requires that the expense related to share-based payment should be presented in the same line as where the cash compensation is presented . Therefore, as of December 31, 2013, the Company includes the non-cash compensation within Selling, General & Administrative expenses in the Consolidated Statement of Operations and Comprehensive Loss. For comparison purposes, the Company applied the same principle for all the four quarters of 2013 and 2012. See Note 1 to the Financial Statements for more information.

 

72
 

 

Note 32b - 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, impairments, non-operating income and expenses 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 allow them to better understand and evaluate our operating results.

   

Adjusted EBITDA   2013     2012     2011  
                   
Net loss – GAAP   $ (22,131,615 )   $ (23,131,936 )   $ (25,310,735 )
Provision for income taxes     (200,301 )     289,136       -  
Depreciation and amortization     6,601,246       5,710,396       5,254,708  
Stock-based compensation     8,515,391       6,302,141       6,818,905  
Interest income and expenses     961,372       532,835       94,463  
Interest expense related to debt discount and conversion feature     2,069,649       1,089,126       -  
Change in fair value of conversion feature     (232,267 )     (2,387,326 )     -  
Loss on extinguishment of debt     2,005,100       -       -  
Changes in fair value of warrant liabilities     (479,322 )     -       -  
Other income & (expense)     302,112       -       (460,000 )
Impairment of related party loans     -       1,060,784       -  
Amortization of deferred financing costs     248,851       531,792       -  
Equity in earnings of unconsolidated joint venture     -       501,776       -  
Intangible assets impairment charge     -       -       522,726  
Adjusted EBITDA   $ (2,339,784 )   $ (9,501,276 )   $ (13,079,933 )

 

    Year ended December 31, 2012  
    Q1     Q2     Q3     Q4  
                         
REVENUES   $ 8,580,968     $ 7,084,969     $ 6,699,381     $ 6,836,870  
Cost of service     6,889,217       5,185,048       4,603,588       4,141,474  
      1,691,751       1,899,921       2,095,793     $ 2,695,396  
Selling, general and administrative expenses     6,261,704       6,104,163       5,931,170       5,889,241  
LOSS FROM OPERATIONS     (5,848,422 )     (5,429,130 )     (5,098,514 )   $ (5,137,747 )
Adjusted EBITDA – Note 32b     (2,878,207 )     (2,665,260 )     (2,125,974 )     (1,831,835 )
NET LOSS     (6,005,189 )     (4,990,909 )     (5,474,665 )   $ (6,661,173 )
Net loss per common share and equivalents - basic and diluted     (0.05 )     (0.04 )     (0.05 )   $ (0.06 )

 

Note 33. Subsequent Events

 

On March 26, 2014, we announced in a press release the appointment of two independent directors to the Company’s board of directors effective April 1, 2014. The two appointees will join our independent director as members of the Board’s Audit and Finance Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

 

On March 17, 2014, a warrant holder affiliated with the Company exercised certain of its warrants to purchase an aggregate of 5,332,383 shares of the Company’s common stock at an exercise price of $0.70 per share, for gross proceeds to the Company of $3,732,668.  The warrants were originally issued in 2009 with an exercise price of $1.00 per share.  A Special Committee of the Company’s board of directors authorized the reduction of the exercise price in order to induce the holder to immediately exercise the warrant for cash providing additional liquidity to the Company, which reduction was subsequently ratified by the Company’s board of directors.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

73
 

 

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, 2013, 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, 2013. Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under “Management’s Annual Report on Internal Controls 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 US.

 

74
 

 

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 (1992) , 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 2013, 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, 2013.

 

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.

Management has identified material weaknesses in internal controls over financial reporting relating to accounting for complex transactions including accounting and valuations associated with business combinations, complex financial instruments, and disclosures surrounding income taxes. This is due partially to the fact that as of year-end the Company’s Board of Director did not have an adequate number of independent directors members.

 

The effectiveness of our internal control over financial reporting as of December 31, 2013 has been attested by BDO USA LLP, an independent registered public accounting firm, as stated in its report, which is included herein.

 

Changes in Internal Control Over Financial Reporting

 

In response to the material weaknesses identified related to the accounting and financial reporting for the period ended June 30, 2013 and December 31, 2013 we instituted the following measures in the fourth quarter of 2013 and in the first quarter of 2014 in order to remediate these weaknesses:

 

· We consulted a professional valuation company to assist us in determining the value of warrants using a Monte-Carlo Simulation model, and providing an expert review layer to complex financing transactions for which there is no in-house relevant expertise; and

 

75
 

 

· We also recently hired additional qualified personnel in the Control and Finance department. A new International Head of Accounting, responsible for the operations of the shared service center in Spain, and a SEC Reporting Controller aimed to manage all SEC related activities including accounting guidance and periodic reporting.

 

· We implemented additional controls and procedures as part of our key controls.

 

· We appointed on March 25, 2014 two independent Directors to the Board of Directors (the “Board”). Effective April 1, 2014, Carl D. Stevens and Geoffrey Leland will join the Board, filling vacancies created following the 2013 annual meeting of stockholders in December 2013. As part of their appointment, Mr. Stevens and Mr. Leland will join Mr. Rijkman Groenink as members of the Board’s Audit and Finance Committee, Compensation Committee and Nominating and Corporate Governance Committee .

 

Although we implemented a significant number of remediation initiatives in fiscal 2013 and is continuing to improve our internal control over financial reporting in fiscal 2014, there can be no assurance that we will eliminate the aforementioned material weaknesses in fiscal 2014.

 

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 the 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.

 

76
 

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The information required by this Item is incorporated by reference from the information to be contained in the Company’s Proxy Statement for its 2014 Annual Meeting of Stockholders.

 

Item 11. Executive Compensation.

 

The information required by this Item is incorporated by reference from the information to be contained in the Company’s Proxy Statement for its 2014 Annual Meeting of Stockholders.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information required by this Item is incorporated by reference from the information to be contained in the Company’s Proxy Statement for its 2014 Annual Meeting of Stockholders.

  

Item 13. Certain Relationships, and Related Transactions, and Director Independence.

 

The information required by this Item is incorporated by reference from the information to be contained in the Company’s Proxy Statement for its 2014 Annual Meeting of Stockholders.

 

Item 14.     Principal Accountant Fees and Services

 

The following table sets forth the aggregate fees billed by BDO USA, LLP (“BDO”), our independent registered accounting firm for the fiscal years ended December 31, 2013 and December 31, 2012. These fees are categorized as audit fees, audit-related fees, tax fees, and all other fees. The nature of the services provided in each category is described following the table.

 

    2013     2012  
Audit and Audit-related Fees   $ 421,387     $ 433,804  
Tax Fees   $ 0     $ 0  
All Other Fees   $ 0     $ 12,892  
Total Fees   $ 421,387     $ 446,696  

 

Audit Fees and Audit-related Fees. These fees generally consist of professional services rendered for the audits of our consolidated financial statements and the effectiveness of our internal control over financial reporting and the review of our financial statements including on our Quarterly Reports on Form 10-Q for the 2013 and 2012 fiscal years. The audit-related fees generally consist of interim procedures related to the performance of our audit or review of our financial statements that are traditionally performed by the independent registered public accounting firm and attendance at Audit Committee meetings.

 

Tax Fees. There were no fees billed by BDO for professional services rendered for tax compliance for the years ended December 31, 2012 and 2011.

 

All other fees. These fees represent services not included under Audit and Audit-related fees, including the provision of certain consents or certain procedures related to the issuance of our registration statements on Form S-3, Form S-1 or Form S-8, as applicable.

 

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 and audit-related services provided by BDO in 2013 and 2012 consistent with the Audit Committee’s responsibility for engaging our independent auditors. The Audit Committee also considered whether the non-audit services rendered by our independent registered public accounting firm are compatible with an auditor maintaining independence. The Audit Committee has determined that the rendering of such services is compatible with BDO maintaining its independence.

 

77
 

  

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

The following exhibits are filed with this Report.

 

Number   Description  

 

Number   Description  
2.1   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 dated July 26, 2011).
3.1   Certificate of Merger (incorporated by reference to Exhibit 3.2 to the Company’s current report on Form 8-K dated October 4, 2011).  
3.2   Certificate of Incorporation of Elephant Talk Communication Corp., a Delaware corporation.(*)  
3.3   By-Laws (incorporated by reference to Appendix C of the Company’s Definitive Proxy Statement on Schedule 14A dated July 26, 2011).
10.1   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 S.A. and the Company, dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 2, 2009).
10.2   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 S.A. and the Company, dated July 15, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K dated July 21, 2009).
10.3   Sale and Purchase Agreement, dated March 17, 2010, by and among the Company and the stockholders of ValidSoft Limited other than Enterprise Ireland  (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K dated March 23, 2010).
10.4   Sale and Purchase Agreement, dated March 17, 2010, by and the Company and Enterprise Ireland (incorporated by reference to Exhibit 2.2 to the Company’s current report on Form 8-K dated March 23, 2010).
10.5   Securities Purchase Agreement by and among the Company and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.28 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).
10.6   Form of Senior Secured Convertible Note issued to certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.29 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).
10.7   Security Agreement by and among the Company and its subsidiaries and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.30 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).
10.8   Form of Escrow Agreement by and among the Company, certain purchasers and The Wells Fargo Bank, National Association, dated March 29, 2012 (incorporated by reference to Exhibit 10.31 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).
10.9   Subsidiary Guaranty by and among the Company and its subsidiaries and certain purchasers, dated March 29, 2012 (incorporated by reference to Exhibit 10.32 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).  
10.10   Registration Rights Agreement by and among the Company and certain purchasers, dated March 30, 2012 (incorporated by reference to Exhibit 10.33 to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011).
10.11   Contract between Vodafone Enabler Espana, S.L. and Elephant Talk Europe Holding, B.V., dated November 1, 2013.(*)(#)
11.1 Statements related to Computation of Ratios.(*)
21.1   Subsidiaries of the Registrant.(*)
22.1   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.(*)(**)

 

101.INS    XBRL Instance Document.(***)
101.SCH   XBRL Taxonomy Extension Schema Document.(***)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.(***)
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.(***)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.(***)
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.(***)

 

* 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.
*** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
# Confidential treatment will be requested with request to certain portions of this exhibit.  Omitted portions will be submitted separately to the SEC.

 

78
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ELEPHANT TALK
COMMUNICATIONS CORP.
 
       
  By:  /s/ Steven van der Velden  
  Name: Steven van der Velden  
  Title:

President and Chief Executive Officer

(Principal Executive Officer)

 
       
  Date: March 31, 2014  

  

Pursuant to the requirements of the Securities Exchange Act of 1934, 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 31, 2014
Steven van der Velden            
             
/s/ Mark Nije  

Chief Financial Officer

(Principal Financial and Accounting Officer)

      March 31, 2014
Mark Nije            
             
/s/ Johan Dejager   Director       March 31, 2014
Johan Dejager            
             
/s/ Rijkman Groenink   Director       March 31, 2014
Rijkman Groenink            

 

79

 

 

Exhibit 3.2 

 

CERTIFICATE OF INCORPORATION

 

OF

 

ELEPHANT TALK COMMUNICATIONS CORP.

 

The undersigned, a natural person (the “Sole Incorporator”), for the purpose of organizing a corporation to conduct the business and promote the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware hereby certifies that:

 

I.

 

The name of this corporation is Elephant Talk Communications Corp. (the “Corporation”).

 

II.

 

The address of the Corporation’s registered office in the State of Delaware is VCorp Services, LLC, 1811 Silverside Road, Wilmington, Delaware 19810, New Castle County.  The name of the Corporation’s registered agent at such address is VCorp Services, LLC.

 

III.

 

The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law (“DGCL”).

 

IV.

 

A. This Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Corporation is authorized to issue is 300,000,000 shares. 250,000,000 shares shall be Common Stock, each having $0.00001 par value per share. 50,000,000 shares shall be Preferred Stock, each having $0.00001 par value per share.

 

B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby expressly authorized to provide for the issue of all or any of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.

 

1
 

 

V.

 

For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:

 

A. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the Board of Directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors.

 

B.

 

1. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide.

 

2. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws or by written consent by the stockholders holding such number of shares of the Corporation as shall be necessary to authorize such action if all shares were present and voting at a meeting of the stockholders.

 

3. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.

 

VI.

 

A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated to the fullest extent permitted by the DGCL, as so amended.

 

B . The Corporation, to the fullest extent permitted by the DGCL, as amended from time to time, shall indemnify any director or officer of the Corporation and may, in the discretion of the Board, indemnify any other person or persons whom it may indemnify pursuant thereto, who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, (including attorneys’ fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by him or her in connection with the action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Such expenses incurred in defending such action, suit or proceeding shall be paid by the Corporation in advance of the final disposition, upon receipt of an undertaking on behalf of the person to repay such amounts if it is determined that he or she is not entitled to be indemnified by the Corporation as authorized hereby, provided that the Board of Directors shall not have determined that such person acted in bad faith and in a manner that such person did not believe to be in, or not opposed to, the best interest of the Corporation, or with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his conduct was unlawful. Such right of indemnification shall be a contract right which may be enforced in any manner enforced in any manner desired by such person. Such right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as the rights under this Article. The indemnification provided in this Article shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such person.

 

2
 

 

C. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.

 

VII.

 

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation.

 

VIII.

 

  The name and the mailing address of the Sole Incorporator is as follows:

 

NAME   MAILING ADDRESS

 

Alex Vermeulen

 

 

Schiphol Boulevard 249, 1118 BH Luchthaven
Schiphol, The Netherlands

 

3
 

 

IN WITNESS WHEREOF, this Certificate has been subscribed this 26th day of September, 2011 by the undersigned who affirms that the statements made herein are true and correct.

 

 

 
 /s/ Alex Vermeulen
Alex Vermeulen
Sole Incorporator

 

4

Exhibit 10.11

 

Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN

 

VODAFONE ENABLER ESPAÑA, S.L.

 

AND

 

ELEPHANT TALK EUROPE HOLDING, BV

 

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES THROUGH A
COMPREHENSIVE TECHNOLOGICAL PLATFORM

 

1 st NOVEMBER 2013

 

 
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

In Madrid, 1 st November 2013

 

ASSEMBLED

 

ON THE ONE PART,

 

MR. JOSÉ PAULO DA SILVA DOURADO NEVES , of full legal age and with address for these purposes at Avenida de Europa 1, Parque Empresarial de La Moraleja, 28108 Alcobendas, Madrid, acting as proxy in the name and on behalf of the trading corporation VODAFONE ENABLER ESPAÑA, S.L. (hereinafter, VEE), with Tax Identification Code No. B-82896119. Acting as President of the Board of Directors and specially empowered by agreement of the Board of Directors of 23rd September 2013nathe power of attorney executed before the Notary of Alcobendas (Madrid), Mr. Manuel Rodríguez Marín, on 9 October 2013, with number 2297 in his minute of record.

 

AND ON THE OTHER,

 

MR. MARK DIRK MARIN NIJE , of full legal age and with address for these purposes at Schiphol Bouleveard 249, 1118BH Schiphol, the Netherlands, acting as proxy in the name and on behalf of the trading corporation ELEPHANT TALK EUROPE HOLDING, BV. (hereinafter, ELEPHANT TALK), with registration number 34252209, which representation he holds by virtue of the powers granted by a resolution of the Company.

 

Both Parties appearing declare that they have sufficient legal capacity to enter into a contract and bind themselves, both personally and in the capacity and representation in which they intervene, which they mutually recognize and undertake not to challenge, and, with their mutual consent

 

 
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

THEY DECLARE

 

I. That VEE is a company authorized by the sectorial telecommunications legislation to provide complete Virtual Mobile Operator (VMO) electronic communications services by virtue of a Resolution of the Telecommunications Market Commission dated 18 August 2008.

 

II. That ELEPHANT TALK is an international provider of electronic communications services for Virtual Mobile Operators through the rendering of operation and technical support services over technological platforms.

 

III. That VEE, in the development of its electronic communications activity, is interested in hiring from ELEPHANT TALK and ELEPHANT TALK is interested in providing to VEE certain operation and technical support services over a comprehensive technological platform in the terms and conditions established in this Contract and the Annexes hereto.

 

IV. That by virtue of what is set down in the foregoing declarations, the Parties have reached an agreement by which ELEPHANT TALK will provide VEE the services mentioned in the proviso declaration III and that are detailed ahead and that they formalize in accordance with the following

 

 
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CLAUSES

 

1. OBJECT OF THE CONTRACT

 

1.1. The object of this Contract is the rendering by ELEPHANT TALK to VEE of the operation and technical support services (hereinafter, the “Services”) described in Annexes A, B1, B2, C, D, E of this contract, in the terms and conditions established in this document and its Annexes (hereinafter, referred to jointly as the “contract”).

 

1.2. The services shall be rendered by ELEPHANT TALK to VEE over the technological platform described in Annex C of this Contract.

 

1.3. This Contract is of an exclusive nature, pursuant to the provisions of the following clauses:

 

1.3.1 ELEPHANT TALK may not render in Spain the Services either directly or indirectly to any operator other than VEE (with or without its own telecommunications network) that is a direct or indirect competitor of VEE in the Spanish electronic communications market, during the term of the present Contract, as per the obligations laid down in Clause 3.3, except with the express authorization of VEE.

 

1.3.2 Likewise, VEE may not contract the Services with any other comprehensive technological platform other than ELEPHANT TALK, whilst ELEPHANT TALK is not authorized to render such Services to other operators within the framework of what is established in Clause 1.3.1 and in accordance with the obligation laid down in Clause 3.6, except with the express authorization of ELEPHANT TALK.

 

1.4 The numbering, codes and other technical parameters allocated to VEE by the competent bodies (MSISDN, IMSI, short numbering codes, ICC, etc.) and which, as and when applicable, are managed by ELEPHANT TALK in the performance of this Contract, shall remain under the control of VEE.

 

2. ESTRUCTURE OF THE CONTRACT

 

2.1. This Contract is structured in accordance with the following schematic:

 

2.1.1 Main Body: It includes the Contract’s essential principles and the elements that regulate the relations between the Parties.

 

1
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

2.1.2 Annex A – Services for the End Customers of the Virtual Mobile Operators (VMOs) of VEE

 

2.1.3 Annex B1 – Support Services for the Virtual Mobile Operators (VMOs) of VEE

 

2.1.4 Annex B2 – Support Services for VEE operations

 

2.1.5 Annex C – Technical Annex

 

2.1.6 Annex D – Economic Terms and Conditions

 

2.1.7 Annex E – Capabilities and Undertakings relating to Project Management

 

2.1.8 Annex F – Communications and Official Contact List

 

2.1.9 Annex G – Data Protection

 

2.1.10 Annex H – Security and Fraud

 

2.1.11 Annex I – Ethical Purchases

 

2.1.12 Annex J – General Health & Risk-Prevention Conditions

 

2.1.13 Annex K – Requirements for Compliance with the Sarbanes-Oxley Rules

 

2.1.14 Annex L – Certificates

 

2.1.14.1 Fiscal Certificate
2.1.14.2 Labor Certificate
2.1.14.3 Copy of Insurance Policy

 

2.1.15 Annex M – Definitions

 

2.1.16 Annex N – Environment

 

2.1.16 Annex O – Information Security General Regulation

 

2.1.17 Annex P – Anti Bribery

 

2.2. The Annexes may have their own associated Appendices, if so decided with the mutual consent of the Parties.

 

2.3 Both Parties explicitly acknowledge that all the elements comprising this Contract have the same status.

 

2
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

2.4. Each one of the Annexes and Appendices, when applicable, as well as any future updates or additions which the Parties may agree to incorporate into this Contract, suitably signed by both Parties, shall form an integral part thereof. The rights and obligations deriving there from shall be exercisable or enforceable from the date it is signed, except in the case of an agreement to the contrary on the validity date.

 

3. ESSENTIAL OBLIGATIONS OF THE CONTRACT

 

The Parties explicitly acknowledge the essential nature of the following obligations within the framework of this Contract:

 

A. Obligations of ELEPHANT TALK:

 

3.1 Ensure the rendering of the Services that are the object of the Contract in the terms and conditions established in the same.

 

3..2 Likewise, ELEPHANT TALK accepts the following obligations:

 

3.2.1 Guarantee that the rendering of the Services under this Contract shall be carried out in accordance with the technologies and modalities currently in existence and working, which shall be suitably maintained and upgraded on the basis of the mobile electronic communications market’s development. In this connection, ELEPHANT TALK guarantees the adequate upgrading of the functionalities, services, platform architectures and technologies available in the telecommunications market at any given moment, as per the roadmap which both Parties will keep updated in order to guarantee their dimensioning in accordance with the growth in the VEE services. The roadmap will be designed and kept updated on the basis of independent benchmarking, reflecting the existing developments in the market.

 

3.2.2 To facilitate VEE the access to future technologies and technological innovations that may appear in the telecommunications market, always provided that a prior request has been made, and that the aforesaid technologies and innovations are within the scope of ELEPHANT TALK.

 

ELEPHANT TALK must notify and make available to VEE, sufficiently in advance for VEE to be able to offer it in the market, the implementation of any new functionality whether deriving from a new project or technology or the consequence of the existing functionalities’ evolution, within the mobile telecommunications environment. In particular, ELEPHANT TALK is committed to providing - within a maximum of [*] - since the signing of the Contract a detailed and accurate plan for the evolution of their infrastructure in such a way that it supports LTE/4G technology and thus allow VEE to provide a LTE/4G mobile communications service within a maximum of [*] from the date of signature of this Contract.

 

3
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

3.2.3 Guarantee the adequate updating of commercial conditions, as regards both the services that are the object of this Contract and any new services that may arise, based on the needs expressed by VEE to keep itself competitive in the market in which it conducts its activities. The economic terms and conditions for the development of new services not included in the object of the Contract, as established in Annexes A, B, C, D and E, shall be established in accordance with the provisions of Annex D.

 

3.2.4 Guarantee the adequate maintenance of the commercial structure and prices, as described in detail in Annex D, in the cases contemplated in 3.2.1 and 3.2.2.

 

3.3 Additionally, ELEPHANT TALK commits not to render, either directly or indirectly, the operation and technical support services under this Contract to any operator other than VEE (with or without its own telecommunications network) that is a direct or indirect competitor of VEE in the Spanish mobile electronic communications market, during the term of [*] , except with the express and written authorization of VEE.

 

B. Obligations of VEE:

 

3.4. To make the payments owed by virtue of this Contract in the terms and conditions of Clause 13 and Annex D relating to the economic terms and conditions.

 

3.5. Fulfillment in good faith of its obligations to provide maximum support to ELEPHANT TALK in this Contract’s application and performance.

 

3..6. Obligation of VEE, pursuant to the provisions of Clause 1.3.2, not to contract the Services under this Contract with any other comprehensive technological platform different to ELEPHANT TALK, except with the previous express and written authorization of ELEPHANT TALK.

 

4. VALIDITY

 

4.1 This Contract shall enter into force on the date it is signed, that is, November 1st 2013, and shall remain in force for a 5-year term. This Contract shall be automatically renewed for successive terms of one (1) years as from the completion of the initial term and/or that of its renewals, except when either of the Parties notifies the other in writing of its intention to the contrary, at least six (6) months in advance of the conclusion of the term that is in force.

 

4.2 In the event of a change of control occurs in [*] , company which currently is [*] , understood as the acquisition by a company outside the Group of companies to which [*] belongs or of a participation involving the majority of its voting rights, and provided that [*] have elapsed since the signing of this Contract, VEE will be entitled to decide to [*] . If as a result of the foregoing, [*] .

 

4.3 In the event that the situation described in clause 4.2 occurs, ELEPHANT TALK’s obligation of exclusivity, as described in clause 3.3 will cease to apply from [*] notification of VEE of [*] ELEPHANT TALK.

 

4
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

4.4 In the event that ELEPHANT TALK decided not to extend this agreement, the provisions of clause 6.4 shall apply.

 

4.5 The parties agree that the effective delivery of the services referred to in annexes A and B will continue from the date of signature of this Contract.

 

5. CONTRACT REVIEW AND AMENDMENT

 

5.1 In the event that one of the cases described below were to arise, the Parties are hereby legitimized to request, in writing, the opening of negotiations that, as and when applicable, shall give rise to the review and amendment of the affected points of the Contract, subject to the agreement of the Parties:

 

5.1.1 [*]

 

5.1.2 [*]

 

5.1.3 [*]

 

5.1.4 [*]

 

5..2 The negotiations for the Contract’s review and/or amendment must comply with the following rules:

 

5.2.1 The Parties undertake to negotiate in good faith.

 

5.2.2 The Parties undertake to mutually make available all the essential information for the development of the negotiations, under the confidentiality obligation established in Clause 9.

 

5.2.3 During the course of the negotiation process for the Contract’s review, it shall be understood that the validity thereof has been provisionally renewed, except in the case of an agreement of the Parties to the contrary.

 

5
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

6. CONTRACT TERMINATION AND CONSEQUENCES

 

6.1 The Contract shall terminate for the general causes accepted in Law and, in particular, for the following causes:

 

6.1.1 With the mutual consent of the Parties, expressly indicated in writing and with the setting of the Contract’s termination date.

 

6.1.2 Due to the termination of the initial validity period or of the tacit renewal, as established in Clause 4.1, always provided that one of the Parties notifies the other in writing of its intention to exclude the Contract’s renewal, a minimum of six (6) months in advance of that date.

 

6.1.3 Due to the revocation, cancellation or modification, by the Authorities, of the legal authorization held by VEE when, in this latter case, fulfillment of the obligations laid down in this Contract is prevented. Both Parties shall do their utmost to avoid this situation.

 

6.1.4 Due to the entry in the body of shareholders of ELEPHANT TALK of a direct competitor of VEE or of the VEE Group in the mobile electronic communications market, whenever such acquisition of shares involves (i) the taking of control by the direct competitor of ELEPHANT TALK in the sense of Article 42 of Spain’s Commercial Code; or (ii) the appointment of at least one Director on the Board of Directors of ELEPHANT TALK.

 

6.1.5 Due to the entry in the body of shareholders of ELEPHANT TALK of a company that in the [*] following entry becomes a direct competitor of VEE or of the VEE Group in the Spanish mobile electronic communications market, whenever such acquisition of shares involves (i) the taking of control by the direct competitor of ELEPHANT TALK in the sense of Article 42 of Spain’s Commercial Code; or (ii) the appointment of at least one Director on the Board of Directors of ELEPHANT TALK.

 

For the purpose of Clauses 6.1.4 and 6.1.5, ELEPHANT TALK undertakes to communicate to VEE whatsoever acquisition of shares on the part of a direct competitor of VEE or of its Group, at the moment such acquisition takes place or the moment at which it has knowledge thereof and is authorized to make such communication.

 

6.1.6 Likewise, due to the entry of ELEPHANT TALK in the body of shareholders of a competitor of VEE or of its Group in the Spanish mobile electronic communications market, whenever such acquisition has the same consequences as those described in Clauses 6.1.4 and 6.1.5 above.

 

6
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

6..2 ELEPHANT TALK may seek the unilateral discharge of Contract through an express and written communication in the following case:

 

6.2.1 Whenever VEE fails to fulfill any of its essential obligations contained therein and always provided that such non-fulfillment is not remedied by VEE within a 30-day term as from the notification requesting remedy.

 

6.3 VEE may seek the Contract’s unilateral discharge by means of an express and written communication in the following cases:

 

6.3.1 Whenever ELEPHANT TALK fails to fulfill any of the Contract’s essential obligations established in Clause 3 thereof.

 

In the event of non-fulfillment on the part of ELEPHANT TALK of the obligations laid down in Clause 3.2, discharge may be made effective by VEE whenever ELEPHANT TALK fails to remedy such non-fulfillment within a thirty (30) day term as from the notification requesting remedy.

 

6.3.2 In the case of repeated non-fulfillment of the operation and quality indications established in Annexes A, B, C and E.

 

6.4 The Contract’s termination for whatsoever cause shall not necessarily involve the immediate cessation of the rendering of the ELEPHANT TALK services to VEE and the latter may request ELEPHANT TALK to continue with the rendering thereof. ELEPHANT TALK shall guarantee the continuity of the rendering of the services in the same conditions as those in which they were being rendered up to termination, always provided that such conditions comply with what has been agreed in the Contract, during a minimum term of twenty four (24) months after the Contract’s termination or at any event during the time that may be necessary for VEE to reach a similar agreement to this one and to satisfactorily migrate all the services to the new platform, and the platform remains stable, understanding by such the criterion that the Technology Department of VEE may establish. Similarly, ELEPHANT TALK shall guarantee complete transparency and the necessary technical support so that migration takes place with maximum speed and least impact on the activity of VEE. During this period, ELEPHANT TALK shall be authorized to render its services to operators other than VEE.

 

6.5 Right to take over control of the service and platforms operation right.

 

6.5.1 VEE is empowered to take over the provision of the services as described in this clause 6.5, either directly or through a third party, in case that VEE cannot generally provide its customers one or more of the essential services that it provides its customers with the services provided by ELEPHANT TALK, as a consequence of the existence of any of the circumstances referred occur (hereinafter the "Circumstance/s") and ELEPHANT TALK is not able to put remedy in a maximum period of forty five (45) calendar days from the date of notification by VEE to ELEPHANT talk:

 

7
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

(i) if VEE is in a serious breach of its legal or regulatory obligations by fault of ELEPHANT TALK and it can cause it to lose its license or constitutes a very serious infringement.

 

(ii) if ELEPHANT TALK enters into liquidation or his personality, is extinguished or is in a situation of Declaration of bankruptcy or proceeds to the general dismissal of payments.

 

(iii) If ELEPHANT TAK seriously breaches its obligation to develop and maintain the hardware or software in order to achieve the object of the present contract and, after being notified by VEE for the effective and necessary compliance with these obligations, ELEPHANT TALK does put remedy the same within the aforementioned.

 

(iv) If ELEPHANT TALK loses the employees that are considered as key and cannot replace them in a reasonable period of time and as a result it is impossible to perform its main obligations under this agreement.

 

6.5.2. In accordance with the above, in case that ELEPHANT TALK could not remedy and/or remove the circumstance/s within the period of forty five (45) calendar days, VEE is enabled to take over of the provision of services, previous irrefutable notification to ELEPHANT TALK with twenty (20) calendar days of the effective date of the takeover of the operation by VEE. In this notice, unless ELEPHANT TALK corrects the circumstance before that date. In this notification, VEE shall specify in a reasoned way the circumstance and the proposed strategy to solve it.

 

6.5.3. As soon as possible, and after receipt of the notification referred to in the preceding paragraph, the parties shall reach an agreement on the way and scope of the takeover of the operation by VEE and if the parties fail to reach an agreement in this regard during the period of twenty (20) days from the notification and VEE continues willing to exercise its right to take over of the operation, VEE will be empowered to exercise its right notifying ELEPHANT TALK in which way it will be exercised as well as stating if it will require a third party to act on its behalf, if that was the case.

 

6.5.4 ELEPHANT TALK must fully cooperate and provide all reasonable and necessary assistance to VEE and/or to any third party hired by VEE (provided that, if the latter is a competitor of ELEPHANT TALK or a company of the Group of ELEPHANT TALK, the prior consent of ELEPHANT TALK is required, which can't be refused it except in a reasoned manner) to allow the resumption of the affected services VEE, allowing at least:

 

(i) Take reasonable control over the management of the equipment and systems required for the provision of services;

 

(ii) access to the management reports related to the services affected by the circumstance and that are necessary to ensure a correct performance of the Services;

 

(iii) sign an agreement for the provision of Services subject to this agreement with a third party in the context of this clause, confirming that VEE is exercising its rights in accordance with the same.

 

8
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

6.5.5 If VEE exercises its rights under this clause it will be obligated to make the payments agreed in Annex D - economic to ELEPHANT TALK for the Services during the period in which VEE has exercised its right to take over operation control, being ELEPHANT TALK obliged to bear the costs incurred by VEE in a justified way by the exercise of the take over the provision of services. In the event that these costs are greater than the invoiced amount, such costs will be billed to ELEPHANT TALK.

 

6.5.6. The take over operation control right by VEE set in this clause shall cease as soon as the Circumstance, is resolved unless VEE has exercised its rights through a third party. In this case, the taking control of the operation by VEE may be extended until [*] of ELEPHANT TALK and never more [*] days] from the resolution of the Circumstance

 

6.5.7 VEE may exercise the powers set forth in this section without prejudice to any other right or faculty established in the Contract.

 

6.6 The Contract’s termination due to the elapsing of the initially agreed 5-year term or any of its renewals shall not involve the immediate cessation of the rendering of the ELEPHANT TALK services to VEE in respect of those VEE customers which, at the moment of termination, have been incorporated into the comprehensive technological platform for a term of less than 18 months. The rendering of the ELEPHANT TALK services to VEE in the terms and conditions of this Contract shall apply in respect of each customer during the term that remains up to the 18-month term’s completion.

 

6.7. At any event, the Contract’s discharge for any of the causes provided for in this Clause shall not represent the waiver by either of the Parties of the exercise of the actions that may correspond to them by Law and shall not release the Parties from fulfillment of their outstanding obligations.

 

6.8 The obligations contained in the Clauses indicated below shall remain in force after the Contract’s termination for a 5-year term: Clause 9 (Confidentiality) and Clause 11 (Applicable Legislation and Binding Settlement of Disputes).

 

7. PENALTY CLAUSE FOR EARLY DISCHARGE

 

7.1 Within the framework of Clauses 6.1.4, 6.1.5, 6.1.6, 6.2 and 6.3, which grant the right to the Party not causing the situation described to seek unilateral discharge of Contract, and without prejudice to the compensation for damages and losses to which it may give rise, as a penalty clause expressly convened between the Parties, the following penalties are established for the cases described below:

 

7.1.1 In the cases provided for in Clauses 6.1.4, 6.1.5, 6.1.6 and 6.3, should it be VEE which exercises the right to unilateral discharge of contract on the grounds of the existence of any of the circumstances established as a cause for discharge of contract by a unilateral resolution in its favor, ELEPHANT TALK shall pay VEE the corresponding amount as established in the following table:

 

9
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

[*]

 

 

Applicable penalty

 

  S < [*] [*]
[*] = S < [*] [*]
[*] = S < [*] [*]
[*] = S < [*] [*]
[*] ≤ S < [*] [*]
[*] ≤ S < [*] [*]
S > [*] [*]
           

 

The P a rties agree that the total number of services in the platform (S) shall be the average of the [*] .

 

7.1.2 In the case provided for in Clause 6.2, if it is ELEPHANT TALK which exercises the right to unilateral discharge of contract, on the grounds of the existence of any of the circumstances established as a cause for discharge of contract by a unilateral resolution in its favor, VEE must pay ELEPHANT TALK, as a penalty, an amount equivalent to that which ELEPHANT TALK has invoiced to VEE during the [*] immediately prior to the exercise of the unilateral discharge right, up to a limit equivalent to the applicable penalty as per Clause 7.1.1 for the corresponding number of services [*] .

 

10
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

8. ECONOMIC LIMIT OF THE PARTIES’ LIABILITY IN THE CONTRACT’S PERFORMANCE

 

8..1 Each Party shall be responsible for the adequate fulfillment of its obligations under this Contract, subject, in respect of possible claims lodged by one Party against the other, to the following limits:

 

8.1.1 There shall be no limitation on their liability other than that which applies pursuant to Spanish legislation in respect of losses that, being due to actions or omissions, comprise: losses produced by the infringement of industrial or intellectual property rights; injuries caused to persons; damage caused to material goods; or losses caused by willful intent.

 

8.1.2 Outside the aforementioned cases, in respect of losses caused by serious negligence in actions or omissions, the responsible Party shall be answerable up to a maximum limit of [*] Euros ( [*] €) in respect of consequential damages, loss of earnings, loss of profits and/or loss of data.

 

8.1.3 Outside the aforementioned cases, in respect of losses caused by ordinary negligence in actions or omissions, the responsible Party shall be answerable up to a limit of [*] Euros ( [*] €).

 

8.1.4 One Party shall be liable before the other for the losses caused (particularly for the loss of logs, data or any other information) due exclusively to the latter’s non-fulfillment of the obligations accepted by it by virtue of this Contract.

 

8.2 The Parties shall not be responsible for the delay, fault in the execution or any other non-fulfillment of any of their contractual obligations when such delay, fault in the execution or non-fulfillment is due to the existence of a cause of force majeure.

 

The Party invoking the partial or complete impossibility of the Contract’s performance for a cause of force majeure must inform the other Party, as quickly as possible and by whatsoever means, the nature, cause, scope and estimated duration of the event. For the time that the event and the effects arising there from last, the Parties shall act and co-ordinate in good faith their efforts with a view to adopting as many measures as may be necessary and essential to alleviate and/or overcome them.

 

The Parties’ contractual undertakings and obligations shall be suspended if the event of force majeure and its effects cannot be alleviated, remedied and/or overcome within the seven days following that on which it was notified. Nevertheless, if the situation caused by force majeure were to continue after one month has elapsed since the event was notified, the Contract shall be lawfully terminated without giving rise to compensation of whatsoever type in favor of either of the Parties.

 

11
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

8.3 ELEPHANT TALK shall keep VEE free from all responsibility and claim that any third party may file against the latter by virtue of this Contract’s performance. To this end, whatsoever claim made against VEE for this reason shall be notified immediately to ELEPHANT TALK so that it can appear in the claim as necessary and/or voluntary passive joint litigant, together with a lawyer representing its position, against the claim, without this representing on the part of VEE abandonment of the right to defend itself in each proceeding, for as long as it continues to appear as the defendant, co-defendant, passive joint litigant or third party in the action.

 

8.4 Under no circumstances shall the liability deriving from the application of Clauses 8.1.2 and 8.1.3 exceed the limit of [*] Euros ( [*] €) for each 12- month term of the Contract.

 

9. CONFIDENTIALITY

 

9.1 Neither VEE nor ELEPHANT TALK may disclose to third parties, without the prior express and written consent of the other Party, any information relating to the content of this Contract or relating to the other Party or the relations of the other Party with its own customers, to which it may have access as a consequence of this Contract, undertaking to treat such information confidentially. The confidentiality obligation established in this Clause shall remain in force during the Contract’s performance and for a term of thee (3) years once it has terminated.

 

9.2 DEFINITIONS

 

9.2.1 For the purpose of this Contract, the following expressions shall be interpreted as per the definitions that appear after them, as follows:

 

- “Own Information”: As an example but by no means limited thereto, the following shall be deemed to be “Own Information”: discoveries, concepts, ideas, know-how, techniques, designs, drawings, drafts, diagrams, models, samples, databases of all types, and any technical, financial or commercial information of either of the Parties.

 

- “Source”: Either of the Parties shall be deemed to be the “Source” whenever, within the terms of this Contract, it is the one which supplies the Own Information.

 

- “Addressee”: Either of the Parties shall be deemed to be the “Addressee” whenever, within the terms of this Contract, it is the one which receives the Own Information from the other Party.

 

12
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

9.3 OWN INFORMATION

 

9.3.1 The Parties agree that any information relating to financial, commercial, technical and/or industrial aspects of either one of them or of their respective businesses supplied to the other Party as a consequence of the agreements they may reach (regardless of whether or not such transfer is verbal, written, on magnetic support or any other computerized mechanism, graphic or of any other type) shall be deemed to be confidential information and shall be treated pursuant to the provisions of this document. For the purpose of this Contract, such information and its copies and/or reproductions shall be deemed to be “Own Information”.

 

9.4 EXCLUSION FROM THIS CONTRACT

 

9.4.1 The following information shall not be deemed to be Own Information and neither shall it be treated as such:

 

i) When it is public knowledge at the moment of the supply to the Addressee or, when the supply has been made, it achieves such condition without the Addressee having infringed the provisions of this Contract.

 

ii) When it can be demonstrated by the Addressee, through its archives, that it was in its possession through legitimate means prior to the information being supplied by the Source, without any confidentiality agreement being in force at that moment.

 

iii) When it has been widely disclosed without any limitation by its legitimate creator.

 

iv) When it was created completely and independently by the Addressee, with the latter being able to demonstrate this fact through its archives.

 

9.5 CUSTODY AND NON-DISCLOSURE

 

9.5.1 The Parties shall treat as confidential the other Party’s Own Information that may be supplied to them and agree to its strict safeguard and custody and not to disclose or supply it, whether partially or in full, to whatsoever third party (with the exception of the companies in the Group to which VEE belongs) without the prior express and written consent of the Source. Such consent shall not be necessary when the obligation to supply or disclose the Source’s Own Information by the Addressee is imposed by Law, a firm legal Judgment, arbitration award or firm Administrative decision.

 

9.5.2 This Contract does not authorize either of the Parties to demand from the other the supply of information and any such obtainment of information from or about the Source by the Addressee shall be received by the latter with the prior consent of the former.

 

9.5.3 All consequences deriving from the negligent custody and/or willful or negligent disclosure of the Own Information, consequent information or a consequence of the Own Information or consequent information or a consequence of the Contract shall be deemed to be an act of unfair competition, without exclusion of the definition thereof as a crime that may be made in any applicable legislation, including a criminal wrong.

 

13
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

9.6 OWN INFORMATION SUPPORT

 

9.6.1 All or part of the Own Information, papers, books, accounts, recordings, lists of customers and/or partners, computer programmers, procedures, documents of all types or technology, the supply of which is made under the condition of Own Information, regardless of the support in which it is contained, shall be treated as secret, confidential and restricted.

 

9.7 OWN INFORMATION DESTINATION

 

9.7.1 It shall be possible for the Own Information to be made known by the Addressee to its managers and/or employees, without prejudice to the Addressee adopting all the necessary measures for the true and exact fulfillment of this Contract, having the obligation of informing the one and the other of the confidential, secret and restricted nature of the information it is making known, and of the existence of this Contract.

 

9.7.2 Likewise, the right of VEE to make available the Own Information it receives from the Source to the companies in the Group to which VEE belongs is hereby recognized, with such companies being subject to the confidentiality and secrecy obligations in the terms and conditions of this Contract.

 

9.7.3 The Addressee must give its managers and/or employees all the guidelines and instructions it may consider appropriate or advisable for the purpose of safeguarding the confidential, secret and restricted nature of the Source’s Own Information.

 

9.7.4 Without prejudice to the provisions of the foregoing paragraphs, each Party shall be responsible not only for the conduct of its managers and/or employees but also for the consequences that may result pursuant to the provisions of this Contract.

 

9.8 RESPONSIBILITY IN THE CUSTODY OF THE OWN INFORMATION

 

9.8.1 The addressee shall be responsible for the custody of the Own Information and as many copies as it may have thereof supplied by the Source, for the purpose of its treatment as confidential, secret and restricted, having the obligation of returning the Own Information and copies thereof to the Source upon termination of their commercial relations, or earlier, when so requested by the Source.

 

14
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

10. CONTRACT ASSIGNMENT

 

10.1 ELEPHANT TALK may not assign the rights and obligations under this Contract, either partially or in full, without the prior express and written consent of VEE. The foregoing notwithstanding, either of the Parties shall be able to partially or fully assign the rights or obligations under this Contract to any company pertaining to its corporate Group in the sense laid down in Article 42 of the Commercial Code, without having to pay any additional amount whatsoever.

 

10.2 At any event, whenever consent to assignment is granted by the non-assigning Party, the assigning Party shall be jointly and severally responsible, with the assignee, for the obligations assumed by virtue of this Contract.

 

In any case, ELEPHANT TALK may only assign the rights and obligations under the Contract to companies that prove to properly dispose of human, technical, intellectual, financial and economic means and materials necessary to assume the obligations arising out of this Contract. Otherwise, the possibility of assignment described in the previous clause 10.1 would be automatically revoked.

 

10.3 The economic and all other rights generated or that may be generated by this Contract may not be encumbered with rights thereon in favor of third parties without the prior express and written consent of VEE, which may not be withheld in an unjustified way.

 

11. APPLICABLE LEGISLATION AND BINDING SETTLEMENT OF DISPUTES

 

11.1 This Contract is subject to the Laws of the Kingdom of Spain.

 

11.2 This Contract shall be signed in Spanish. In the event of a discrepancy on the Contract’s interpretation, amendment or performance, the Parties agree that the Spanish version shall prevail. At any event, the Parties undertake to use their best endeavors to settle such discrepancy, avoiding as far as is possible having to resort to litigation.

 

11.3 For the settlement of whatsoever dispute relating to this Contract’s interpretation and fulfillment, both Parties abide by the jurisdiction of the Courts and Tribunals of the city of Madrid.

 

12. RESPONSIBILITY OF ELEPHANT TALK IN THE CONTRACT’S PERFORMANCE

 

12.1 SERVICE QUALITY LEVELS AND COVERAGE

 

12.1.1 ELEPHANT TALK guarantees to VEE that the quality of the service offered shall maintain the service levels described in Annexes A, B, C and E.

 

15
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

12.1.2 ELEPHANT TALK shall adequately dimension the infrastructure and resources made available to VEE for the rendering and economic valuation of the services included in the Contract, in accordance with the necessary traffic and network planning forecasts made available through the mechanisms which the Parties shall establish for the Contract’s correct working. VEE shall provide ELEPHANT TALK with forecasts on traffic and number of services a minimum of three months in advance. ELEPHANT TALK undertakes to dimension the human and material resources in accordance with these forecasts so as to guarantee the agreed service levels, always provided that the real traffic volumes and/or number of services are kept within deviations of up to + [*] with respect to the forecast. Above that value, ELEPHANT TALK undertakes to use its best endeavors to maintain the agreed service levels.

 

12.1.3 ELEPHANT TALK shall manage the complete performance of this Contract. For this, ELEPHANT TALK shall act diligently in the performance of the Contract’s object, procuring the supply, execution and completion of the whole in the agreed terms and conditions, rendering such services either directly or through subcontracts with the individuals or bodies corporate that effectively render such services. The contractors selected by ELEPHANT TALK must be duly authorized and qualified for conducting such functions and under no circumstances must VEE be affected by whatsoever responsibility or liability resulting from such election, lack of performance or negligence in the fulfillment of the obligations assumed by ELEPHANT TALK or the subcontractors chosen by it.

 

12.1.4 Quality in the Contract’s Performance

 

12.1.4.1 ELEPHANT TALK undertakes to make available all the technical, human, material and economic resources that may be required for fulfilling the object of this Contract. It shall be responsible for obtaining all the necessary licenses, permits and authorizations for fulfilling the object of this Contract and for their adaptation to the contracted purpose.

 

12.1.4.2 The Parties accept that, in the rendering of some of the services under this Contract, the prevailing legislation may require that some of them have to be carried out through third parties other than ELEPHANT TALK.

 

12.1.4.3 ELEPHANT TALK assumes the guarantee of fulfillment of the administrative, employment and tax requirements and obligations associated with the performance of this Contract, whether carried out directly or through subcontracted third parties.

 

12.1.4.4 In any circumstance and at any moment, VEE may require from ELEPHANT TALK the adaptation of the Contract’s object to the legislation on personal and material safety and security as imposed by the applicable legislation and the replacement of the defective object should it not be adequate for the contracted purpose, as per the technical specifications, at no additional cost.

 

16
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

12.2 CASES OF DISCONNECTION OF SERVICE

 

VEE may disconnect its network from the service provided by ELEPHANT TALK in the cases described below without this being taken as non-fulfillment of any of its obligations:

 

12.2.1 Whenever the safety and integrity of its network is in such danger that this could seriously affect its working.

 

12.2.2 Whenever people’s integrity is at risk.

 

12.2.3 In those cases in which interoperability of the services of VEE or of its customers is endangered to the extent that the rendering thereof is seriously affected.

 

12.2.4 In the event of a serious infringement of the regulations relating to the secrecy of communications and the right to honor, privacy and protection of data of a personal nature, with serious violation of third-party rights.

 

12.2.5 Whenever, with the existence of any of the causes of discharge of Contract established in Clause 6, the nature thereof makes it essential to disconnect the service or a part thereof, prior to the services’ final cessation during the Transition Period.

 

13. MONETARY CONSIDERATIONS

 

14. 13.1 Prices of the Services under the Contract

 

13.1.1 The invoicing prices and conditions applicable to the services under this Contract are established in Annex D “Economic Terms and Conditions”.

 

13.1.2 All the prices and terms and conditions of an economic content included in this Contract and its Annexes are given without including VAT or other indirect taxes.

 

13.2 Taxes

 

13.2.1 All present or future taxes of whatsoever type that may be incurred as a consequence of this Contract’s execution and performance shall be settled by the Parties in accordance with the Law.

 

17
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

15. SECRECY OF COMMUNICATIONS AND PERSONAL DATA PROTECTION

 

14.1 At all times ELEPHANT TALK shall guarantee the Secrecy of the Communications to which it may have access during the rendering of the services under this Contract, as per the provisions of the applicable Spanish regulations in force at any given moment.

 

14.2 For the rendering of the services under this Contract, ELEPHANT TALK shall have access to the personal data contained in the files of VEE; consequently, such data may only be processed in accordance with the provisions of Annex G. At any event, ELEPHANT TALK undertakes to abide by all the provisions that may apply on the subject and, in particular, those of Spain’s Organic Law 15/1999 of 13 December 1999 of the Protection of Personal Data (hereinafter, “LOPD”) and other regulations for its application in force at any given moment.

 

15. SAFEGUARDING OF INTELLECTUAL AND INDUSTRIAL PROPERTY RIGHTS AND THE PARTIES’ RIGHTS

 

15.1 “Intellectual and Industrial Property Rights” (hereinafter, “IPR”) shall be deemed to be all the intellectual and industrial property rights (including, without limitation, all rights of an economic or personal type, such as copyright) that are recognized at this moment or in the future by Spanish intellectual or industrial property legislation or the laws of any jurisdiction applicable to the case, including, without limitation, all inventions (and, of them, the inventions implemented in the IT sector with or without patent), patents, “utility models”, industrial designs, semiconductor topography rights, trade-marks and service marks, whether registered or unregistered, reproduction rights, logos, presentation names and commercial names, know-how (but only to the extent that the foregoing can confer a legal protection or license under the pertinent applicable legislation), domain names and goodwill associated with all of them, including in each case the capacity (should it exist) (i) to apply for whatsoever registration whether necessary or simply appropriate for obtaining or protecting such rights in any part of the world and any register thereof, and (ii) to claim whatsoever compensation or any other remedy for the infringement of such rights. IPR shall include, without limitation, all the intellectual and industrial property rights registered with an official register in any part of the world and the applications for registration and the concession rights thereof and any right or form of protection of a similar nature throughout the world.

 

18
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

15.2 The Parties shall maintain all the rights over their respective names, logos, marks, databases and/or any other goods protected by the prevailing rules on the subject of IPR. Likewise, the Parties shall maintain all the rights over their respective patents, “utility models”, industrial designs, databases and/or any other goods protected by the IPR.

 

15.3 ELEPHANT TALK shall only be able to use the IPR of VEE (or of the companies in the Group to which it belongs) in the terms and conditions for which the latter authorizes such use and, at any event, such authorization shall refer strictly to the development of the activity under this Contract. In the event of a modification, and at the request of VEE, ELEPHANT TALK has the obligation of permanently and immediately updating, eliminating or replacing the IPR of VEE or of the companies in the Group to which it belongs.

 

VEE may only use the IPR of ELEPHANT TALK (or of the companies in the Group to which it belongs) in the terms and conditions for which the latter authorizes such use and, at any event, such authorization shall refer strictly to the development of the activity under this Contract. In the event of a modification, and at the request of ELEPHANT TALK, VEE has the obligation of permanently and immediately updating, eliminating or replacing the IPR of ELEPHANT TALK or of the companies in the Group to which it belongs.

 

15.4 The Parties may not make use of or possess marks, domain names or other IPR rights that can be confused with the industrial property rights which the other Party or other companies in the Group to which it belongs exploit in the placing on the market of their products and services. The Parties may only use the other Party’s IPR for the purpose of carrying out the object of this Contract, having the obligation of using their own name in all their other activities.

 

15.5 In particular, the ownership and all the IPR over the software, operating manuals, designs, distinctive signs and associated documentation, supplied or made available to VEE by ELEPHANT TALK as part of the Service or developed within another scope that are the property of ELEPHANT TALK shall continue to be the full property of ELEPHANT TALK or of the owner thereof. Whenever software, owned by ELEPHANT TALK or third parties, is supplied to VEE or its customers together with any of the Services, ELEPHANT TALK shall grant VEE or its customers a non-exclusive and non-transferrable license (except for the companies in the Group to which they belong that operate in the Spanish mobile electronic communications market) to use, store, develop, reproduce and distribute that software solely in connection with those Services. Likewise, VEE shall also be allowed to make a reasonable number of backup copies thereof.

 

15.6 Except in the case of an agreement to the contrary between the Parties, the new IPR developments carried out exclusively for VEE, which are requested through the corresponding document for the special project relating to the Services under the Contract, shall be the exclusive property of VEE. The foregoing notwithstanding, without prejudice to the Parties convening other conditions, VEE shall grant to ELEPHANT TALK a non-exclusive and non-transferrable usage license, which cannot be sub-licensed, for the new IPR developments and solely for the rendering of the Services.

 

19
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

15.7 VEE undertakes to transfer to its customers the need to sign the agreements that the owner of the IRP may reasonably request in relation to any material provided by ELEPHANT TALK in the Contract’s performance, when so required.

 

15.8 Whatsoever inclusion of the object of this Contract or the performance thereof in an advertising or promotional campaign, by virtue of which the name of one of the Parties or any other IPR of the latter or of any of the companies in the Group to which it belongs is announced, inserted or used, shall require the prior express and written consent of such Party.

 

15.9 VEE is the holder of all the IPR to which ELEPHANT TALK may have access for the purpose of this Contract’s performance. Under no circumstances shall it be understood that by virtue of this Contract VEE grants to ELEPHANT TALK a license to use the IPR with which VEE or any of the companies in the Group to which it belongs place their telecommunications products and services on the market.

 

15.10 In turn, ELEPHANT TALK declares under its sole responsibility that it is the holder of all the patents, marks, utility models, copyrights, registered designs and other IPR that are necessary for rendering to VEE the services established in this Contract.

 

ELEPHANT TALK undertakes to compensate VEE for any claim or legal proceeding having its origin in the infringement (or alleged infringement) of any patent, design or copyright by virtue of the possession or use by VEE of any equipment or software made available by ELEPHANT TALK pursuant to this Contract. To this end, VEE must notify whatsoever alleged infringement to ELEPHANT TALK immediately and in writing, must not admit anything relating to the infringement, shall allow ELEPHANT TALK to direct the proceedings and negotiations, giving it all reasonable assistance, and must authorize it, always for the account of ELEPHANT TALK, to modify the equipment or software or obtain the corresponding license so as to avoid the infringement.

 

15.11 Within a term of thirty (30) days from this Contract’s execution, ELEPHANT TALK undertakes to sign an agreement with an escrow entity (selected by ELEPHANT TALK) for the purpose of depositing the source code, development programmers, operating manuals and all other associated documentation that may be necessary for the correct maintenance of the deposited software, being that which is necessary for the correct rendering of the Services under this Contract. Likewise, within a term of ten (10) days from this Contract’s execution, ELEPHANT TALK shall remit a copy thereof to VEE.

 

Consequently, the object of this deposit is to guarantee to VEE future access to the source code when one or several of the following circumstances arises:

 

· Whenever ELEPHANT TALK is liquidated or wound up; it starts whatsoever mercantile or bankruptcy proceeding for the purpose of the company’s liquidation or winding up; it finds itself in a situation of insolvency or takes action for the company’s merger or spin off; or whenever it is going to cease or change the corporate purpose of its business.

 

· Whenever ELEPHANT TALK is accredited as a debtor in a third-party bankruptcy proceeding; it is called by the Administration or whatsoever other official public or private body to declare on all or part of its assets or goods on the occasion of the commencement of an audit or inspection; an administrative order is served on ELEPHANT TALK; it signs an agreement by virtue of which payment to its creditors is established on the basis of the profit obtained by ELEPHANT TALK.

 

20
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

· Whenever ELEPHANT TALK fails to comply with its obligations to support, guarantee and maintain the software in order to achieve the object of this Contract and, after being notified by VEE for the effective and necessary fulfillment of such obligations, ELEPHANT TALK fails to comply with them within a thirty-day term from the notification.

 

VEE shall be able to use, share and sub-license the source code in accordance with the circumstances indicated in the foregoing section and solely for the purpose of (i) carrying out the support, guarantee and maintenance operations, and (ii) for the continuity, enhancement or updating of the rendering of the Services under this Contract. VEE shall have the right, at its election, to share or license the source code, either with an employee or with a third party authorized by VEE for the purpose of complying with a series of previously established support, guarantee, maintenance, enhancement and updating obligations in favor of ELEPHANT TALK for the performance of this Contract. VEE may only share or license the source code when such subject has previously accepted a written commitment under which it undertakes to maintain the confidentiality of such source code and to use it solely for the purpose of fulfilling the obligations imposed by VEE.

 

In the event that instead of belonging to ELEPHANT TALK the source code belongs to a third party from which it has been obtained, ELEPHANT TALK must endeavor to ensure that the legitimate owner thereof also carries out the deposit of such source code in the same terms and conditions as those established for ELEPHANT TALK.

 

To the extent that ELEPHANT TALK may endeavor to assign to a third party its intellectual property rights over the software which is being used for developing the rendering of the Services under this Contract, having been previously licensed to VEE, ELEPHANT TALK prior to such assignment must notify and obtain the prior consent in writing of VEE.

 

The fees corresponding to the deposit shall be for the account of ELEPHANT TALK and shall be included in the maintenance service fee.

 

After notifying ELEPHANT TALK accordingly, VEE shall request from the chosen escrow entity, without the need for the prior authorization of ELEPHANT TALK, the availability and sending of the corresponding source code with due justification of the reasons why it is requesting it.

 

21
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

16. MARKETING AND PUBLIC RELATIONS

 

16.1 Neither of the Parties shall be legitimized to use the corporate name and/or marks owned by the other Party without the prior consent, in writing, of the holder thereof.

 

16.2 Neither of the Parties shall make public announcements (i.e. press releases or verbal presentations) relating to this Contract, its content or the service rendered without the other Party’s prior consent in writing. The Parties shall agree and publish whatsoever press release jointly.

 

17. CONTRACT ENFORCEABILITY

 

17.1 A declaration of complete or partial nullity of one of more of this Contract’s clauses by the competent authority shall not affect the validity of the remaining clauses, which shall maintain their binding force. In this case, the Parties undertake to negotiate a new clause or clauses to replace the annulled clause or clauses that, within the terms in keeping with the Law and in strict compliance with the judgment or decision declaring such nullity, best maintain the identity of purpose with the annulled clause or clauses, insofar as such purpose has not been declared contrary to Spain’s set of laws.

 

17.2 The enforceability of this Contract shall be conditional upon the signing of all the Annexes referred to in Clause 2. Be that as it may, once all the Annexes have been signed, the date of the Contract’s entry into force shall be deemed to be that on which the Main Body thereof is signed, date on which it shall take effect and on which the Annexes to the Contract shall also enter into force. The Parties agree that the maximum date for signing the Annexes pending execution is 31 March 2014. In the event that once this date has been reached such execution has not taken place, except with the express and written agreement of the parties to the contrary, for all intents and purposes the Contract shall hereby become invalid, without the Parties being able to claim whatsoever amount. The Parties undertake to make available all the necessary resources and to negotiate in good faith so that the signing of the Annexes is possible within the agreed term.

 

22
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

18. BINDING CONTRACT

 

18.1 This Contract, made up of the Main Body, Annexes and, as and when applicable, Appendices, includes all the terms and conditions and essential aspects of the agreement that currently exists between the Parties.

 

18.2 The foregoing paragraph notwithstanding, the intervening Parties confer on this Contract a fully valid and binding character, expressly agreeing that the lack or absence of a subsequent agreement on questions of detail or development may not be put forward by either of the Parties as sufficient cause for waiving the binding nature of this Contract or questioning its enforceability and validity. The Parties agree that the discrepancies that may be generated in relation to these developments shall be settled in accordance with the mechanisms provided for in this Contract.

 

19. INDEPENDENCE OF THE PARTIES

 

19.1 It shall be the specific and exclusive obligation of ELEPHANT TALK to comply with all the legal obligations that correspond to it, in particular those of a labor and fiscal nature, relating not only to the company itself but to the personnel in its employ.

 

19.2 In this connection, the Parties expressly agree that this Contract does not represent an association or dependence between them nor the only relationship in the rendering of the services which each one carries out, meaning that both Parties shall be absolutely independent and autonomous, and VEE shall have no responsibility, not even subsidiary, in respect of the obligations incurred by ELEPHANT TALK in respect of third parties and, in particular, the personnel in its employ.

 

19.3 In particular, non-fulfillment of the obligations of ELEPHANT TALK or its subcontractors on the subject of Occupational Hazard Prevention or the complete or partial lack of compliance with the provisions of Annex J shall empower VEE to withhold the monetary consideration in a sufficient amount to cover all the liabilities that effectively derive from any breaches committed by ELEPHANT TALK or its subcontractors. In addition to the foregoing, the joint and several responsibilities of the Parties pursuant to the provisions of Section 42.3 of the prevailing Consolidated Text of Spain’s Law of Corporate Infringements and Penalties may not be eluded.

 

19.4 ELEPHANT TALK, in the performance of this Contract, shall be the only one empowered to adopt all the surveillance and control measures it may deem appropriate to verify compliance by the worker of its labor obligations and duties in relation to ELEPHANT TALK, ensuring in the adoption and application of such power due consideration and taking into account the capacity of each dependent worker of ELEPHANT TALK.

 

19.5 In accordance with the foregoing, ELEPHANT TALK undertakes to hand over to VEE, whenever it is required to do so by the latter, a list of the personnel in its employ assigned to the Contract’s performance, in addition to a copy of the TC-1 and TC-2 Social Security contribution forms, a negative Certificate of arrears issued by the Social Security General Treasury and registration in the corresponding accident at work and occupational illness mutual insurance company, in addition to supporting documents of payment to the Public Exchequer of the income tax withholdings made on behalf of the workers on its payroll. As and when applicable, an updated copy of contribution to the Special Self-Employed Workers’ Regime RETA [in its Spanish initials] and all other documents requested of it, such as compulsory and voluntary insurance premium receipts.

 

23
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

19.6 ELEPHANT TALK declares that it has the consent of its workers to be able to hand over to VEE those of their personal data that are necessary for fulfilling the obligations of this Contract. In the event that any of the workers were to subsequently revoke the consent granted or oppose the processing of their data, ELEPHANT TALK shall notify VEE and thereafter shall refrain from handing over any data of such worker to VEE. Likewise, VEE undertakes not to use the data of the workers of ELEPHANT TALK for any purpose other than that of permitting adequate fulfillment and control of the rendering of services provided for in this Contract.

 

19.7 VEE may at any moment demand from the other Party the updated exhibition of the compulsory legal situation of ELEPHANT TALK with respect to its workers.

 

19.8 The new assignment of a worker to the execution of the contracted services by ELEPHANT TALK must be notified to VEE and the regularity of its situation must be accredited prior to its incorporation into the Contract’s performance, in the same terms and conditions as those established in the foregoing paragraphs.

 

19.9 Failure to comply with the aforementioned obligations shall be a cause for this Contract’s automatic discharge, without the right to any compensation in favor of ELEPHANT TALK and without prejudice to the legal actions that may correspond to VEE before the former for the damages and losses that such non-fulfillment may cause to it.

 

19.10 ELEPHANT TALK undertakes to assume in full the direction, organization and management of the human and material resources assigned to the Contract’s performance.

 

20. SUBCONTRACTING

 

20.1 ELEPHANT TALK shall be able to perform the services described in this Contract either directly or through subcontracts with third parties, subject to the prior written authorization of VEE, which may not be withheld without justification, being responsible before VEE for complete or partial non-fulfillment or negligent fulfillment of the obligations assumed by virtue of this Contract and for those established in general legislation, particularly those referring to the obligations which it must assume on Labor, Fiscal, Occupational Hazard Prevention and Data Protection matters.

 

24
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

20.2 In the event that ELEPHANT TALK uses for the rendering of the service under this Contract personnel made available to it by a Temporary Employment Agency, ELEPHANT TALK must abide by all the obligations and special limitations in respect of the work to be conducted as imposed by the regulation of this type of service relationship, particularly on the subject of Occupational Hazard Prevention. Consequently, ELEPHANT TALK shall release VEE from any direct or indirect responsibility resulting from its relations with the Temporary Employment Agency with which it signs a contract for the availability of or with its workers, having the duty of fulfilling all the obligations laid down in this Contract for the case of subcontracting. In addition to the foregoing, the joint and several responsibilities of the Parties pursuant to the provisions of Section 42.3 of the prevailing Consolidated Text of Spain’s Law of Corporate Infringements and Penalties may not be eluded.

 

20.3 In the event that ELEPHANT TALK subcontracts the partial or complete performance of this Contract, it must reliably communicate this fact to VEE prior to formalizing such contracting. Upon receipt of this communication, VEE shall have five (5) working days in which to oppose it for whatsoever reason. If, once this term has elapsed, VEE has not declared its opposition, it shall be understood that it expressly accepts the subcontracting communicated to it. The foregoing notwithstanding, in the event that the subcontracting involves access on the subcontractor’s part to data for which VEE is responsible, the provisions of this Contract and its Annexes relating to the protection of personal data must be adopted.

 

20.4 The legal relations and contracts that ELEPHANT TALK must formalize with third parties for fulfillment of its obligations shall contain amongst their clauses the express exclusion of the responsibility of VEE in respect of the aforesaid relations, irrespective of the legal nature thereof.

 

20.5 VEE shall not be responsible before customers or third parties for the injuries to persons or damage to material objects that may occur, for whatsoever reason, on the occasion of this Contract’s implementation by ELEPHANT TALK or its subcontractors.

 

20.6 At all times the contracts executed with third parties relating to the rendering of services must respect the rights and obligations laid down in this document.

 

21. ENVIRONMENTAL OBLIGATIONS

 

21.1 ELEPHANT TALK expressly undertakes to fulfill all the legislation with an environmental content that may apply to it in relation to the activities whose execution results from this Contract’s performance.

 

21.2 Likewise, as established in the prevailing legislation, it undertakes to adequately manage and treat all classes of toxic and hazardous waste that may originate in or result from any activity directly or indirectly related to this Contract’s performance and, in particular, it undertakes to carry out in respect thereof and pursuant to the applicable legal provisions all the specific activities that may be required, be they management, storage, treatment or any other.

 

25
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

21.3 In the same way, ELEPHANT TALK expressly undertakes to comply with the obligations specified below, without prejudice to complying in full with any other obligations that may be imposed on it by a valid legal provision applicable to the activities established through this Contract, the inadequate treatment of which may have repercussions on or affect the environment. Consequently, ELEPHANT TALK agrees to commit itself to:

 

21.3.1 Carry out all the activities entrusted to it by VEE as a result of this Contract, strictly complying with the principles and guidelines deriving from the Environmental Policy and guidelines of the Environmental Management System implanted by VEE, the full content of which it declares it knows.

 

21.3.2 To make available to VEE all the information required of it in relation to any impact or incidence on the environment resulting from the activities, the execution of which results from this Contract, and, as and when applicable, to submit to whatsoever inspection, verification or measurement of such effects, either by VEE or any third party designated by the latter and, in particular, with respect to the generation of waste, its treatment, the emission of noise or other obnoxious elements into the atmosphere and any other similar effects that by virtue of the applicable legislation require specific activities.

 

21.3.3 As established in Spain’s Law 22/2011 of 28 July of Waste and contaminated soils (hereinafter, the “Waste Act") and all other applicable provisions that apply or replace it, to manage and subsequently treat the waste generated during the performance of the activities established by means of this Contract and to hand over to VEE the corresponding documentation supporting the generated waste’s correct management.

 

21.3.4 To draw up and, when applicable, send to VEE, at its request, a study of the environmental impact resulting from whatsoever activity, the execution of which results from this Contract, with the minimum content indicated in Annex N.

 

21.3.5 ELEPHANT TALK shall be responsible for any infringements or sanctions that may be attributed to it on the grounds of violation of the applicable environmental legislation, without being able to charge to VEE any amount or charge for these concepts. Likewise, it expressly accepts the responsibility that within any scope may be attributed to it for whatsoever infringement of the applicable environmental legislation relating to the contracted activities and, in particular, in respect of the generation of an environmental impact, whether in the handling of the materials or products used for the execution of any activity resulting from this Contract or their inadequate management, storage or treatment.

 

21.3.6 ELEPHANT TALK undertakes to adopt all the preventive measures it considers appropriate so as to avoid any negative impact or incidence on the environment during the execution of the work resulting from this Contract, with all charges deriving from the attribution of responsibility for the infringements that derive there from being for its account, whether due to non-fulfillment of the regulations applying to the specific activity or any other, without being able to attribute to VEE any responsibility for these concepts.

 

26
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

21.3.7 Prior to the start of the work resulting from the execution of this document, it undertakes to sign the appropriate contract with a Waste Management Company authorized by the corresponding Regional Government, pursuant to the terms and conditions of the Waste Act and other provisions that apply or replace it, in relation to the management of the waste generated during the performance of the work or activities required of it as per the provisions of this Contract.

 

21.3.8 VEE reserves the right to demand from ELEPHANT TALK the presentation of at least one copy of the contract signed with the authorized Waste Management Company and the handing over of the documents that, pursuant to the applicable prevailing provisions in this respect, may be required of it subsequent to the completion of execution of the tasks resulting from this Contract’s performance.

 

21.3.9 ELEPHANT TALK shall be responsible for applying all the corrective measures it considers necessary to avoid the production of whatsoever impact or incidence on the environment during the execution of the work that is the object of this Contract.

 

21.3.10 Similarly, in the event of whatsoever impact, incidence or violation of the environmental legislation applicable to any activity, the execution of which results from this Contract, it undertakes to adopt the corrective measures that may be necessary to minimize or remedy them.

 

22. SUBSIDIARY RESPONSIBILITY

 

22.1 For the purpose of the exception of Section 43.1 f) of Spain’s General Tax Law 58/2003 of 17 December 2003, a certificate issued by the Tax Administration demonstrating that ELEPHANT TALK is up-to-date in the payment of its tax obligations is attached as Annex L.

 

22.2 For the purpose of avoiding the declaration of subsidiary responsibility of VEE relating to the rule of law referred to in the preceding paragraph, within the terms and with the requirements laid down in the aforementioned Section 43.1 f) of the General Tax Law and the regulations for its application, ELEPHANT TALK must send to VEE the appropriate certificate demonstrating that it is up-to-date in the payment of its tax obligations.

 

22.3 Should VEE not receive such Certificate within the twelve (12) months prior to the moment at which VEE must make the payment, it shall be empowered to withhold the amount that must be paid until it receives such Certificate and under no circumstances can interests accrue on the withheld amount for delayed payment.

 

22.4 For the purpose of the exception of Article 42.1 of Royal Legislative Decree 1/1995 of 24 March 1995 of Spain’s Law of the Workers’ Statute, a negative Certificate of arrears issued by the Labor Administration demonstrating that ELEPHANT TALK is up-to- date in the payment of its labor obligations is attached as Annex L.

 

27
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

23. MISCELLANEOUS

 

23.1 The Parties may add rectifications, amendments and annexes or appendices to this Contract, which shall be binding on them as from the date of effect, always provided that such rectifications, amendments and annexes are set down in writing, signed by an authorized representative for the Parties and is incorporated into the Contract.

 

23.2 Except for the written rectifications, amendments and annexes made after the Contract’s execution, this Contract represents the complete agreement reached by the Parties and invalidates all previous verbal and written negotiations, declarations and agreements.

 

23.3 Throughout the validity of this Contract and for one year thereafter, VEE undertakes not to hire, through a labor or mercantile contract, directly or indirectly, whenever it has knowledge thereof, the employees of ELEPHANT TALK relating to the rendering of the services under this Contract, unless express agreement of the parties.

 

23.4 Each Party shall meet the charges and costs of all types caused to it as a result of the negotiation and signing of this Contract.

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Main Body of the Contract, in duplicate and for a single purpose, on the date indicated ut supra.

 

 

28
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

Signed: Mr. José Da Silva Dourado Neves                                 Signed: Mr. Mark Dirk Marin Nije
/s/ José Da Silva Dourado Neves                                               /s/ Mark Dirk Marin Nije
For: VODAFONE ENABLER ESPAÑA, S.L . For: ELEPHANT TALK EUROPE HOLDING, BV

 

29
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex A. Services for the End Customers of the Virtual Mobile Operators (VMOs) of VEE

 

Annex A. Services for the End Customers of the Virtual
Mobile Operators (VMOs) of VEE

 

 
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex B1. Support Services for the Virtual Mobile Operators (VMOs) of VEE

 

Annex B1. Support Services for the Virtual Mobile
Operators (VMOs) of VEE

 

 
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex B2. Support Services for VEE Operations

 

Annex B2. Support Services for VEE Operations

 

 
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA
S.L. (VEE) and ELEPHANT TALK EUROPE, HOLDING
BV. FOR THE PROVISION OF TECHNICAL AND
OPERATIVE SERVICES

 

Annex C. Technical Annex

 

1 st November 2013

 

 
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

1. Object and scope of the Annex

 

The present document defines the technical conditions applicable to the Contract signed between VEE and ELEPHANT TALK for the provision of technical and operative services, to which thus Annex is part of , and that comprises the following

 

· General technical requirements (Section 2)

 

· Services requirements (Section 3)

 

· Information systems requirements (Section 4)

 

· Network requirements (Section 5)

 

· Operation and Maintenance requirements (Section 6)

 

2. General technical requirements

 

The final network solution implanted by ELEPHANT TALK will include at least the following platforms:

 

· [*]

 

[*]

 

The design and implantation of the system and network architecture, must guarantee the availability of equipment and applications as well as other quality parameters according to the standards recommendations and to the applicable regulation. All critical network elements ( [*] ) must be redundant without any unique point of failure.

 

VEE's Host MNO (Hsot MNO) will be able to communicate in advance any change in its network architecture that could affect to the quality of technical services provided through the contract. Additionally, the Host MNO will be able to communicate, in advance, the changes that others may be required to do to avoid the mal function, deterioration or degradation of the services.

 

The technical solution must fulfill the following conditions and requirements:

 

a) The MNO Host will provide to VEE with:

 

· Radio Access

 

· Incoming and outbound interconnections. However, when the volume of Interconnection traffic justifies it, VEE could also choose to establish direct interconnection with operators. The direct points of interconnection with other networks, including IP connections, will be made in Co-locations of the carrier house in which both ELEPHANT TALK and the Host MNO Host have points of presence (POP), unless it is differently agreed by the Parties. In case a Party forces a change of location or the opening of a new POP, it will have to compensate to the other Party with an amount equivalent to the generated costs, except it is differently agreed by the Parties. Any change of location and/or opening of new POP will have to be approved by both Parties.

 

1 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

· International roaming service . The Host MNO will also provide national roaming service of in those zones where it has network sharing agreements with other operators. ELEPHANT TALK will have to configure its infrastructure adequately to support this service according with the information provided by VEE. This configuration must occur, at most, in thirty (30) calendar days following its receipt by ELEPHANT TALK.

 

b) [*]

 

c) [*]

 

d) [*]

 

e) [*]

 

f) [*]

 

g) ELEPHANT TALK assumes the commitment to deploy and to operate the infrastructure (network elements and information systems) required by VEE to support the portfolio of services according to the called “Full MVNE” model. Particularly, it is required that ELEPHANT TALK commits to the:

 

· [*]

 

h) [*]

 

i) [*]

 

[*]

 

ELEPHANT TALK’s technical solution and services proposal will also include the functionalities and services described in the following chapters of this document. [*]

 

Any implementation, adjustment o maintenance request will be based in the process described in Annex E (sections 3 and 4).

 

2 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

3. Services Requirements

 

3.1. SIM Profile

 

[*]

 

3.2 . [*]

 

3.3. [*]

 

3.4. [*]

 

3.5. [*]

 

3.6. [*]

 

3.7 [*]

 

3.8. [*]

 

3.9. [*]

 

3.10. [*]

 

3.11. [*]

 

3.12. [*]

 

3.13. [*]

 

3.14. [*]

 

3.15. [*]

 

3.16. [*]

 

3.17. [*]

 

3.18. [*]

 

3.19. [*]

 

3.20 [*]

 

3.21. [*]

 

3.22. [*]

 

3 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

3.23. Data retention normative

 

ELEPHANT TALK will support all the requirements of the Spanish regulation on data retention which is mandatory and applicable to thick model MVNOs.

 

3.24. MMSC portability check
   
[*]  
   
3.25. MMSC standards
   
[*]  
   
3.26. MMSC interconnection
   
[*]  
   
3.27. MMS charging
   
[*]  
   
3.28. MMS Lawful Interception
   

ELEPHANT TALK's MMSC will have Lawful interception capabilities.

 

4. Information Systems development

 

4.1. Provisioning

 

[*]

 

4.2 Mediation

 

As a general rule the technical solution should produce its own CDRs (except post-paid roaming CDRs from Vodafone). CDR's will be used for reconciliation, and rating and billing for post-paid as well as litigation.

 

ELEPHANT TALK must be prepared to send to VEE’s wholesale billing system all CDRs generated within ELEPHANT TALK’s equipment, in the format and periodicity requested by VEE. These CDRs will cover all traffic cases requested by VEE. The current format and periodicity of the CDRs is defined in Annex B.2.

 

4.3 Portability

 

The system should provide a standalone (independent from the Host MNO) solution for the management of the Mobile Number Portability (MNP) requests and incidences concerning the MVNO’s hosted by VEE. This solution needs to have direct communications with the MNP platforms of other MNO’s (including the Host MVNO) according to Spain MNP Regulation, and be prepared to evolve to a centralized reference entity, according to the conditions defined in Annex B1 of the Contract.

 

The solution must be also prepared to exchange numbering files with other MNO’s through the Host MNO, if required (e.g. recuperation of MVNOS numbers that have been ported to other operators and have been cancelled afterwards)

 

4 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

4.4 Top-up

 

The solution should not require any top-up interface to the Host MNO unless it is authorized by VEE. Top-up methods should include vouchers (both via USSD and IVR), web based, ATM/POS integration

 

4.5 Retail billing

 

The proposed solution should be capable of performing retail billing

 

4.6 Wholesale billing

 

The proposed solution should be capable of performing wholesale billing on behalf of VEE, in the terms described in Annex B2 of the Contract.

 

4.7 Reconciliation

 

The system must be capable of performing the reconciliation between retail and wholesale billing. The report should be generated on a monthly basis.

 

4.8 Back-office systems

 

The solution must provide back-office systems providing full MNVO services. MNVO should get full control over their own business and customers

 

4.9 Financial reporting

 

The system must be capable of generating all the financial information required by the Host MNO or by the MVNOs hosted by VEE, according to local regulation and in the terms described in Annex B2 of the Contract.

 

4.10 Data Warehouse

 

[*]

 

4.11 Fraud management in roaming

 

[*]

 

5. Network Requirements

 

5.1. Portability

 

ELEPHANT TALK's solution will support the number portability processes according to the technical specifications set by the Comision del Mercado de las telecomunicaciones. VEE will provide this documentation to ELEPHANT TALK in order that ELEPHANT TALK elaborates the technical specifications and executes the necessary developments.

 

5 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

The initial cope of the Contract includes mobile number portability according to current architecture and of the first version of the centralized architecture that will put into services, most probable in 2010. [*]

 

[*]

 

VEE will provide ELEPHANT TALK the necessary information for the initial charge of the data base of portability. As of that moment, ELEPHANT TALK will have to be able to support the number portability functionality of in an autonomous way.

 

5.2. Capacity

 

All network elements will be sized and scaled in order to shelter the subscribers assuring quality of service according to Standards and current Regulation, based in VEE's forecast.

 

5.3. Robustness and redundancy

 

All the critical Network elements ( [*] ) must be redounded without having a single point of failure that affects the network stability so that the necessary robustness is maintained. This concept of redundancy implies functional redundancy (resilient services), redundancy of physical location (equipment with same functionalities must be located in different locations), redundancy of the transmission (the redundant ways of transmission will be separated and they will not share common fiber ring sections, carriers, etc).

 

5.4. Functionality

 

ELEPHANT TALK will deliver the following functionalities at service delivery date :

 

· [*]

 

5.5. Location Based Services

 

ELEPHANT TALK will carry out the necessary developments to offer and basic location services and applications to the MVNO’s clients. These developments will include the management of the end customer’s privacy, integration of third parties and any other aspect related to these applications.

 

The location services provided by ELEPHANT TALK [*] .

 

[*]

 

6 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

5.6. Policing

 

[*]

 

5.7. Treatment of events (Tones and announcement/release causes)

 

Generally the ELEPHANT TALK will play the announcements, inclusively when the release cause will be in the Host MNO, in this case, the Host MNO will send the release cause to ELEPHANT TALK’s network in order to allow him to play the announcement.

 

Only there will be few cases, in which the call will not be delivered by the Host MNO to ELEPHANT TALK (e.g. congestion). In this event the announcement will be played in the Host MNO’s Network.

 

5.8. Short codes

 

ELEPHANT TALK will be able to handle voice calls to short codes.

 

For geographical short numbers, the Host MNO will deliver the call to ELEPHANT TALK with the translated long number as B number

 

According to Spanish regulation, calls to certain short numbers must not appear in the bill (i.e. 016)

 

5.9. Infrastructure

 

The network solution diploid by ELEPHANT TALK must include at least the following nodes:

 

· [*]

 

[*]

 

5.10. Transmission interface

 

[*]

 

5.11. [*]

 

  5.12. [*]

  

 

7 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

5.13. Interconnection MAP

 

[*]

 

5.14. CAMEL Signaling

 

The Host MNO will route CAMEL messages to ELEPHANT TALK’s network at SCCP level. [*] .

 

5.15. Signaling GT encoding in GSM/GT applications

 

Global Title encodings will be performed in both networks, Host MNO's and ELEPHANT TALK’s, [*] .

 

[*]

 

5.16. Signaling routing

 

ISUP signaling will be routed in DPC, and MAP signaling will be routed in Global Title.

 

5.17. Signaling NI

 

The MSC network indicator for signaling will be set to 2 (national).

 

The network indicator in the STP for signaling will be set to 0 (International).

 

5.18. Interconnection Voice Routes

 

Circuits of 2Mb defined between the HOST MNO and ELEPHANT TALK at each interconnection point agreed in CTI will be gathered in a unique beam.

 

Differentiated routes will be set up for access and interconnection traffic between the Host MNO and VEE.

 

VEE can establish interconnection agreements with other operators different from the Host MNO. In these cases ELEPHANT TALK could establish direct interconnection routes with these operators, according with the conditions indicated in section 2 about the direct interconnection with other operators.

 

5.19. Interconnection ECHO cancellers

 

Enabling of Echo cancellers in the Host MNO and ELEPHANT TALK’s networks will be performed according to procedure for control of echo defined in General Specification of Integrated Services User Part (ISUP) EG.S3.003.

 

8 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

5.20. Synchronization interface

 

According to UIT-T Recommendation G.803, normal operation mode among operators is pseudo synchronism that does not require that all clocks be synchronized with the same primary reference (PRC) but that operators can be synchronized with different PRCs if they fulfil ITU-T Recommendation G.811. According to previous paragraphs, the Host MNO and ELEPHANT TALK’s network will not be synchronized with each other at first, that is, synchronism signals will not be transmitted in the interconnection.

 

In order to guarantee a correct operation, that is a low number of sliding by time period, border exchanges will have synchronization units according to UIT-T Recommendation G.812 and will be synchronized in relation to a PRC.

 

5.21. Roaming & International interconnection

 

In order to guarantee the roaming and SMS/MMS IW services, ELEPHANT TALK’s network nodes with external visibility should be within the numbering plan of the Host MNOS (HLRs, SCPs, SMSCs).

 

Host MNO will act as international SCCP carrier for ELEPHANT TALK.

 

The roaming service is based on the use of SIMs with an specific range of the E.212 21406- provided by the Host MNO, accordingly, the virtual customers will use a range provided by the Host MNO so it will be application the same agreements that the Host MNO has for it direct customers.

 

If the Host MNO has no Camel roaming out agreement with a roaming partner with the network 21406-, then ELEPHANT TALK should be able to bar the outgoing calls and SMS coming from their prepaid subscribers roaming in that roaming partner. Most of the Camel roaming out agreements that the Host MNO has in place are based on CAP phase 1. This must be taken into account when defining IN services.

 

In order to guarantee that the VEE’s customers can use the same SMS IW agreements that the Host MNO offers, ELEPHANT TALK’s SMSC should be able to split traffic by country code and therefore forward SMS traffic to specific country codes to the Host MNO’s SMS hubs

 

For all the roaming partners to have access to the ELEPHANT TALK's packet network, the Host MNO will assign IP public addresses to its packet network elements (SGSN, DNS, GGSN, MMSC) and advertise them into the GRX network by the Host MNO’s.

 

VEE will provide ELEPHANT TALK the necessary support to test this functionality.

 

5.22. Lawful interception

 

ELEPHANT TALK’s HLR must accept ATI requests.

 

9 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

5.23. IP Environment

 

5.23.1. Physical interconnection

 

The Physical interconnection between ELEPHANT TALK and VEE will be performed in two locations when it is justified according to the traffic and service and critical factor.

 

The Point of Interconnection will be made up of two firewalls and a border gateway in ELEPHANT TALK's side.

 

At logic level, the interconnection will be based on a main and a backup connection with automatic switching.

 

5.23.22. Routing protocols

 

[*]

 

5.24. GPRS and HLR features

 

[*]

 

5.25. DNS features

 

[*]

 

5.26. GGSN features

 

[*]

 

5.27. [*]

 

5.28. WAP Gateway

 

[*]

 

10 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

6. Operations and Maintenance Requirements

 

6.1. ELEPHANT TALK -MVNO Interface

 

ELEPHANT TALK will be the unique interface to MVNO for support to fault management and communication of planned works (in its own or in the Host MNO's network) that affect MVNO customers service.

 

6.2. Tools for the MVNO

 

ELEPHANT TALK assumes the management, operation and maintenance of applications offered to the MVNOs. ELEPHANT TALK will also operate and maintain the systems that hosts these applications.

 

6.3. Planned work communication to MVNO

 

ELEPHANT TALK will communicate planned works to the MVNO and provide communication tools if needed.

 

6.4. Individual incidences management MVNE-MVNO

 

ELEPHANT TALK will provide the individual incidences management tool to the MVNO. ELEPHANT TALK will manage single customer incidences with the MVNO. VEE will share its experience with ELEPHANT TALK for the managing of these incidences. VEE will establish formula to prevent the incorrect filtering of incidences by the MVNO,

 

6.5. General incidences management ELEPHANT TALK -MVNO

 

ELEPHANT TALK will provide the general incidences management tools to the MVNO. ELEPHANT TALK will manage general incidences with the MVNO. VEE will share its experience with ELEPHANT TALK for the managing of these incidences

 

6.6. Notification of general faults ELEPHANT TALK - MVNO

 

ELEPHANT TALK will provide the general incidences notification tool to the MVNO. ELEPHANT TALK will notify any general incidence that affect the service to the MVNO's customers, whenever the Host MNO requires so. VEE will share its experience with ELEPHANT TALK for the managing of these incidences

 

11 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

6.7. ELEPHANT TALK - Host MVNO, O&M point of contact

 

Both the Host MNO and ELEPHANT TALK will define in their technical O&M teams a single point of technical contact for the management of incidences an tickets, as well as for the coordination of maintenance activities. This technical teams will be referred as OSPOC (Operational Single Point Of Contact).

 

Both OSPOC will be formed by technical profile team, with policing and mobile network architecture knowledge.

 

The relations between ELEPHANT TALK and the Host MNO will be carried through the tools provided by the Host MNO

 

6.8. Planned works MVNE-Host MNO

 

ELEPHANT TALK shall communicate the Host MNO any planned works within its network that affects the interconnection to the Host MNO and/or service to MVNO. Planned service outages shall be communicated 5 days in advance.

 

ELEPHANT TALK will use e-mail to notify planned works. The e-mails should be sent to the OSPOC e-mail address.

 

The Host MNO will provide ELEPHANT TALK tools to notify those access network changes that affect the service to the MVNO customers.

 

6.9. Single customer incidences ELEPHANT TALK-Host MNO

 

No single customer incidents (subscriber complaints) must be reported to VF.

 

6.10. General incidences management ELEPHANT TALK-Host MNO

 

For general incidences management, Host MNO's Trouble Ticketing tool will be used according to the Host MNO's security policy.

 

6.11. Notification of general incidences ELEPHANT TALK-Host MNO

 

The Host MNO will notify ELEPHANT TALK those incidences in the access network that notoriously affect the service to the MVNO's customers For it, it will use the incidences notification tool provided by the Host MNO. ELEPHANT TALK will notify these incidences to the MVNO when the Host MNO requires it.

 

ELEPHANT TALK will inform the Host MNO by e-mail and telephone, of those notorious incidences in their network that affect the end-to-end service of the MVNO through mail and telephone. For it, it will use the contacts defined in the OSPOC escalation matrix. ELEPHANT TALK will notify these incidences to the MVNO when the Host MNO requires it.

 

12 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

In case of critical incidences, the Host MNO will be able to require ELEPHANT TALK detailed technical reports about the cause and development of the incidence.

 

6.12. Follow-up Meetings ELEPHANT TALK-Host MNO

 

ELEPHANT TALK shall hold periodical Service Review Meetings with the MVNO and the Host MNO . These meetings are intended to review service operation and maintenance status, main faults and so on. The Parties will determine the periodicity and the content of these meetings.

 

The meeting will be held in Spain in the placed established by VEE.

 

6.13. Periodic reports

 

ELEPHANT TALK shall generate and distribute to both the MVNO and to Host MNO periodic reports with the figures of the main key performance indicators (KPIs). A list of required indicators will be provided by Host MNO. Minimum KPIs to be provided are defined in Appendix 2 (“Main service indicators (KPIs)”) of this Annex. VEE will obtain any Host MNO's indicators if they are required for generation of the periodic reports,

 

6.14. Escalation hierarchy

 

· The escalation is made through a SPOC (Single Point of Contact) group with an unique telephone, fax and e-mail.

 

· Both the ELEPHANT TALK SPOC and the Host MNO SPOC will have homologous levels for escalation in 24x7. It will be the Host MNO responsibility to define these levels of escalation.

 

· It is also necessary that ELEPHANT TALK defines with the MVNO with 24x7escalation matrix, Those matrix should be accessible for the Host MNO.

 

6.15. Escalation of general faults ELEPHANT TALK-Host MNO

 

ELEPHANT TALK will have to solve the incidences occurred in its own network without intervention or technical consultancy from the Host MNO, and no incidence should to be scaled to the Host MNO until it is technically demonstrated that the network of the Host MNO is involved.

 

ELEPHANT TALK will have to notify to MNO Host those notorious incidences of their network that impact the service. It will be necessary to indicate the cause of the incidence, the impact to the service and the considered time of resolution.

 

13 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

6.16. Radio Coverage information

 

The radio coverage that the Host MNO offers to the MVNO will be equivalent to that offered to its own customers. ELEPHANT TALK shall not escalate any individual coverage incident to the Host MNO. ELEPHANT TALK/MVNO's call center shall be able to manage this type of individual incidents so that they are not forwarded in any case to the Host MNO. For it, they will use the NC coverage tool of provided by the Host MNO.

 

6.17. Call Trace

 

ELEPHANT TALK must have a call trace tool to obtain necessary information to solve and/or report faults appeared in the Host MNO interconnection and/or to report them in the incidence was in the access network.

 

The usage of this tool should not affect the service in any case.

 

6.18. Monitoring

 

ELEPHANT TALK must implement end-to-end service monitoring (eg. Voice success rate, data success rate, SMS success rate PDP context success rate,…) and end-to-end application monitoring (eg. Top-up success rate, provisioning success rate, CDRs generation, …)

 

6.19. ELEPHANT TALK's Support

 

24x7 ELEPHANT TALK support needed for resolution of critical faults.

 

24x7 ELEPHANT TALK support needed for resolution of major general faults and single customer incidents.

 

6.20. ELEPHANT TALK's language for communication language

 

For any type of interaction with the MVNO, except for scaled incidences (Ej.: programmed, , works, reports, etc…), MVNE (ELEPHANT TALK) will use Spanish or English as language for communications, according to the MVNO's preferences.. Scaled incidences will be done in English.

 

ELEPHANT TALK can use English or Spanish in the communications with VEE and the Host MNO.

 

7. Service level associated to technical aspects

 

The Appendix 2 of this Annex will be applicable.

 

* * *

 

14 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

And in witness of their conformity with all the foregoing, both appearing parties, in the representation in which they take part, sign this Annex C in two copies and to a single purpose on the date indicated in the heading,

 

Fdo: D. José Paulo Da Silva Dourado Neves Fdo: D. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
Por VODAFONE ENABLER ESPAÑA, S.L. Por ELEPHANT TALK EUROPE, HOLDING BV
 

 

 

15 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

Appendix 1: ICCID and IMSI formats

______________________________________________________

 

Technical report

 

Mobile Network Virtual Enabler (MVNE): ICCID & IMSI formats

 

Reference Date  
TET_Enabler_IMSI&ICCID_format_(commercial)_v1.0 008/10/01  
Department Prepared  
Handsets & SIM Cards    
Author    
Jimenez, Jose Angel, VF-ES (jjimenef)    

 

C3 – confidential

 

Description

 

The following information applies to COMMERCIAL cards ONLY

 

· [*]

 

16 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

Appendix 2: Service Levels on and main Key Performance indicators on (KPIs)

 

ELEPHANT TALK will provide the technical and operative services so that the services rendered by the MVNO to the end users fulfill the mobile telephony quality of service obligations that are required by the applicable regulation to this type of operators at any time. Specifically, special attention will be made to the indicators defined in tables 1, 2and 3

 

Table 1

 

[*] [*] [*] [*]
[*]

[*]

 

 

 

[*]

 

 

 

[*]

 

 

 

[*] [*] [*]

[*]

 

 

 

[*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]

 

[*]

 

17 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. and ELEPHANT TALK COMMUNICATIONS, HOLDING AG. FOR
THE PROVISION OF TECHNICAL AND OPERATIVE SERVICES

Annex C. Technical aspects

 

Table 2

 

[*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]  
[*] [*] [*] [*] [*] [*]  
[*] [*] [*] [*] [*] [*]  
[*] [*] [*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  
[*] [*] [*] [*]  

 

[*]

 

Table 3

 

[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]

 

[*]

 

18 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA,
S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR
THE SUPPLY OF OPERATION AND TECHNICAL
SERVICES THROUGH A COMPREHENSIVE
TECHNOLOGICAL PLATFORM

 

 

 

 

 

Annex D: Economic Terms and Conditions

 

 

 

 

 

1 st November 2013

 

19 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

1. Object and Scope of the Annex

 

This document defines the economic terms and conditions that apply to the Contract signed by VEE and ELEPHANT TALK for the supply of operation and technical services, of which this Annex forms a part, and which comprise the following:

 

· General economic terms and conditions

 

· Prices for the rendering of services

 

· Penalties for non-fulfillment of the service level (SLA)

 

· Invoicing and payment terms and conditions

 

· Fiscal clause

 

2. General Economic Terms and Conditions

 

In accordance with the conditions laid down in the Main Body of the Contract:

 

a. VEE undertakes to pay the amounts that correspond for the rendering of services in accordance with the invoiceable concepts and discounts defined in section 3 of this Annex (“Prices for the Rendering of Services”).

 

b. The possibility of applying any other price or consideration other than those contemplated in section 3 of this Annex is expressly excluded, except in the case of a prior agreement between the Parties.

 

c. The Parties undertake to review the valid price and discount amounts on an annual basis, in accordance with the principles established in section 3.

 

d. In the event of non-fulfillment by ELEPHANT TALK of the service levels (SLA, Service Level Agreement) specified in the Contract’s Main Body and Annexes, the penalties described in section 4 of this Annex “Penalties for Non-fulfillment of the Service Level (SLA)”) shall apply.

 

e. Invoicing and payment of the amounts due shall be made in accordance with the provisions of section 5 of this Annex “Invoicing and Payment Terms and Conditions”.

 

20 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3. Prices and Discounts for the Rending of Services

 

3.1 List of billable Concepts, Prices and Discounts

 

In accordance with the Contract’s provisions, for all the services included within its scope, the following concepts are established:

 

1. Virtual Mobile Operators management
2. Special projects
3. Special operations
4. Other services outsourced or delegated by VEE to ELEPHANT TALK

 

Each one of these concepts is defined in detail in the following sub-sections:

 

3.2 Virtual Mobile Operator Management

 

3.2.1 Definitions and General Terms and Conditions

 

3.2.1.1 Implantation of a New Virtual Mobile Operator

 

Before the implantation of a new Virtual Mobile Operator, VEE and ELEPHANT TALK must agree to:

 

· An Implantation Project Plan that clearly specifies the project’s scope in terms of available functionality, detailed work plan and implantation time schedule, in accordance with what is specified in Annex E.

 

· The VMO Model under which implantation and subsequent exploitation are to be carried out and which shall determine the prices to be applied:

 

a. “Complete” Model
b. “Minimum” Model
c. “Minimum” Model for MVNO migrated to VEE from any company pertaining to the VODAFONE Group to VEE
d. M2M “complete solution” MVNO Model
e. M2M “minimum solution” MVNO Model
f. Small size ( [*] ) for "complete" solution MVNO Model
g. Small size ( [*] ) for "minimal" solution MVNO Model
h. Special Models (other models not detailed above, large-size VMO and customized projects)

 

21 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

Possible non-fulfillment of the implantation SLA (e.g. in the event of an unjustified delay occurring in the planned RFS date attributable to ELEPHANT TALK) shall involve the application of the corresponding penalties, as described in section 4 of this Annex (“Penalties for Non-fulfillment of the Service Level (SLA)”).

 

3.2.1.2 Exploitation of a Virtual Mobile Operator

 

The RFS milestone also marks the official start-up of the support services to the VMO and, consequently, the start of application of the active services’ monthly maintenance fees that may apply, in accordance with the VMO Model and the operating conditions.

 

The monthly maintenance fees shall apply up to the date of the VMO’s final de-registration, which marks the official end of the hired support services.

 

 

3.2.1.3 Definition of “Active Service”

 

The monthly maintenance fee is invoiced per “active service” (SA) and is expressed in euros per active service and month (€/SA month).

 

An “active service” is an IMSI / MSISDN duple provisioned in the platform’s HLR and which is found in one of the statuses corresponding to a service that has been sold to and is used by the end customer and which is still in condition to be used by that customer. The exact list of the “statuses” deemed to be “active” in the life cycle of a prepayment or post-payment mobile service is the following:

 

· For prepaid services, he following lifecycle States: active, inactive, disabled and frozen, are taken into account
· For postpaid services, the following lifecycle States: active and frozen, are taken into account

 

22 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

The definition of the lifecycle and the meaning of each of the States is attached as Appendix 1 to the present annex.

 

The number of active services in an invoicing period (SA AOP ) shall be calculated as [*] :

 

[*]

 

3.2.1.4 Inactivity Rate

 

Any service (understood as an MSISDN-IMSI duple) provisioned in the HLR and which is one of the statuses defined as non-active shall be deemed to be a non-active service (SNA i ) .

 

At any given moment, a check must be made to ensure that all the services (MSISDN-IMSI duples) provisioned in the HLR (STot i ) shall be equal to the sum of the active services (SA i ) and non-active services (SNA i ) .

 

[*]

 

If the inactivity rate (TInac) of a VMO is less than [*] or the sum of the number of non-active services of all the platform’s VMOs is kept below [*] , then [*] shall be generated for the inactive services.

 

[*]

 

In accordance with the foregoing, if the sum of the average number of excess non-active services of all the platform’s VMOs for a calendar month does not exceed [*] .

 

If otherwise, that is, when:

 

[*]

 

For each VMO, the following amount shall be paid as excess inactivity:

 

[*]

 

Where: [*] is the [*] which is defined below in the second sub-section of each VMO Model (3.2.2.2, 3.2.3.2, 3.2.4.2, 3.2.5.2, 3.2.6.2, 3.2.7.2, 3.2.8.2).

 

3.2.1.5 Average Monthly Data Traffic

 

Certain Models can establish limits on the average monthly data traffic the VMO’s active services carry out in the invoicing period.

 

[*]

 

23 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.2 “Complete” Model

 

In this is Model for the implantation and exploitation of new VMOs, no type of restriction relating to the operating or system support level, volume of active services or range of services made available to the end customer, is defined, with the sole exception that the average monthly data traffic of the VMO (defined in section 3.2.1.5) may not exceed the value of [*] MB/SA∙month, t o the contrary as what happens with the others.

 

The detailed list of services included in this Model shall be included in Annexes A (VMO end customer Services), B1 (Services for the VMO) and B2 (Services for VEE) and shall coincide with the definition of the “Full HW/SW solution” Model.

 

3.2.2.1 VMO Implantation Fee

 

The implantation fee in this Model is established at [*] €/VMO .

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

24 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.2.2 Monthly Active Service Maintenance Fee

 

The total general monthly active service maintenance fee (CMM Tot ) is calculated by multiplying the period’s average number of active services (SA AOP ) – as defined in section 3.2.1.3 – by the monthly unit maintenance fee (CMM(SA AOP )):

 

CMM Tot = SA AOP ∙CMM(SA AOP )

 

The monthly unit maintenance fee (CMM(SA EOP )) is calculated on the basis of the average number of active services in the invoicing period (SA AOP ) , as established in the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·month
[*] £ x < [*] [*] €/SA·month
[*] £ x < [*] [*] €/SA·month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
[*] £ x < [*] [*] €/SA· month
x ³ [*] [*] €/SA· month

Table 1. Monthly Unit Maintenance Fee for the “Complete” Model

 

Example of application : in the case that a VMO under the "complete" model has an average number of active services ( SA AOP ) of [*] in a given billing period, ELEPHANT TALK will invoice VEE with the concept of monthly maintenance fee for active services for that OMV, the following amount: [*] .

 

25 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

In those cases in which the VMO’s average number of active services is equal to or greater than an established limit ( [*] ) during more than [*] consecutive invoicing periods, VEE may request an improvement in the maintenance prices applicable to the excess services over and above the established limit, being agreed by the parties a reduction revision of at least a [*] over the unitary monthly fee of the last step.

 

The prices listed in the above table are valid if the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) is less than or equal to [*] MB/SA·month .

 

Where the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) is more than [*] MB/SA·month, the following increments over the previous table will apply:

 

MB/month Incremental cost over SIM price (€)
[*] [*] [*]
[*] [*] [*]
[*] [*] Gb [*]
> [*] Gb [*]

 

 

Figure 1. Monthly Unit Maintenance Fee for the “Complete” Model

 

26 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.2.3 Other Monthly Fees

 

Only in the case of VMOs that contract the “generation of prepayment or post-payment invoice / historic record of usage for the end customer” service, a monthly fee of [*] €/month is defined for each active service that enjoys this service in the invoicing period in question.

 

No other monthly maintenance fees shall be applied, except in the case of a prior agreement between the Parties.

 

3.2.2.4 Minimum Monthly Invoicing and Accrual of Monthly Fees

 

As from the RFS date and until the VMO’s de-registration date, the minimum monthly amount of the sum of the regular fees in this Model is established at [*] €/VMO∙month . In the case of incomplete months, this amount shall be distributed proportionally by dividing the number of days of operation in the month into the standard month’s duration in days (30 days).

 

This amount includes all the regular payments for the rendering of services that may be established for the VMO.

 

The different monthly fees shall accrue on the last day of the invoicing period in question.

 

27 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

 

Figure 2. Monthly Fee for “Complete” Model VMO based on the Number of Active Services

 

So as to avoid zigzags, the Parties agree to apply linear interpolation between the slope change points on the curve.

 

3.2.3 “Minimum” Model

 

This Model is similar to the previous one (“Complete” Model), with the sole difference being that the VMO, instead of [*] , shall only have an [*] to access the functionality at its disposal, as specified in the following paragraph. As in the “Complete” Model, the average monthly data traffic of the VMO (as per the formula established in section 3.2.1.5) may not exceed the value of [*] MB/month .

 

The detailed list of services included in this Model shall be included in Annexes A (VMO end customer Services), B1 (Services for the VMO) and B2 (Services for VEE) and shall coincide with the definition of the [*] .

 

3.2.3.1 VMO Implantation Fee

 

The implantation fee in this Model is established at [*] €/VMO .

 

28 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

3.2.3.2 Active Service Monthly Maintenance Fee

 

The total general monthly active service maintenance fee (CMM Tot ) is calculated by multiplying the period’s average number of active services (SA AOP ) – as defined in section 3.2.1.3 – by the monthly unit maintenance fee (CMM(SA AOP )):

 

CMM Tot = SA AOP ∙CMM(SA AOP )

 

The monthly unit maintenance fee (CMM(SA EOP )) is calculated on the basis of the average number of active services in the invoicing period (SA AOP ) , as established in the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
x ³ [*] [*] €/SA·mes

 

Table 2. Monthly Unit Maintenance Fee for the “Minimum” Model

 

29 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Example of application : in the case that a VMO under the "minimum" model has an average number of active services (SAAOP) of [*] in a given billing period, ELEPHANT TALK will invoice VEE with the concept of monthly maintenance fee for active services for that OMV, the following amount: [*] .

 

 

In those cases in which the VMO’s average number of active services is equal to or greater than an established limit ( [*] ) during more than [*] consecutive invoicing periods, VEE may request an improvement in the maintenance prices applicable to the excess services over and above the established limit, being agreed by the parties a reduction revision of at least a [*] over the unitary monthly fee of the last step..

 

The prices listed in the above table are valid if the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) is less than or equal to [*] MB/SA•month.

 

Where the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) is more than [*] MB/SA•month , the following increments over the previous table will apply:

 

 

Figure 3. Monthly Unit Maintenance Fee for the “Minimum” Model

 

30 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.3.3 Other Monthly Fees

 

Only in the case of VMOs that contract the “generation of prepayment or post-payment invoice / historic record of usage for the end customer” service, a monthly fee of [*] €/month is defined for each active service that enjoys this service in the invoicing period in question.

 

No other monthly maintenance fees shall be applied, except in the case of a prior agreement between the Parties.

 

3.2.3.4 Minimum Monthly Invoicing

 

As from the RFS date and until the VMO’s de-registration date, the minimum monthly amount of the sum of the regular fees in this Model is established at [*] €/VMO∙month . In the case of incomplete months, this amount shall be distributed proportionally by dividing the number of days of operation in the month into the standard month’s duration in days (30 days).

 

This amount includes all the regular payments for the rendering of services that may be established for the VMO.

 

The different monthly fees shall accrue on the last day of the invoicing period in question.

 

31 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

 

Figure 4. Monthly Fee for “Minimum” Model VMO based on the Number of Active Services

 

So as to avoid zigzags, the Parties agree to apply linear interpolation between the slope change points on the curve.

 

3.2.4 “Minimum” Model for VMO migrated to VEE from any Company pertaining to the VEE Group

 

This Model makes available to the VMO a level of functionality and support similar to the previous one (“Minimum” Model) but it only applies to the VMOs migrated to VEE from any company belonging to the VEE Group. As in the “Minimum” Model, the average monthly data traffic of the VMO (defined in section 3.2.1.5) may not exceed the value of [*] MB/month .

 

The detailed list of services included in this Model is identical to that of the standard VMO “Minimum” Model defined in the preceding section.

 

3.2.4.1 VMO Implantation Fee

 

The implantation fee in this Model is established at [*] €/VMO .

 

32 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready for Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

3.2.4.2 Monthly Active Service Maintenance Fee

 

The total general monthly active service maintenance fee (CMM Tot ) is calculated by multiplying the period’s average number of active services (SA AOP ) – as defined in section 3.2.1.3 – by the monthly unit maintenance fee (CMM(SA AOP )):

 

CMM Tot = SA AOP ∙CMM(SA AOP )

 

The monthly unit maintenance fee (CMM(SA EOP )) is established as a single value of [*] €/SA month .

 

In those cases in which the VMO’s average number of active services is equal to or greater than an established limit ( [*] ) during more than three consecutive invoicing periods, VEE may request an improvement in the maintenance prices applicable to the excess services over and above the established limit.

 

To the date of signature of the present annex, three MVNO's, have been migrated, being applicable the following prices for each of them, provided that the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) does not exceed the value of [*] MB/month, and that service levels and that the major monthly service indicators (KPIs) listed in Annex C to this agreement are fulfilled and ELEPHANT TALK accredits its compliance in an irrefutable manner with VEE sharing the agreed information agreed monthly between the parties in due time and form:

 

· EROSKI : the unitary monthly maintenance fee (CMM ( SA AOP ) is set to a unique value of [*] €/ SA•month.

 

· LEBARA : the unitary monthly maintenance fee (CMM ( SA AOP ) is set as follows, based on the average number of inbound and outbound minutes completed by each SA AOP :

 

33 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Average (inbound and outbound) minutes  carried by each   SA AOP Incremental cost over the SIM price (€)
< [*] minutes [*]
[*] [*] minutes [*]
[*] [*] minutes [*]
[*] [*] minutes [*]
[*] [*] minutes [*]

 

Table 3.-Unitary monthly maintenance fee for LEBARA.

 

· HITS : the unitary monthly maintenance fee (CMM (SAAOP) is set to a unique value of [*] €/ SA•month.

 

Where the average monthly traffic of the OMV (defined in paragraph 3.2.1.4) is more than [*] MB/SA·month , apply the following increases on prices defined for each migrated MVNO models:

 

MB/month Incremental cost over the SIM price (€)
[*] - [*] [*]
[*] [*] [*]
[*] [*] Gb [*]
> [*] Gb [*]

 

Table 4.- Incremental cost over the SIM price (€) by data usage.

 

3.2.4.3 Other Monthly Fees

 

Only in the case of VMOs that contract the “generation of prepayment or post-payment invoice / historic record of usage for the end customer” service, a monthly fee of [*] €/month is defined for each active service that enjoys this service in the invoicing period in question.

 

No other monthly maintenance fees shall be applied, except in the case of a prior agreement between the Parties.

 

3.2.4.4 Minimum Monthly Invoicing and Accrual of Monthly Fees

 

This Model does not establish a minimum monthly amount for the monthly maintenance payments that may be established for the VMO.

 

34 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

The different monthly fees shall accrue on the last date of the invoicing period in question.

 

3.2.5 M2M complete solution VMO Model

 

This Model is equivalent to the “Complete” Model but with two additional restrictions:

 

· The VMO’s end customer may not make use of voice or video-call services
· The VMO’s end customer may not make use of voice services
· The VMO’s end customer may not make use of SMS services
· The average monthly data traffic of the VMO (defined in section 3.2.1.5) may not exceed the value of [*] MB/month

 

Where the monthly average data usage is exceeded in a given month, the price of the corresponding model shall apply on the SIMs that exceeds the average values.

 

When there is Voice or SMS usage expected, the parties will analyze the model prior agreement, and the price will be between the one reflected in section 3.2.5 (minimum price) and 3.2.2. (Maximum price).

 

In all other aspects, the detailed list of services included in this Model shall coincide with that of the “Complete” Model.

 

3.2.5.1 VMO Implantation Fee

 

The implantation fee in this Model is established at [*] €/VMO .

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready for Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

35 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.5.2 Monthly Active Service Maintenance Fee

 

The total general monthly active service maintenance fee (CMM Tot ) is calculated by multiplying the period’s average number of active services (SA AOP ) – as defined in section 3.2.1.3 – by the monthly unit maintenance fee (CMM(SA AOP )):

 

CMM Tot = SA AOP ∙CMM(SA AOP )

 

The monthly unit maintenance fee (CMM(SA EOP )) is calculated on the basis of the average number of active services in the invoicing period (SA AOP ), as established in the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
x ³ [*] [*] €/SA·mes

 

Table 5. Monthly Unit Maintenance Fee for the “Minimum” Model

 

Example of application : in the case that a VMO under the M”M "complete" model has an average number of active services (SAAOP) of [*] in a given billing period, ELEPHANT TALK will invoice VEE with the concept of monthly maintenance fee for active services for that OMV, the following amount: [*] .

 

In those cases in which the VMO’s average number of active services is equal to or greater than an established limit ( [*] ) during more than three consecutive invoicing periods, VEE may request an improvement in the maintenance prices applicable to the excess services over and above the established limit.

 

36 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

 

  

Figure 5. Monthly Unit Maintenance Fee for the M2M Model

 

3.2.5.3 Other Monthly Fees

 

Only in the case of VMOs that contract the “generation of prepayment or post-payment invoice / historic record of usage for the end customer” service, a monthly fee of [*] €/month is defined for each active service that enjoys this service in the invoicing period in question.

 

No other monthly maintenance fees shall be applied, except in the case of a prior agreement between the Parties.

 

3.2.5.4 Minimum Monthly Invoicing

 

As from the RFS date and until the VMO’s de-registration date, the minimum monthly amount of the sum of the regular fees in this Model is established at [*] €/VMO∙month . In the case of incomplete months, this amount shall be distributed proportionally by dividing the number of days of operation in the month into the standard month’s duration in days (30 days).

 

This amount includes all the regular payments for the rendering of services that may be established for the VMO.

 

37 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

The different monthly fees shall accrue on the last day of the invoicing period in question.

 

 

Figure 6. Monthly Fee for the “Minimum” Model VMO based on the Number of Active Services

 

So as to avoid zigzags, the Parties agree to apply linear interpolation between the slope change points on the curve.

 

3.2.6 M2M minimum solution VMO Model

 

This Model is equivalent to the “minimum” Model but with two additional restrictions:

 

· The VMO’s end customer may not make use of voice or video-call services
· The VMO’s end customer may not make use of voice services
· The VMO’s end customer may not make use of SMS services
· The average monthly data traffic of the VMO (defined in section 3.2.1.5) may not exceed the value of [*] MB/month

 

Where the monthly average data usage is exceeded in a given month, the price of the corresponding model shall apply on the SIMs that exceeds the average values.

 

38 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

When there is Voice or SMS usage expected, the parties will analyze the model prior agreement, and the price will be between the one reflected in section 3.2.5 (minimum price) and 3.2.2. (Maximum price).

 

In all other aspects, the detailed list of services included in this Model shall coincide with that of the “Minimum” Model.

 

3.2.6.1 VMO Implantation Fee

 

The implantation fee in this Model is established at [*] €/VMO .

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready for Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

3.2.6.2 Monthly Active Service Maintenance Fee

 

The total general monthly active service maintenance fee (CMM Tot ) is calculated by multiplying the period’s average number of active services (SA AOP ) – as defined in section 3.2.1.3 – by the monthly unit maintenance fee (CMM(SA AOP )):

 

CMM Tot = SA AOP ∙CMM(SA AOP )

 

The monthly unit maintenance fee (CMM(SA EOP )) is calculated on the basis of the average number of active services in the invoicing period (SA AOP ), as established in the following table:

 

39 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes

 

Table 6. Monthly Unit Maintenance Fee for the “Minimum” Model

 

Example of application : in the case that a VMO under the M2M "minimum" solution model has an average number of active services (SAAOP) of [*] in a given billing period, ELEPHANT TALK will invoice VEE with the concept of monthly maintenance fee for active services for that OMV, the following amount: [*] .

 

In those cases in which the VMO’s average number of active services is equal to or greater than an established limit ( [*] ) during more than three consecutive invoicing periods, VEE may request an improvement in the maintenance prices applicable to the excess services over and above the established limit.

 

3.2.6.3 Other Monthly Fees

 

Only in the case of VMOs that contract the “generation of prepayment or post-payment invoice / historic record of usage for the end customer” service, a monthly fee of [*] €/month is defined for each active service that enjoys this service in the invoicing period in question.

 

No other monthly maintenance fees shall be applied, except in the case of a prior agreement between the Parties.

 

3.2.6.4 Minimum Monthly Invoicing

 

As from the RFS date and until the VMO’s de-registration date, the minimum monthly amount of the sum of the regular fees in this Model is established at [*] €/VMO∙month . In the case of incomplete months, this amount shall be distributed proportionally by dividing the number of days of operation in the month into the standard month’s duration in days (30 days).

 

This amount includes all the regular payments for the rendering of services that may be established for the VMO.

 

The different monthly fees shall accrue on the last day of the invoicing period in question.

 

40 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.2.7 Small size “complete solution” VMO Model

 

They will be considered as "small size" OMV's those VMO whose three-year business plan does not provide for a number of active services exceeding [*] . The detailed list of services included in this model will match the “Complete” model, but with a lower level of customization.

 

The parties will study and agree, case-by-case and in good faith, the best economic model for this model.

 

3.2.8 Small size “minimum solution” VMO Model

 

They will be considered as "small size" OMV's those VMO whose three-year business plan does not provide for a number of active services exceeding [*] . The detailed list of services included in this model will match the “Minimum” model, but with a lower level of customization.

 

The parties will study and agree, case-by-case and in good faith, the best economic model for this model.

 

3.2.9 Special models

 

3.2.9.1 “Large-Size” VMO

 

“Large-size” VMOs shall be deemed to be those whose long-term business plan envisages a number of active services in excess of [*] (or [*] in the case of type M2M VMOs). VEE shall be able to request from ELEPHANT TALK special conditions for this type of VMO under the following general assumptions:

 

· Greater level of personalization
· Greater level of minimum monthly invoicing
· Lower monthly unit maintenance fees

 

3.2.9.2 “Customized” VMO Models

 

In the case of VMOs whose features or needs do not adequately meet any of the foregoing models, VEE shall be able to request a customized offer. In the case of models that can be defined as a hybrid of several of the reference models, the quoted economic terms and conditions must be constructed in accordance with those defined for such reference models (applying qualitative criteria for their interpolation, extrapolation or analogy, as applicable).

 

41 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.3. Reference prices for the extension of the solution to new Vodafone Group OpCos and/or extension to new countries

 

In the case that VEE extends the solution for the provision of technical and operational services to one or more companies of the Vodafone Group and/or extends the solution to another country, and based on the premise that possible extensions are done within the framework of this Contract, a discount in the reference prices for each of the chargeable concepts will apply as follows:

 

3.3.1 VMO Implantation Fee

 

Implementation fee will be set depending on the applicable OMV model. No different price than the one defined for each of the possible models included in paragraph 3.2. of the present Annex will be applied.

 

Example of application : If VEE extends the solution for the provision of technical and operational services to OpCo 1 of the Vodafone Group, and the OMV model to launch is under the full model, as defined in paragraph 3.2.2. of the present Annex, the implantation fee would be € [*] , as defined in paragraph 3.2.2.1. of the present Annex.

 

Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the VMO implantation fee that corresponds according to the model of VMO. The accrual of the [*] remaining of the VMO implementation fee will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation by the VMO, and so is accredited through an act of acceptance Ready For Service (RFS) signed by VEE. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered commercially acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of Ready for Service (RFS) conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

42 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

In addition, the parties agree that, if the number of lines expected in the Business Plan for a particular country is less than [*] lines, ELEPHANT TALK may increase the cited implementation fee to VEE in an amount that will be studied case by case and negotiated and agreed by the parties in good faith.

 

3.3.2 Active Service Monthly Maintenance Fee

 

Active services monthly maintenance fee will be calculated and set depending on the applicable MVO model, taking into account the following premises:

 

· [*]

 

Example of application : If VEE extends the solution for the provision of technical and operational services to [*] , and the OMV model to launch is under the minimum model, as defined in paragraph 3.2.3. of the present Annex, the monthly active service maintenance fee would be calculated with the mechanism described in paragraph 3.2.3.2 of the present Annex and according with the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[* ] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
x ³ [*] [*] €/SA·mes

 

Table 7-monthly unit maintenance fee for the "minimum" model including the [*].

 

43 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

· [*]

 

Example of application : If VEE extends the solution for the provision of technical and operational services to [*] , and the OMV model to launch is under the minimum model, as defined in paragraph 3.2.3. of the present Annex, the monthly active service maintenance fee would be calculated with the mechanism described in paragraph 3.2.3.2 of the present Annex and according with the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
x ³ [*] [*] €/SA·mes

 

Table 8-monthly unit maintenance fee for the "minimum" model including the [*].

 

44 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

· [*]

 

Example of application : If VEE extends the solution for the provision of technical and operational services to [*] , and the OMV model to launch is under the minimum model, as defined in paragraph 3.2.3. of the present Annex, the monthly active service maintenance fee would be calculated with the mechanism described in paragraph 3.2.3.2 of the present Annex and according with the following table:

 

SA AOP CMM(SA AOP )
x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
[*] £ x < [*] [*] €/SA·mes
x ³ [*] [*] €/SA·mes

 

Table 9-monthly unit maintenance fee for the "minimum" model including the [*] .

 

3.4 Special Projects

 

Based on the procedure which regulates the preparation of special projects for the development of a new functionality, at the request of VEE or its customers and providers, in accordance with what is established in Annex E, ELEPHANT TALK shall invoice the following concepts:

 

§ Project Execution : Designed to cover the costs of the project’s development testing, documentation and implementation of the project. Once the foregoing points have been agreed, VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The accrual of the cost of the project will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation and unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready for commercial exploitation, and thus is credited in an irrefutable manner by ELEPHANT TALK. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents should be considered commercially acceptable and where ELEPHANT compromises a date for implantation or correction thereof, unless the parties have agreed a different payment mechanism during the project.

 

45 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

§ Recurring Maintenance or Use of Service Fees : In the event that the project requires the payment of recurring fees for maintenance or use of the service, these fees shall be grouped together as additional fees to the other recurring fees of the VMO or of VEE. Their accrual shall be similar to that of all other recurring fees. These recurring fees must be specified in the document responding to the feasibility study and must have been expressly accepted by VEE. In any case, they will begin to apply from the date of RFS. In the case of incomplete months, such amount will be prorated by dividing the number of days of operation of the month between the duration in days of the month type (30 days). The monthly recurring fee is accrued the last day of the billing period. .

 

3.5 Special Operations

 

Based on the procedure that regulates the execution of special operations, at the request of VEE or its customers and in accordance with what is described in Annex E, ELEPHANT TALK shall invoice the following concepts:

 

§ Project Execution : Designed to cover the costs of the project’s development, testing documentation and implementation of the project. VEE will request ELEPHANT TALK in a written and provable way, the beginning of the execution of the project plan approved by both parties. The beginning of the execution will mark the moment of accrual of the [*] of the project execution cost that corresponds according to the offer agreed by the parties. The accrual of the [*] of the project execution cost will occur after the effective date of the Ready For Service (RFS), which will take place when there are no incidents related to the implantation unsettled by ELEPHANT TALK, and when all the functionality defined in the specification document is ready the exploitation, and so is accredited by ELEPHANT TALK in a irrefutable way. Exceptionally, Ready For Service (RFS) may be authorized by VEE when it understands that the unavailability of functionality or outstanding incidents are considered acceptable, and as long as ELEPHANT commits a date for implantation or remedy of them. In this case VEE will issue an act of acceptance of the works conditioned to the remedy of these incidents or pending functions in the terms reflected in the Act.

 

§ Recurring Maintenance or Use of Service Fees : In the event that the task requires the payment of recurring fees for maintenance or use of the service, these fees shall be grouped together as additional fees in to the other recurring fees of the VMO or of VEE. Their accrual shall be similar to that of all other recurring fees. These recurring fees must be specified in the document responding to the feasibility study and must have been expressly accepted by VEE. In the case of incomplete months, such amount will be prorated by dividing the number of days of operation of the month between the duration in days of the month type (30 days). The monthly recurring fee is accrued the last day of the billing period. .

 

46 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

3.6 Other Services Outsourced or Delegated by VEE to ELEPHANT TALK

 

This section defines the economic terms and conditions applicable to services to be rendered by third parties that, although provided for in the Contract, have been identified as not covered by the foregoing invoiceable concepts and the rendering of which has been requested by VEE and agreed by both Parties. These services include, inter alia:

 

· [*]

 

· [*]

 

· [*]

 

· [*]

 

ELEPHANT TALK shall transfer these costs to VEE in full, raised by a maximum percentage of 5% to cover management charges, except in the case of a prior agreement between the Parties. These costs shall accrue to VEE on the payment date of ELEPHANT TALK to the third parties in each one of the services.

 

VEE shall be able to audit the real cost of the third-party services supported by ELEPHANT TALK in order to check the correct application of the invoicing terms and conditions defined in this section.

 

3.7 [*]

 

As established in the Main Body of the Contract, [*] . For this, the Parties shall order the implementation of a process for their updating by an independent entity. Alternatively, the Parties may mutually define a different updating process.

 

47 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

4. Penalties for Non-Fulfillment of the Service Level (SLA)

 

4.1 General Principles

 

The Parties agree to establish a system of compensations for the case of non-fulfillment of the agreed service levels, which are specified in Annexes A, B1, B2, C and E.

 

These compensations are additional to the penalties provided for in the Main Body of the Contract.

 

4.2 Services to End Customer

 

In the event of critical incidents affecting the end customer’s service, the cause of which is attributable to the operations and/or resources under the responsibility of ELEPHANT TALK, VEE shall be able to claim from ELEPHANT TALK compensation that is proportional to the affected income, in accordance with the following formula:

 

[*]

 

In the event that the cause’s responsibility is shared by VEE and ELEPHANT TALK, the Parties shall establish a quantitive distribution of such responsibility based on the conclusions of the incident analysis report. The compensation requested by VEE from ELEPHANT TALK shall be calculated by applying the attribution percentage obtained from the preceding formula.

 

4.3 Implantation of New Virtual Mobile Operators

 

In the case of non-fulfillment of the date agreed for the start of the service’s acceptance tests (UAT) in the VMO’s implantation plan for causes entirely attributable to ELEPHANT TALK, VEE shall be able to claim compensation proportional to the connection fee. The Parties agree to a penalty equivalent to [*] of the VMO’s connection fee for [*] in respect of the plan, with a maximum of [*] of the connection fee or [*] of the affected VMO’s monthly fees (whichever is greater).

 

4.4 Development of New Services, Special Projects and Special Operations

 

In the case of non-fulfillment of the main milestones committed to in the project plan included in the feasibility study submitted by ELEPHANT TALK (start of the project’s acceptance tests, project RFS, the special operation’s termination) for causes entirely attributable to ELEPHANT TALK, VEE shall be able to claim compensation proportional to the quoted service’s amount (as indicated in the feasibility study). The Parties agree to a penalty equivalent to the maximum of [*] of the VMO’s connection fee for [*] in respect of the plan or [*] of the project’s execution cost.

 

48 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

5. Invoicing and Payment Terms and Conditions

 

5.1 Ordinary Invoices for the Rendering of Services

 

ELEPHANT TALK shall issue an ordinary invoice on a monthly basis. The invoice shall be issued as from the first working day of each month and shall include all the services that have accrued in the previous calendar month. In principle, it shall comprise the following sections:

 

· For each VMO in operation (from the RFS date and up to its de-registration):

 

a. Initial connection fee: Only for the VMOs whose RFS has occurred in the preceding month
b. Regular fees for the rendering of services accrued in the preceding month
c. Special projects carried out for the VMO and accrued in the preceding month
d. Special operations carried out for the VMO and accrued in the preceding month
e. Services outsourced or delegated to third parties and accrued in the preceding month

 

· Other charges of a general nature:

 

a. Special projects of a general type and accrued in the preceding month
b. Special operations of a general type and accrued in the preceding month

 

In addition to the invoice summary, ELEPHANT TALK shall generate a detailed invoice in electronic format, the format of which is to be agreed by the Parties prior to the first ordinary invoice’s issue. The detailed invoice shall contain all the necessary information for identifying the invoiced services and reconstructing the calculation of each item’s amounts.

 

49 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

5.2 Procedure for period purchase order processing for the issuing of ordinary services invoices

 

To improve operating procedures associated with payments, purchase orders may be placed to ELEPHANT TALK for periods of [*] , counting from the date of entry into force of the new SLAs framework defined in Annex C - technical of the present Contract, and set on November 1, 2013.

 

Such purchase orders shall include the corresponding billable concepts as described in section 5.1. of the present Annex, except any other general charges, described in section 5.1. of the present Annex.

 

This agreement shall not affect the due date of the invoice, to be produced in the month that corresponds (for example, if it is agreed the pre-issue of ordinary invoices for the period between [*] , in the month of [*] , the invoice relating to the activity of [*] will be due on the same date that it would if it was issued in that month.

 

Additionally an operation procedure is agreed to regularize the possible deviations between issued purchase orders and the services actually provided. Therefore, each month (N), ELEPHANT TALK and VEE will review the services effectively rendered in the current month and compare it against the purchase order issued for it, agreeing, if appropriate, adjustments to apply on the invoice for the following month, which may be made in favor of ELEPHANT TALK, in the case that VEE’s estimation of the order of was lower than the services actually rendered; or in favor of VEE, in case that the VEE’s estimation exceeds the services actually provided. Also, the other general charges described in paragraph 5.1 of the present annex, will be included in the same, as well as any operation and/or special project made in the previous month.

 

In addition, the parties agree to issue, [*] , a new order for a period of [*] additional months.

 

Example of application:

 

· The parties agree in [*] to issue a purchase order for the following [*] , i.e. for the period comprised between [*] .

 

· After the first [*] , i.e. in [*] , VEE will issue an additional order for [*] , comprising the period comprised between [*] inclusive.

 

The purchase order estimation will be done by VEE, in good faith and using the realistic business forecast prepared by VEE, as a basis.

 

5.3 [*] for provision of services

 

ELEPHANT TALK provides a commercial discount for provision of services, in the following terms:

 

50 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

· [*] on the monthly fee for maintenance of active services to models defined in sections 3.2.3.2."minimum Model "; 3.2.5.2 "Model for M2M MVNO solution", 3.2.6.2. "Model for M2M MVNO minimum solution ", 3.2.7.2. "OMV's small size complete solution model " and 3.2.8.2. "OMV's small size complete solution model ".

 

· [*] for active services for model defined in paragraph 3.2.2.2. "complete solution" model.

 

5.4 Extraordinary Invoices for Execution of Special Projects or Special Operations

 

Subject to an agreement between the Parties, ELEPHANT TALK shall be able to issue extraordinary invoices in advance relating to the execution of special projects or special operations that are unusual or of a particular scope.

 

5.5 Execution of Penalties

 

In the case of non-fulfillment of the Service Level Agreement (SLA) involving the payment of monetary penalties, these penalties shall be included as credits in the subsequent ordinary monthly invoice.

 

5.6 Payment Terms

 

The ordinary and extraordinary invoices for the rendering of services shall mature at their term from the invoice’s issue date agreed by the parties . Payment must be made by VEE on day [*] following the maturity date.

 

VEE shall use its best efforts to make available to ELEPHANT TALK access to the “confirming” service through one of the financial institutions with which VEE customarily works. Moreover, VEE accepts a [*] increase in the prices of this Annex as assistance to offset the additional costs involved in extending payment beyond [*] days after the invoice date. If such costs were to exceed the limit of [*] or were to fall below [*] , the Parties undertake to negotiate in good faith the updating of the [*] % offsetting percentage.

 

51 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

5.7 Payment Addresses

 

Payments relating to the Contract shall be made by means of a transfer to the bank accounts notified by the Parties and located in Spain. The holder of each account must coincide with each Party’s corporate person.

 

Within a minimum term of 7 calendar days prior to the date of issuance of the invoice, each Party must notify the other of any change in the payment address of the amounts to be settled, having the obligation of facilitating the details of their bank accounts as per the Spanish Banking Association’s coding, in respect of the last payment address.

 

6. Fiscal Clause

 

In connection with the invoicing carried out by ELEPHANT TALK, Value Added Tax or similar tax corresponding to the pertinent jurisdiction, hereinafter, the Tax, must be added to all the agreed prices.

 

If the Tax is applicable to any amount payable to ELEPHANT TALK, ELEPHANT TALK shall present an invoice to VEE that must comply with all the requirements established in the applicable legislation and that shall enable VEE to obtain, as and when applicable, the deduction or return of the Tax through the applicable deduction or return procedure (the “Fiscal Invoice”).

 

Upon receipt of the Fiscal Invoice, VEE shall pay the Tax corresponding to the payment to ELEPHANT TALK at the rate in force.

 

Given the fact that ELEPHANT TALK provides services outside the European Union, ELEPHANT TALK shall provide VEE with an explanation of the nature of the Tax, the applied rate and any ways in which VEE can deduct this Tax.

 

In the event that ELEPHANT TALK incorrectly calculates the amount of Tax chargeable to VEE, the invoice shall be corrected in the following manner:

 

· Where VEE paid in excess, ELEPHANT TALK shall reimburse this amount to the company plus interest and any related charge and shall supply VEE with a correct invoice or credit note for the amount of the excess payment made by the company;

 

· Where VEE paid less than the correct amount, the company shall pay the extra amount to ELEPHANT TALK upon receipt of the correct invoice.

 

· Both payments shall be made in accordance with the provisions of Clause 5. So as to avoid any doubts, VEE shall not accept the cost of any fines, interest or other charges arising from the incorrect charging of the Tax.

 

52 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

Withholding applicable to the payment:

 

The Price shall be paid without applying any deductions or compensation except when the applicable Law establishes otherwise. In those cases in which the applicable Law imposes the obligation of making withholdings as a consequence of the services rendered by ELEPHANT TALK, VEE shall withhold and pay the tax to the corresponding Tax Office in the name and on behalf of ELEPHANT TALK. VEE shall present to ELEPHANT TALK the pertinent certificate of withholdings, with details of the amount deducted or withheld.

 

In the event of the existence of a Double Taxation Agreement, the tax withholding rate or exemptions established in such Agreement shall be applied. VEE shall only withhold and pay the reduced tax in the name and on behalf of ELEPHANT TALK when the competent Tax Authorities of the provider’s country issue an adequate tax address certificate in accordance with the terms and conditions of the Double Taxation Agreement signed by ELEPHANT TALK and VEE and delivered to the latter.

 

If VEE in good faith were to pay the Price to ELEPHANT TALK without applying the established deduction or withholding and a subsequent audit or tax inspection were to identify that a deduction or withholding ought to have been applied to the amount due, ELEPHANT TALK shall be responsible for paying this deduction or withholding within a 30-day term, at the request of VEE, to the pertinent authority together with the corresponding sanctions and interests. VEE shall present to ELEPHANT TALK all the documentation to which the foregoing section refers.

 

ELEPHANT TALK declares and guarantees to VEE that its tax address is in Switzerland and that it shall continue to keep its tax address in that country, except when it notifies a change of tax address in writing thirty (30) days in advance. In the event that ELEPHANT TALK were to change its tax address, it shall immediately present all the documentation demanded by VEE demonstrating its tax address in the territory. Should VEE not be informed of a change of tax address by ELEPHANT TALK, the latter must compensate VEE for all the costs, including but not being limited to the withholding of the tax at source, sanctions and interests. The foregoing is the sole and exclusive recourse of VEE in this type of situation.

 

53 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex D in duplicate and for a single purpose on the date indicated ut supra.

 

Signed: Mr. José Paulo Da Silva Dourado Neves Signed: Mr. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije

For: VODAFONE ENABLER ESPAÑA, S.L. For: ELEPHANT TALK EUROPE HOLDING, BV

 

54 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV

FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES

Annex D: Economic Terms and Conditions

 

 

APÉNDICE 1: DEFINITION OF LIFE CYCLE

 

 

55 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV
FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES
Annex D: Economic Terms and Conditions

 

APPENDIX 2: TRANSFORMATION PLAN COSTS

 

Projects Cost Monthly cost (if applicable)  
[*] [*] [*]  
[*] [*] [*]  
[*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*]  
[*]  
[*]  
[*] [*] [*]  
[*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  
[*] [*] [*]  

 

56 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV
FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES
Annex E: Capabilities and Undertakings Relating to Project Management

 

Annex E: Capabilities and Undertakings Relating to
Project Management

 

57 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV
FOR THE SUPPLY OF OPERATION AND TECHNICAL SERVICES
Annex F: Communications and Office Contact List

 

Annex F: Communications and Official Contact List

 

58 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK COMMUNICATIONS EUROPE HOLDING BV

FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES

Annex G: Data Protection

 

CONTRACT BETWEEN VEEVODAFONE ENABLER
ESPAÑA, S.L. AND ELEPHANT TALK
COMMUNICATIONS EUROPE HOLDING BV FOR THE
PROVISION OF TECHNICAL AND OPERATIONAL
SERVICES

 

Annex G: Data Protection

 

1st November 2013

 

59 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK COMMUNICATIONS EUROPE HOLDING BV
FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex G: Data Protection

 

ANNEX G

 

DATA PROTECTION

 

The provision of the services that is the object of this contract will require the access to personal data which are of the responsibility of VEE. By ELEPHANT TALK who will since now be considered Responsible of the Treatment.

 

As result of the above and under law 15/1999, of Personal data protection of 13 th December (hereinafter LOPD), as well as in Royal Decree 1720/2007 of 21 December adopting Regulation development of the LOPD (hereinafter "RLOPD"), ELEPHANT TALK undertakes to compliance the following clauses:

 

1. - Confidentiality.

 

ELEPHANT TALK is committed to keep the maximum reserve and secrecy on the information to which it has had access or knowledge that is contained in any file of which VEE is responsible, in special, that that contains personal data. Confidential Information will be considered any data or own information of VEE to which ELEPHANT TALK accedes as a result of the provision of the services stated in Annex I of the present contract, as well as that to which had been able to accede before the signature of the same. ELEPHANT TALK is committed not to disclose this Confidential Information, neither totally, nor partly, as well as not to publish it, nor put it to disposition of thirds, directly or through third persons or companies, without the previous consent in writing of VEE.

 

The confidentiality obligations established in this clause will stand while the relation between the parts lasts, as well as during five (5) more years after the mentioned relation between VEE and ELEPHANT TALK is extinguished by any cause

 

2. Personal data included in VEE files

 

1. Access to Personal data of VEE's responsibility does not have the consideration of communication or transfer of data, but simple access by ELEPHANT TALK to the same, access that is necessary for the execution of the obligations of the present contract.

 

2. ELEPHANT TALK recognizes that the legislation on protection of personal data (LOPD, arts. 197 and 278 of the Penal Code, and other regulations applicable) sets a series of obligations in the processing of personal data and purpose undertakes to:

 

· In General, to observe as many provisions, organizational and technical measures that are necessary and execute all those necessary acts or simply advisable to comply strictly to the obligations that correspond according to current legislation and with good practices in the sector, as responsible for the treatment of files of VEE’s responsibility.

 

60 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK COMMUNICATIONS EUROPE HOLDING BV
FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex G: Data Protection

 

· Access to personal data contained in files VEE, responsibility only when necessary for the object of the present contract services and only and exclusively to fulfill the obligations contained in the present contract, always in accordance with the instructions facilitated by VEE.

 

· Not give or communicate, in no case to third parties, the personal data included in files responsibility of VEE to which it has access, even for purposes of its conservation, as well as not to allow any type of access to them by third parties.

 

· Ensure personal data are handled only by those employees whose intervention is accurate for the contractual purpose.

 

· Destroy or return, at choice of VEE, personal data to which it has had access, based on stipulations in category 5 (other obligations) of this Annex.

 

3. Both parties recognize the special importance that in the treatment of the personal data included in files of VEE responsibility that can be accessed by ELEPHANT TALK as a result of the services provided to VEE, is made with full guarantees regarding safety, complying with applicable regulations.

 

Therefore, ELEPHANT TALK expressly undertakes to observe and take as many necessary security measures to ensure confidentiality, secret and integrity of personal data that it has access, as well as to take in future any security measures that are required by laws and regulations intended to preserve secrecy, confidentiality and integrity in the automated treatment of personal data.

 

To these effects, ELEPHANT TALK expressly states that has implemented the basic, medium or high level, security measures, as the case is and the required security level depending on the type of data that it accesses by virtue of the provision of service in question, required by the RLOPD in its title VIII, sections III and IV, articles 89-114. In addition, ELEPHANT TALK expressly, states that corresponding security measures not only are deployed but they are also contained in a Security Document, which is known and mandatory for all its personnel, as established by the RLOPD in its title VIII, chapter II, art. 88. 

 

3. Possibility of subcontracting of services

 

ELEPHANT TALK may not subcontract with a third the realization of any treatment that has been entrusted VEE, unless it has have obtained the prior written authorization to do so. In this case, once the authorization has been obtained , the subcontractor shall be subject to provisions of this annex using addendum to it.

 

61 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK COMMUNICATIONS EUROPE HOLDING BV
FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex G: Data Protection

 

4. Other obligations

 

1. The obligations set for ELEPHANT TALK in this Annex shall be also mandatory for employees, partners, both external as internal, and subcontractors, being its responsibility that they comply with these obligations. ELEPHANT TALK undertakes to which no stranger to your organization natural or legal person access data from contained in the responsibility of VEE, files personal to the ELEPHANT TALK to arrange access as the fruit of the agreed services regardless of the contractual relations ELEPHANT TALK could have with third parties. Specifically, ELEPHANT TALK undertakes to not outsource in no cases and under no circumstance collected activities in the This agreement that could pose an even remote access to personal data included in file VEE, responsibility without prior consent by written it.

 

2. ELEPHANT TALK shall inform its staff and, where appropriate, collaborators and subcontractors of obligations set in the present Confidentially Annex as well of the obligations related to the processing of personal data. ELEPHANT TALK will make as many warnings and subscribe as many documents as necessary with its staff, and where appropriate, partners and subcontractors, with the aim of ensuring the implementation of such obligations.

 

Similarly, ELEPHANT TALK is committed after the extinction of the relationship between itself and VEE for any cause, to destroy or, if indicated by VEE, return to the same or to whom VEE had appointed, any confidential information and in particular, (i) of personal data included in files owned by VEE, to which it had access because of the services contained in the present contract, (ii) those data which, in its case, had been generated as a result of the processing of personal data contained in files owned by VEE, (iii) as well as media or documents in which any of these personal data recorded, not preserving copy any of any kind. Should ELEPHANT TALK proceed to the destruction of the above-mentioned information, it will issue a certificate in favor of VEE, stating this action.

 

The destruction of data will not be applicable where there is a legal provision that requires its conservation, in which case must proceed to the return of the same ensuring VEE such conservation.

 

By its part, ELEPHANT TALK will keep the data properly blocked as responsibilities of its relationship with VEE may arise.

 

3. ELEPHANT TALK undertakes to leave VEE free, for any damage, prejudice, spending (including without limitation, attorneys fees) civil liability, penalties or fines imposed by any administrative or judicial organ (specially, in the case of filing of any kind of procedure by the Agencia Española de Protección de Datos) by claims brought against VEE that derived or relate to the failure of ELEPHANT TALK any subcontractor hired by ELEPHANT TALK, obligations or and guarantees arranged in this annex or the rules on data protection personal.

 

5. Prevalence

 

The This Annex shall prevail to any other regulation established by Parties regarding data protection and Confidentiality in any other document earlier or later, unless expressly parties, with reference to This Annex, carried out some modification of the whole or part of the same.

 

62 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK COMMUNICATIONS EUROPE HOLDING BV

FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES

Annex G: Data Protection

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex G in duplicate and for a single purpose on the date indicated in the header.

 

Signed. D. Paulo Da Silva Dourado Neves Signed. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VODAFONE ENABLER ESPAÑA, S.L. By ELEPHANT TALK EUROPE, HOLDING BV

 

63 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

CONTRACT BETWEEN VODAFONE ENABLER
ESPAÑA, S.L. AND ELEPHANT TALK EUROPE
HOLDING BV, FOR THE PROVISION OF
TECHNICAL AND OPERATIONAL SERVICES

 

Annex H: Security, fraud and
information protection specifications

 

 

 

 

 

 

 

1st November 2013

 

64 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES

Annex H: Security, fraud and information protection specifications

 

ANNEX H

 

SECURITY, FRAUD AND INFORMATION PROTECTION SPECIFICATIONS

 

1. GENERAL ASPECTS   67
     
2. CONTROL AND INSPECTION OF THE CONDITIONS OF SECURITY   68
     
2.1 Media monitoring and control   68
     
3 BREACHES   69
     
3.1 as serious breaches:   69
     
3.2 as light breaches:   69
     
4. Physical and electronic Security and   70
     
4.1 Security Systems   70
     
4.2 Service monitoring   72
     
6.1 Implementation of the information security policy   72
     
6.2 Responsibilities of systems and networks of VEE   73
     
6.3 Networks and systems   73
     
6.4 User accounts   73
     
7 FRAUD   74
     
8 Management of Business continuity (BCM)   75
     
8.1 Business continuity strategy   75
     
8.2 business continuity plans   75
     
8.3 Crisis management   76
     
8.4 operational validations   76
     
8.5 standard references   76

 

65 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

     
Appendix B: standards and security procedures    
     
SUMMARY OF GENERAL REGULATION OF INFORMATION SECURITY    
     
1. Introduction    
     
1) correct use information    
     
2) User login ID and passwords    
     
3) Use of the information outside of corporate resources    
     
4) Storage information in the microcomputer environment    
     
a) External storage units    
     
b) Information on mobile devices storage    
     
5) Use of electronic mail and Internet    
     
a) Security for the use of your email measures    
     
b) Security for the use of Internet measures    
     
6) Antivirus and protection against malicious programs    
     
7) Connections to data network    
     
a) Equipment Connections to the data network    
     
b) Access from the data network    
     
c) Data network access    
     
8) Legislation in for personal data    
     
9) Communication of incidents    
     
SUMMARY REGULATION OF PHYSICAL SECURITY FOR EXTERNAL SATFF IN VEE INSTALLATIONS    

 

66 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

1. GENERAL ASPECTS

 

The provisions contained in the present document, shall be in any case without prejudice to the contract that brings cause to the present Annex.

 

ELEPHANT TALK assumes full responsibility on the technical, legal and economic suitability of the systems, processes and procedures related to the protection of facilities, equipment, materials and information related with the activities object of this contract as well as any that may derive from the same.

 

It is also ELEPHANT TALK’s responsibility to adhere to all the mandatory rules and the good practice applicable at every time to activity that is running, both in its technical and administrative aspects.

 

ELEPHANT TALK must give its collaboration to VEE's Fraud, Risk and Security Direction (referred ahead as the Direction of Security) in all actions and research that before an incident of security and/or fraud might necessary. In any case,

 

ELEPHANT TALK will be responsible for informing Direction of Security and in particular, the person that VEE designates as responsible to do this, on any security incident and/or fraud that happens, as well as any risk that detects circumstance by ELEPHANT TALK, and which could pose a threat to the interests of VEE.

 

ELEPHANT TALK must have the proper authorizations granted by the competent bodies of security. 

 

Where appropriate, ELEPHANT TALK must have security and surveillance service SUPPLIERS that are duly certified by competent private security bodies .

 

ELEPHANT TALK undertakes to train and inform their workers on the policy of security, standards and procedures to implement them as PROVIDERS of goods and services to VEE, and shall prove compliance with this obligation in case of being required by VEE.

 

67 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

In case any security incidence occurs on the duration of the contract, ELEPHANT TALK undertakes to immediately report it to VEE Fraud, Risk and Security Department is Spain.

 

ELEPHANT TALK will be responsible to guarantee the fulfillment of that stipulated in these clauses on the part of any other company subcontracted by ELEPHANT TALK for the execution of the following contract. In addition ELEPHANT TALK will have to communicate this situation to the FRS department.

 

2. CONTROL AND INSPECTION OF THE SECURITY CONDITIONS

 

2.1 Media monitoring and control

 

The Direction of Security by means of the Responsible that it designates may carry out in anytime (even with prior to the beginning of the provision of service) an audit control, verification and supervision over the security conditions in which ELEPHANT TALK, or their subcontractor, perform the awarded, work with the aim of ensuring that the standards and safety procedures included in Annex B, are executed in all times.

 

Subsequently the Direction of Security will issue a report within not more than 48 hours from the conclusion of the audit in which said collected deficiencies will be recorded.

 

In case that these deficiencies are qualified by the Direction of Security as serious, they shall be remedied by ELEPHANT TALK prior to the start of the provision of the service, if the audit had made prior to the start of the service, or within not more than 15 calendar days from its communication formal (or a period of more than if it is agreed and accepted in writing by VEE).

 

On the other hand, and in the assumption that these deficiencies are qualified by the Direction of Security as light They must be remedied by ELEPHANT TALK within 30 calendar days from the formal notification of the report (or in a longer term if this is agreed) (and accepted in writing by VEE).

 

68 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

ELEPHANT TALK will allow VEE access to the original documentation that supports the fulfillment of its obligations under the contract, as well as any equipment and facilities involved in the provision of the service for which, the necessary staff for this purpose will be made available to VEE.

 

In case that an inquiry as a result of an incidence of security, ELEPHANT TALK undertakes to cooperate and provide assistance technique that you are required by VEE.

 

3 BREACHES

 

Any breach of contract in the field of security, fraud and Information protection , shall be communicated by the Direction of Security to ELEPHANT TALK, using the corresponding record of incidents which receipt shall be signed by ELEPHANT TALK.

 

Without prejudice of that established thing in Clause Seventh of the Contract of PROVIDERS, the Direction of Security:

3.1 as serious breaches:

 

· the substantial or regular breach of Security rules and procedures included in Annex B.

 

· the impairment of ELEPHANT TALK of the tasks of control and inspection that correspond to VEE or its personal authorized;

 

3.2 as light breaches:

 

· the precise and non substantial breach of the Security rules and procedures included in Annex B.

 

· not provide the Direction of Security reports and data that you are required by virtue the present annex.

 

69 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

The accumulation of more than five minor breaches in a quarterly period will constitute a serious breach and the accumulation of three serious breaches over the lifetime of this contract; will lead to the resolution of it.

 

These breaches will be qualified by the Direction of Security. If any discrepancy of qualifications by ELEPHANT TALK in serious breaches not coming from upon accumulation of minor offences, ELEPHANT TALK may request at its expense a report to an facultative external to both parties agreed and accepted by them who will act as mediator. This facultative will be selected from among persons of recognized prestige in the area of security, as an expert in local and international techniques and standards in this field.

 

4. PHYSICAL AND ELECTRONIC SECURITY

 

The following security requirements will be of general application. Exceptionally the Fraud, Risk and Security Department, and as a request of the Supply Chain Department (SCM)p can adapt these measures to the particular circumstances of ELEPHANT TALK.

 

4.1 Security Systems

 

When ELEPHANT TALK access or manages information or goods of VEE or of its customers, it must have the following means of protection:

 

· A security system of to protect installations against unauthorized access.

 

· An electronic system for access controls by use of individualized accreditation and/or elements of biometric identification.

 

· A of closed-circuit television system connected to a permanent digital recording system with sight on the physical access points to rooms and spaces where the operations object the contract are produced, as well as equipments giving support to them.

 

Computers and security systems must be installed and maintained by written contract by part of company approved by the competent bodies.

 

70 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

Any detected deficiency or breakdown on computers or installed security systems and that implies the non-operation of the system shall be settled in a maximum term of 24 hours. This situation should be communicated by ELEPHANT TALK to Direction of Security immediately.

 

In case that the necessary measures to settle breakdowns or deficiencies are not taken in the established term, the Security Direction reserves the right to settle these breakdowns or deficiencies at the expense of ELEPHANT TALK.

 

71 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

4.2 Surveillance Service

 

ELEPHANT TALK must have, when VEE thus requires it, a 24 hour surveillance service of, with an installed CCTV system to be able to monitor the installation, the correct use of the of the access control systems, care of the possible intrusion and fire alarms and any other appropriate performances them within their professionals competences.

 

5. SECURITY OF PEOPLE

 

ELEPHANT TALK shall take the necessary measures to dispose of a individualized writing (see annex A), signed by each of the persons that access the facilities and systems where VEE's information is processed. That document shall reflect the acceptance, and recognition of VEE’s confidentiality standards.

 

ELEPHANT TALK undertakes to keep these writings archived together with the proof of the identity of the signatories for the entire period of validity of this agreement and during the 5 years after the completion of the same.

 

ELEPHANT TALK will take the necessary measures to implement identification, registration and accreditation procedures of each one of those who access facilities and systems where computers, systems are hosted and/or VEE's information is processed .

 

6 INFORMATION AND COMMUNICATIONS TECHNOLOGIES SECURITY

 

6.1 Implementation of the information security policy

 

ELEPHANT TALK, in General, shall comply with VEE’s security rules and procedures included in Annex B, and particularly , ELEPHANT TALK undertakes to implement measures of described security in the LO 15/1999 of 13 December of personal data protection that regulates the treatment basic , medium or high Level files, depending on the corresponding level of the processed data.

 

72 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

6.2 Responsibilities on the use of VEE’s systems and networks.

 

ELEPHANT TALK will be responsible for all actions to be carried out in and from VEE’s systems and networks with user accounts that have been provided for the provision of the contracted Service, being responsibility of ELEPHANT TALK to have identified at all times, those persons who use them and provide these data at the request of VEE.

 

6.3 Networks and systems

 

ELEPHANT TALK’s IP networks that connect with the network of VEE, whenever possible, must be isolated both physically as logically of any other network (whether private or public), including ELEPHANT TALK’s private network.

 

ELEPHANT TALK will have an access profile with the minimum required access to perform their work, have exclusive access to machines, to applications and the information you need to perform services his work.

 

All ELEPHANT TALK’s desktop computers or laptops of that connect to VEE’s network must have installed a resident antivirus antispyware and antikeylogger, and be updated to the latest file and patch and/or security release. ELEPHANT TALK recognizes VEE’s capacity to monitor and register accesses and uses of VEE’s systems and networks.

 

6.4 User accounts

 

User accounts assigned by VEE will be responsibility of ELEPHANT TALK, which must be associated to the person who uses them at all times.

 

Where possible, ELEPHANT only TALK will have temporary access and not permanent to production systems.

 

ELEPHANT TALK undertakes to keep up-to-date at every time the inventory of its staff with access to VEE’s networks or systems, communicating VEE punctually and according to the procedures that are establish the registrations, deregistration, and necessary modifications. ELEPHANT TALK is committed to collaborate, according to the established procedures with the periodic revision of the accesses to VEE’s network and systems granted to its staff and whenever it requests it.

 

73 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES

Annex H: Security, fraud and information protection specifications

 

ELEPHANT TALK will make intrusion tests of its technical infrastructure that is dedicated to the connectivity with VEE, evaluating its security level, getting a vulnerabilities report and action plans of to reduce them.

 

VEE reserves the right to require this report as well as to apply the action plan for the minimization of vulnerabilities.

 

ELEPHANT TALK can be monitored by VEE, when it is deemed necessary to identify any potential security risk of the connection and access.

 

7. FRAUD

 

Without prejudice of what it is established in Clause 7 of the PROVIDER Contract, ELEPHANT TALK undertakes to respond for all those economic damages, as well of any other kind, directly or indirectly derived of the illicit activity, suffered by VEE or by third parties with whom VEE has a contractual relation, as result of all actions or omissions of fraudulent nature carried out by persons or entities, that would provide effective services for ELEPHANT TALK, either on a labor basis or through the corresponding commercial contract being also obliged to adopt the measures it deems most appropriate for the surveillance and control in order to prevent the breach of their obligations, under the above contractual relationship.

 

VEE shall immediately bring to the attention of ELEPHANT TALK, the discovered illicit activities, so that it can immediately put a stop to them.

 

Once an economic evaluation of the damage suffered by VEE is calculated it will be notified to ELEPHANT TALK, which shall proceed to pay the compensation thereof in the maximum period of 90 days.

 

74 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

In the case that ELEPHANT TALK un-attended the payment requirement without a justified cause, the amount which, in his case, it should compensate VEE will generate an interest on arrears in accordance with what is legally established at each time, from the day following the due date for VEE.

 

8 BUSINESS CONTINUITY MANAGEMENT OF (BCM)

 

With the aim of ensuring the availability and continuity of service hired by VEE for the lifetime of the contract, ELEPHANT TALK shall have a deployed and operational business continuity strategy. This strategy will be composed of the following aspects:

 

8.1 Business continuity strategy

 

ELEPHANT TALK must have of a business continuity strategy properly documented and approved by the company management.

 

8.2 business continuity plans

 

ELEPHANT TALK must having and maintaining operating plans cover business continuity the following aspects:  

 

· Regular identification of critical business processes

 

· Recovery plans for critical processes revised regularly

 

· Specific operational plans reviewed regularly to cover the following aspects: 

 

1. Relocation plans for buildings where critical processes are done

 

2. alternative production plans for productive environments

 

3. Critical communication systems and computer applications that must be duly duplicated in separated geographical locations or have contracts for third party backup plans

 

4. Expert functions that must be identified and should have a substitution procedure

 

5. Information or critical records that must be properly protected and duplicates in alternative places

 

75 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex H: Security, fraud and information protection specifications

 

6. Critical supplies and suppliers must be identified and an alternative supply plan should exist

 

7. Services provided to VEE according to the service levels defined in the contracts

 

8.3 Crisis management

 

During the period validity of the contract, ELEPHANT TALK must have crisis management plans for serious incidents covering coordination, recovery and the communication with customers and other important actors in the market.

 

8.4 operational validations

 

During the period of the contract ELEPHANT TALK must have a strategy of validation to validate the effectiveness of its business continuity plans and crisis management. These reports will be available for query by VEE with the aim of ensuring that the service provided to VEE It is guaranteed at any time.

 

8.5 standard references

 

The reference for business continuity management standard is the BS25999-2 published by the British Business Standard Institute.

 

76 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES

Annex H: Security, fraud and information protection specifications

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex H in duplicate and for a single purpose on the date indicated in the header.

 

Signed. D. Paulo Da Silva Dourado Neves Signed. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VODAFONE ENABLER ESPAÑA, S.L. By ELEPHANT TALK EUROPE, HOLDING BV

 

77 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

CONTRACT BETWEEN VODAFONE ENABLER
ESPAÑA, S.L. AND ELEPHANT TALK EUROPE
HOLDING, BV. FOR THE PROVISION OF TECHNICAL
AND OPERATIONAL SERVICES

 

Annex I: Ethical purchasing

  

1st November 2013

 

78 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

ANNEX I

 

ETHICAL PURCHASING

 

VODAFONE is one of the largest telecommunications companies of the world and as such plays an important role to contribute to the enrichment of the life of persons.

 

We are also mindful of the importance of managing our business in a careful and responsible manner, and that is why we have adopted a set of essential values and principles of business to regulate our activities and interactions with all our stakeholders throughout the world, including our suppliers.

 

In accordance with our business principles, we are committed to "promote the implementation of our business principles by" "part of our suppliers and business partners".

 

The ethical purchasing policy set below must be read in conjunction with our business principles , and is designed with the aim of promoting both safe and fair, working conditions as well for the responsible management of environmental and social issues within VEE supply chain.

 

The Policy has been developed after having consulted our employees, suppliers and non-governmental organizations. This policy sets the level that we desire that VEE and our supplier reach over the time.

 

The principle of continuous improvement is applied to all the aspects of the Policy.

 

In accordance with the dispositions of application of the Policy and as a condition of the negotiation, VEE will require the first level suppliers that assure that they understand and accept its rules and to confirm that they will fulfill them.

 

We will collaborate with our suppliers in the implementation of the Policy, which might include joint audits and visits to their facilities to assess compliance, on a continuous basis.

 

VEE will publicly inform on the implantation and the fulfillment of the Policy

 

We will encourage all suppliers to implement the rules of our Policy it in each area of their business and within their own supply chain.

 

The ethical purchasing Policy is accompanied of orientative Guidelines that provide more clarity, guidelines and information that endorses its requirements. The references contained in the orientative Guidelines are indicated in the text of the Policy with abbreviations like “[DO1] “. Both documents must be read jointly.

  

POLICY IMPLANTATION

 

Property

 

79 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

· The of ethical purchasing Policy of VEE jointly belongs to global purchasing Management and the global terminals Directors.

 

· Directors as well as their respective suppliers management teams, at global or carrier level, will have operative responsibility for the application of the Policy.

 

Communication

 

· VEE will communicate and present its Policy Ethical Purchases its more excellent groups of interest, as much commits like externally.

 

· It will be encouraged to the VEE suppliers to deliver all attack reasonable to promote and to present the Policy between its own suppliers and subcontractors.

 

Training and Awareness

 

· VEE and its suppliers will make sure that all the implied people receive the formation and the directions necessary to support the Policy.

 

Application

 

· the suppliers that implant this Policy must fulfill all the applicable regulations, laws and norms in the countries in which they are present.

 

· The Policy is applied with the objective to promote safe and right conditions of work, and the management responsible for the environmental and social questions within VEE's supply chain.

 

· It will be required that the suppliers confirm (in writing) that are applying to the Policy or a similar norm of purchases like the Policy of conduct of the electronic industry (EICC by its abbreviations in English); Basic policy of initiative of ethical commerce (ETI); Norm SA 8000 of Social Accountability International; or the collegiate Institute of purchases and provisions (CIPS).

 

· We will collaborate with our suppliers in the implantation of the Policy, which can include the accomplishment from joint audits [DO1] and visits to its facilities to evaluate its fulfillment.

 

· VEE will ask for their suppliers that facilitate the reasonable access to him to their facilities and all the excellent information with the object of evaluating their fulfillment of the Policy, and that delivers attacks reasonable to make sure that the same their subcontractors do.

 

Corrective actions

 

· It is expected that the suppliers identify, correct and control the continued fulfillment of the activities gathered in the norms of the Policy.

 

80 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

· The suppliers must inform VEE immediately of any serious breach of the Policy and both will decide a calendar for corrective performances.

 

· In case of identifying themselves and of persisting the breaches of the Policy, VEE will consider the possibility of ending the commercial relation with the supplier at issue.

 

Follow up and reports

 

· VEE's of Corporative Responsibility and Purchasing departments will adopt an approach based on risk [DO2] to control the implantation and the fulfillment of the Policy in our chain of provisions, and will inform into the progress in the annual report of Corporative Responsibility of VEE.

 

· VEE and their suppliers will deliver attacks reasonable to facilitate, to their employees and other groups of interest, means to inform, of confidential way, on any real or possible infraction of the Policy.
·

THE ETHICAL PURCHASING POLICY

 

1 Child Manpower 

· No hiring of anyone whose age is below the minimal legal work age. [1]
· Minors (people under the age of 18) will not be assigned to dangerous tasks, or any task that is not commensurate with the development of the child. [2]
· Whenever minors are hired, their best interests will prevail.
· It will support, will be developed or will be made contributions to policies and programs to assist with any juvenile who is currently working.

 

2 Forced works 

· No forced, compulsory labor or regime is used of bonded and employees have the freedom to terminate your employment by giving reasonable notice. Employees are not obliged to deposit neither money nor identity with the company documents.

 

3. Safety and health

· Employees working in a healthy and safe environment of in accordance with international standards and national laws. Such an environment includes access to clean toilets, drinking water, if necessary, adequate for food storage facilities.
· If the company provides accommodation, it must be clean, secure and should be to meet basic needs of employees.
· Employees will receive adequate information and training on safety and health.

 

4. Freedom of Association

· As far as permitted by law, all employees are free to join or be represented by unions or similar external trade union organizations.

 

81 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

5 Discrimination

· Negative discrimination [3] is prohibited , including on grounds of race or sex.

 

6. Disciplinary practices

· Employees are treated with respect and dignity. Is prohibited any form of physical, verbal aggression or other harassment, threats or any other form of intimidation.

 

7 Work Hours

· · Labor hours for employees shall comply with national laws and are not excessive [4].

 

8 Salaries

· Employees understand their working conditions and receive a wage [5] fair and reasonable, low conditions equally fair and reasonable.

 

9 Individual behaviors

· Any form of bribery, will not be tolerated including tenders or dishonest payments made to employees or organizations or from of these same.

 

10. The environment

· The pertinent legislation and the international norms in the management of environmental impacts is fulfilled. In the countries where there is no environmental legislation or it is not applied, responsible practices in the environmental impacts management will be made.

 

· Processes have been implemented to improve, actively, the efficient use of limited resources (such as energy, water and raw materials) and technical, operating management, precise controls have been implemented to minimize harmful emissions to the environment.

 

· Precise measures have been implemented to improve the environmental compliance of their products and services when they arrive at the hands end user

 

· The company supports innovative developments in products and services that can offer social and environmental benefits.

 

GUIDELINES

 

These guidelines accompany VEE ethical purchasing Policy and they have been designed to provide more clarity, guidelines and information in favor of the requirements of the Policy. The Guidelines will be reviewed periodically and, when it appropriate, they will be updated to reflect the advances in the ethical management of the provision chain and the best practices of the sector.

 

82 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

The reference numbers like “DO1”, appear in the main text of the Policy and correspond to the notes that come next, under their respective titles.

 

Application

 

DO1.     The audits could be made through a VEE representative or a third party. Also joint audits between VEE and ELEPHANT TALK can be made and count with the aid of a representative of the sector or a related nongovernmental association.

 

Monitoring and Information

 

DO2.     VEE will put greater attention in those parts of the supply chain where the risk of not fulfilling the Policy is more elevated or where it can have greater difference with the available resources.

 

Child work

 

DO3.     The minimum age means the age in which the scholastic obligation end, or under 15 years of age (or below 14 years, in the countries whose means of education are insufficiently developed, in agreement with international principles).

 

DO4.     The personal development includes the health or physical, mental, spiritual, moral or social the development of a child.

By “Child” a smaller person is understood of 18 years, as she defines herself in Article 1 of the United Nations Convention on the rights of the Child.

 

“Personal Development” is as it is described in Article 32 of the United Nations Convention on the rights of the Child.

 

Forced labor

 

DO5.     A reasonable term of notification is based on the period of contractual notification of an employee and supposes the existence of written contract for all the employees, which reinforces the VEE position of which all the employees understand and count with written information on the conditions of use by virtue of clause 8 on Remuneration.

 

Health, Security and Well-being

 

DO6.     the general principles are: to identify, to diminish and to prevent the risks, to use competent and enabled people, to provide and to maintain equipment and tools of security, including personal protective equipment when it is necessary.

 

DO7. This would have to include the election and formation of people at an appropriate level, in individual of the executives who are responsible for the fulfillment of the obligations of Prevention of labor risks of the supplier.

 

83 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

Discrimination

 

DO8.     the discrimination measures include among others: race, color, sex, identification of gender, sexual direction, religion, political opinion, nationality, social origin, social or civil condition, condition of native, handicap, medical condition, state of the VIH, pregnancy, age, condition of veteran and union affiliation.

 

The supplier must assure that any form of discrimination at any moment of the employment process does not occur, from the selection of possible candidates, interviews and evaluation to the conditions of the position, remuneration or reasons for dismissal.

 

Schedule of Work

 

GN9.     The restrictions in the working hours are destined mainly to protect the workers who do not have functions of supervision or management.

 

GN10.     The exceptional circumstances can include emergency situations, but they will not include anticipated periods of intense demand or temporary increases in the production requirements.

 

GN11.     In order to determine if the working hours are excessive or no, the type of work made and the suitable working hours for the position it must considered.

 

Right of information

 

VEE puts in practice a mechanism of denunciation of irregularities by virtue of its policy of Duty of information. Our suppliers, contractors and employees have the obligation to inform on dishonest acts, corruption, fraud, problems related to labor human rights and, damages to the environment or any other non ethical behavior, either directly to our Group corporative security team +44 (0) 1635 667911 or through a third independent party in +44 (0) 1249 661 795. All the information is confidential.

 

REFERENCES

 

Ethical Purchasing policy is based on the following standards International:

 

· The United Nations Declaration of Universal human rights.
· Conventions the of the International Work Organization.
· Convention on the rights of the child of United Nations.

There is also reference to:

· Standard SA 8000 for International social Accountability
· the Basic code of the initiative of trade of ethics and
· the project of standards on responsibility of the transnational corporations and other business enterprises rights human (2003)

 

84 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VEE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDINGBV. FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex I: Ethical purchasing

 

In Respect of the conventions of the ILO on labor standards, reference has been made to the following provisions during the development of this policy:

· Convention No. 1 (reasonable working hours)
· Convention No. 29 (forced labor and servitude)
· Conventions No. 87, 98 and 135 (freedom of Association)
· Convention No. 111 (discrimination)
· Convention No. 138 (minimum age)
· Convention No. 135 and recommendation No. 143 (the) (Representatives of workers)
· Convention No. 155, article 19 (training in the field of the) (security and occupational hygiene)

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex I in duplicate and for a single purpose on the date indicated in the header.

 

Signed. D. Paulo Da Silva Dourado Neves Signed. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VODAFONE ENABLER ESPAÑA, S.L. By ELEPHANT TALK EUROPE, HOLDING BV

 

85 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

CONTRACT BETWEEN VODAFONE
ENABLER ESPAÑA, S.L. AND ELEPHANT
TALK EUROPE HOLDING BV FOR THE
PROVISION OF TECHNICAL AND
OPERATIONAL SERVICES

 

Annex J- General Conditions for prevention
of risks and health

 

86 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

Annex J

 

General Conditions of prevention of risks and health.

 

It is an objective of Vodafone Enables España, S.L. (VEE) to strictly comply with the demands on prevention of Labor risk, that establishes the Spanish legislation on law 31/1995 of 8 November, on prevention of labor risks (LPRL), amended by Law 54/2003, of 12 December, reform of the normative framework of the Prevention of occupational risks, as well as its rules and provisions of development, in any type of work do in their centers or workplaces, this company is directly addressed. Both Parties considered, in any case, such measures are based on the prevention, as a basic criterion that must guide all safety action labor and, hence criterion whose attention lies with all those companies collaboration with VEE.

 

According to the REAL Decree 171/2004 of 30 January, develops article 24 of the Law 31/1995 of 8 November, the prevention of workplace risk in the field coordination of business activities and to develop the VEE obligations of the implementation of this article, ELEPHANT TALK relation a:

 

1 THE COMPANY AND THE SERVICES OBJECT OF CONTRACT:

 

1 Credits that has the documentation below is listed in it affecting to the development of the contract, referring copy of such services documentation in the case that VEE so requires:

 

(i) Organization resources for the preventive activities.

 

Specification of the Organization, indicating:

 

· Chosen Modality of preventive Organization (self provided prevention service, external, etc.) and assumed and agreed specialties with SP “external”.

 

87 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

· List of available Human Resources available human and their training in prevention and geographical scope of action for the development of the management of prevention

 

· Name the partner or person holding the highest responsibility and that credited the validity of the documentation submitted to VEE.

 

ii) Assessment of the risk.

 

The evaluation of Risks may be:

 

· In General, which will cover all activities and tasks that may perform workers, as well as the generic information s and instructions delivered by VEE, concerning the risks inherent in the post of work.

 

· Specific, caused by work intending to perform in specific locations and/or not be included in the previous evaluation.

 

These assessments relate solely to the contract services without exclude any activity or task. All assessments will be carried out and revised by ELEPHANT TALK of agreement, at least set out in the Democratic Republic 39/97 of 17 January, by which adopted the RSP.

 

iii) Planning of the preventive activity

 

From the assessment of risks that might arise from the development of the services subject to the contract and according to the results obtained, ELEPHANT TALK will have before it a planning its preventive activity in which, to the less, will detail defined preventive activities to accredit, in PRL, subject to workers who develop services covered in the contract. Such planning will define:

 

a) TRAINING theorical and practical-, sufficient and suitable.

 

By each course necessary training, at least specify:

 

· Title, agenda of the course, theoretical or practical content, time load of each part and activities or tasks for which it is compulsory.

 

88 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

· Certification required for the faculty provided the course.

 

(b) Sufficient and appropriate information.

 

The information (prior and ongoing) will be at least concerning:

 

· Risk for safety and health of workers.
· Measures and applicable protection and prevention activities.
· Measures taken from pursuant to article 20 of the LPRL of emergency. measures

 

(c) Health surveillance.

 

Of the monitoring of health, at least indicate:

 

· Types of specified medical examinations.
· Recurrence established for each tip or of recognition.
· Evaluation of health at regular intervals after the incorporation into the work, change functions or prolonged absence.

 

Each type of specified medical examination and its periodicity will be (signed) stipulated by a professional, an entity or body in medicine of the working.

 

d) Equipment of work and means of protection.

 

· Relationship of working equipment used by workers and which will be suitable to the job to be performed. Identification of those that in their use may present specific risks for workers or third parties and measures to take to control or reduce these risks.
· Relationship equipment individual protection (EPI) suitable (with CE marking) that will be provided to their workers and identification of activities, tasks or functions for those that are provided.

 

89 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

e) Procedures of work and action in the case of emergency. In these procedures, among other issues should include the necessary instructions on first aid, evacuation of injured, etc.

 

2) ACCREDITATION AND CONTROL OF WORKERS.

 

To develop (specified in the corresponding item (iii) paragraph) planning of its preventive activity of the present document establishes a system of accreditation and monitoring of workers on the prevention of risks, to ensure that ELEPHANT TALK only accredited workers to develop the subject of the contract services.

 

Before activity, ELEPHANT TALK credited in writing to VEE that the relationship workers providing the hired services met with the obligations under the risk assessment and planning of its appropriate preventive activity. Such accreditation will mean that workers indicated:

 

· Have received sufficient risk information measures for the prevention of such risks and measures of emergency must be applied in each service to be developed
· Han received the corresponding training both theoretical and practical, sufficient and appropriate techniques and procedures for the prevention of hazards that given job.
· To the vigilance of health, this is suitable for such work.
· In respect to the WORK EQUIPMENT and means of protection (‘ in later PPE ' s) individual and collective necessary for his work, the PROVIDER ELEPHANT TALK available all necessary, the maintained in appropriate conditions of use, as well as known and this trained in its use and maintenance.

 

90 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

VEE may verify compliance with the previous requirements. If when request certifications finds does not conform to what is specified, VEE is reserve in any case and in its sole discretion, the right to refuse entry to its facilities workers designated by ELEPHANT TALK, notifying ELEPHANT TALK purpose, forcing it, within a maximum 7 days to update and verify the information previously fulfilled.

 

ALL THOSE WORKERS THAT DO NOT HAVE THE ADEQUATE ACCREDITATIONS WILL HAVE EXPRESSLY PROHIBITED THE EXECUTION OF WORK FOR VEE.

 

Development of This section on the system of accreditation and control of the workers, is reflected in a "Protocol control workers" duly signed and managed by both parties.

 

ELEPHANT TALK designate the presence of preventive if as a result resource in the development of services the present contract submit the cases laid down in the legislation in force. In that case, persons designated shall fulfill the requirements laid down in the legislation in force, as well as they will develop the functions and established responsibilities.

 

91 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

3) NOTIFICATION ACCIDENTS AND INCIDENTS THAT OCCURRED IN CENTRES OR PLACES OF WORK OF VEE

All the accidents or incidents during the development of their activity business as VEE provider must be notified immediately.

 

Next to the notification, ELEPHANT TALK is obliged to submit the following documentation duly sealed and approved by its prevention service or in his case by the representative of the company within a period not exceeding 7 days after the date of the accident:

 

· From the injured full identification TC1 and TC2, certificates of training, delivery of information and EPI´s and aptitude medical.
· From the Responsible "for execution of work" at that time: identification complete and testimony of what happened, co n its signature original.
· Report accidents, at least indicating the kind of sinister, happened event identification of witnesses and his statement, etc.
· Measures that will take to correct the situation that caused the accident or to avoid new casualties.

 

4) REQUIREMENTS IN THE CASE OF SUPPLIES OF GOODS.

 

In the case that as a result of the contract award is the provision of machines, equipment, products and useful work, ELEPHANT TALK obliged:

 

· To ensure that they do not constitute a source of danger for the worker, whenever installed and used in conditions, uses, forms and for recommended purposes by them. Moreover, must have certification CE.
· When appropriate, will be packaged and labeled to allow your conservation and manipulation in safety.

 

92 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

· Provide the (security chips) information indicating the correct way of use by workers, the additional preventive measures to be taken and industrial risks involving both normal use, as their manipulation or improper use or maintenance.
· Any information must be in Spanish.

 

5) REQUIREMENTS IN CASE OF REALIZATION OF WORKS OF CONSTRUCTION

 

For jobs that involve the completion of construction, will be obliged compliance with Dr 1627/97, on October 24, which lays down the minimum provisions on safety and health in construction.

 

6) OTHERS OBLIGATIONS OF ELEPHANT TALK.

 

i) ELEPHANT TALK must deliver to the Manager of the contract by VEE:

 

· Any documentation required in this annex,
· Communicating any changes that occur in any of the stated documents.

 

ii) ELEPHANT TALK certified companies that hire or subcontract for the realization the contract services that meet their obligations in field of prevention of workplace risk. Shall be the responsibility of ELEPHANT TALK to their contracts or outsourced monitoring of the preventive rules contained in this document or any other type of information in this respect that is transmitted by VEE to ELEPHANT TALK, as well as where appropriate, coordinate the implementation of the work.

 

93 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

iii) for each company contracted name subcontracted and/or, ELEPHANT TALK will deliver to VEE a certificate showing that it meets the requirements demanded in the field of Prevention of occupational hazards.

 

iv) VEE will be at the disposal of ELEPHANT TALK for those queries that it needs to make. You can set contact over the contract manager. Are reminded that as indicated constitutes legal requirements of enforceable, without prejudice come also included elsewhere in the contract or contracts signed, so it is them requires stricter enforceable Also recalling the need that their workers serve and take additional measures of prevention VEE to establish. This derives than any expenditure which can cause compliance or failure to comply with these obligations shall be borne by ELEPHANT TALK account.

 

v) ELEPHANT TALK undertakes all data provided to VEE are truthful and duly updated so as to meet all requirements required by applicable law on data protection personal. VEE reserves the right to check, when deems it timely, truthfulness, implementation and compliance with the instructions, rules, etc. are part of the documentation submitted by ELEPHANT TALK, of which must have.

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex J in duplicate and for a single purpose on the date indicated in the header.

 

94 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex J – General Conditions for prevention of risks and health

 

Signed. D. Paulo Da Silva Dourado Neves Signed. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VODAFONE ENABLER ESPAÑA, S.L. By ELEPHANT TALK EUROPE, HOLDING BV

 

95 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex K: Requirements for Compliance with the Sarbanes-Oxley Rules

 

Annex K: Requirements for Compliance with the

Sarbanes-Oxley Rules

 

96 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex L: Certificate

 

Annex L: Certificate

 

97 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex M: Definitions

 

Annex M: Definitions

 

98 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex N: Quality and environment

 

CONTRACT BETWEEN VODAFONE ENABLER
ESPAÑA, S.L. AND ELEPHANT TALK EUROPE
HOLDING, BV FOR THE PROVISION OF TECHNICAL
AND OPERATIONAL SERVICES

 

Annex N: Quality and environment

 

 

 

1 st November 2013

 

99 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex N: Quality and environment

 

ANNEX N

 

ENVIRONMENT

 

QUALITY PARAMETERS OF THE OBJECT OF THE CONTRACT

 

MINIMUM CONTENT OF THE QUALITY PLAN

 

Notwithstanding the technical specifications and the adequacy to the law applicable to the contract, the quality Plan shall have the following minimum content:

 

A QUALITY OF THE OBJECT

 

1. List of documentation to be used for the supply, including definition, characteristics and criteria of acceptance.

 

2. Program of Inspection Points detailing, in sequence, all actions provided for in the control of quality on the object of the contract to ensure its characteristics during the entire process, indicating quality variables to control, control criteria, measurements, tolerances and acceptance criteria.

 

3. Index of the of the final quality dossier that will delivered to VEE, before the acceptance of the supplies. This dossier will include technical documents and the evidence and results of checks carried out, for the sake of the adequacy of the object of the contract with the features, and quality requirements.

 

100 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex N: Quality and environment

 

B QUALITY OF THE PRODUCTION PROCESS

 

1. Quality management procedures that ELEPHANT TALK intends to apply during the term of this Contract. In all cases the following will be included in the proposed set: "Control of suppliers and subcontractors", "treatment of non-conformities, deviations and claims", "Management of corrective actions", "Process Control" (of the object of the contract), and "Control of calibration of measuring and test equipment", being ELEPHANT TALK empowered to apply other additional procedures.

 

2. Appointment of a person in charge of quality that acts as interlocutor with the VEE Department of quality evaluation and that takes responsibility for the realization of the results of the quality Plan.

 

MINIMUM CONTENT OF THE ENVIRONMENTAL MANAGEMENT PLAN

 

Without prejudice to the technical specifications and the adequacy to the law applicable to the contract, the environmental Plan shall have the following minimum content:

 

A. IDENTIFICATION AND EVALUATION OF ENVIRONMENTAL ASPECTS

 

1. List of all the environmental aspects associated with the activity, in relation to:

 

- Emission of pollutants, noise and vibrations into the atmosphere.

 

- Assimilable to urban and inert waste management.

 

- Management of hazardous waste.

 

- Alteration of the natural environment / landscape.

 

- Visual condition of temporary facilities.

 

- Condition to the cultural, artistic or archaeological heritage.

 

2. Quantification of the above mentioned aspects, insofar as that is possible.

 

3. Relationship of preventive and corrective measures to minimize the environmental impact of the activity undertaken.

 

101 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex N: Quality and environment

 

B.- IDENTIFICATION OF LEGAL REQUIREMENTS OF ENVIRONMENTAL MANAGEMENT

 

1. List of derived requirements and standards applicable to the activity, and in connection with the described environmental aspects.

 

2. Copy of the necessary documents in relation to the applicable law (document tracking and control of hazardous waste, construction permit).

 

3. Copy of the environmental impact assessment when the environmental impact assessment regulations may apply to the activity carried out.

 

C.- MONITORING AND CONTROL OF WORK PLAN

 

1. Records of monitoring and control with the following contents: description of operation, type of control (visual or documented), periodicity of control, acceptance criteria and control manager.

 

2. Description and copy of the Procedure in emergency situations.

 

3. Identification of the authorized management company that is going to make charge inert waste and hazardous waste.

 

4. Identification of the person responsible for environmental management .

 

ELEPHANT TALKis committed to complying with all the provisions of this annex and with the procedures and specifications derived from the environmental management system implemented in VEE that apply to you, which will be delivered by VEE to ELEPHANT TALK upon request. Likewise, it shall take all necessary measures to ensure that employees are informed of the provisions of this annex and the procedures and specifications that apply to it.

 

And in conformity with the above, both appearing in the representation that involved, sign the present annex N exemplary twice and a single effect on the designated date in the header,

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex N in duplicate and for a single purpose on the date indicated in the header.

 

102 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex N: Quality and environment

 

Signed: Mr. Paulo Da Silva Dourado Neves Signed: D. Mark Dirk Marin Nije
 /s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VEE ENABLER ESPAÑA S.L. By ELEPHANT TALK EUROPE HOLDING, BV

 

103 de 152
Certain of the Annexes to the Agreement are currently unexecuted and will be executed separately by the Parties as forseen in the Main Body of the contract in Section 17.2. Upon execution of the outstanding Annexes, and if the Parties so desire, we will submit subsequent requests for confidential treatment with the SEC for the relevant portions of those Annexes.

 

CONTRACT BETWEEN VODAFONE ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING BV FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex O: Information Security General Regulation

 

Annex O: Information Security General
Regulation

 

104 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

CONTRACT BETWEEN VODAFONE
ENABLER ESPAÑA, S.L. AND
ELEPHANT TALK EUROPE HOLDING,
BV FOR THE PROVISION OF
OPERATIONAL AND TECHNICAL
SERVICES

 

Annex P: Security of Information general regulation

 

 

 

 

 

 

1 st November 2013

 

105 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

ANNEX P

 

GENERAL INFORMATION SECURITY REGULATIONS

 

1 Introduction

All external personnel authorized to access or modify the information owned by VEE is subject to compliance with the rules of safety of information, in particular:

 

· All external collaborator of VEE, must keep the required confidentiality during and after their employment relationship with respect to the information of company or personal data to which access for their work.

 

· All external collaborator of VEE must strictly comply with confidentiality clauses included in contracts for the provision of services, or those that have been signed with a personal.

 

VEE shall be entitled to take appropriate legal measures in case of failure to comply with these responsibilities.

 

2. Proper use of the information

 

All employees of VEE and external partners will be responsible for non-disclosure, loss or unavailability of information, either accidentally or deliberately. As general rule, information must not be removed from the workplace, except in those cases in which there is no other solution and the extraction of information is fully justified. Whenever information is removed from systems, equipment, or office of VEE, the data must be encrypted in the equipment of the third party, the responsible of the third in VEEE (VEE SPOC) must approve the extraction and in the case of being C3 or C4 information, the Information Officer must approve the removal of the information.

 

The notebooks of the third party expected to treat or maintain data from VEE must have the USB and CD/DVD recorders disabled and hard disk must be encrypted by software validated by VEE.

 

106 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

Confidential information will not be sent over the Internet or other public network, since by nature it is not considered secure.

 

In General, the storage on corporate resources or access or download from resources provided by VEE of any type of content (videos, music, images, documents, etc.) subject to copyright, intellectual property law or any other law or regulation in force applicable in this respect is not allowed. Any such content will be deleted automatically.

 

In the termination of the contract the third party must destroy all documents (paper or electronic) associated with the service offered to VEE. The third will use a data cleansing tool for this purpose, those computers that may contain information of VEE.

 

3 User ID and passwords

 

The authentication mechanisms (user IDs and passwords, digital certificates, etc.) are personal and non-transferable and, therefore, cannot be shared. Each person is responsible for the actions that are recorded in the technological resources with its user code. The actions carried out in systems and infrastructures of VEE are recorded and may be monitored in order to identify and investigate security incidents.

 

4 Use of information outside the corporate resources

 

The use of paper, removable media or files with information that has been extracted from the technological resources should be avoided as far as possible. Special attention must also be taken in those cases in which sensitive information is distributed either on magnetic supports, through pouch or by personal mailboxes of employees and external collaborators.

 

In those cases in which information is sent or received, to or from other entities or enterprises through telematic means, it will be agreed with these companies, together with ICT security, secure means of distribution, according to the established connection standards.

 

107 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

5 Storage of Information in the microcomputer environment

 

In no case, users may create any file or document containing personal data in network drives; this information should only remain in the corresponding platforms on which safety measures to ensure the confidentiality, integrity and availability of information and compliance with the security measures established in the legislation of personal character data corresponding to the level of security of the files have been implemented.

 

Microcomputer-based information must be stored in those resources that will ensure its confidentiality, integrity and availability in each case.

 

5.1 External storage units

 

Proper use and custody of information will be the responsibility of the user who has made the extraction of information from the platform which housed it originally.

 

5.2 Storage in mobile devices

 

Provided that mobile devices in which information property of VEE can be stored, are used, security measures enabling the protection of information stored in them from all kinds of theft, unauthorized access, disclosure of the information contained in them or loss of the devices, either deliberately or accidentally, must be implanted.

 

6 Use of e-mail and Internet access

 

E-mail and Internet access are working tools which can be provided by VEE to their external partners to exclusively perform the tasks involved in its work. It is not a tool intended for private or personal use.

 

108 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

6.1 Safety measures for the use of electronic mail

 

It the case that a user account of the domains @vodafone-enabler.com, @corp.vodafone.es or any other domain owned by the VODAFONE group is granted, the user is not identified in a particular way, but as a member of VODAFONE, therefore no user should participate in forums in a personal title since it would involve the name of VODAFONE.

 

The use of public email systems for communications issues related to the functions carried out by the user in his job is prohibited.

 

All users access to corporate mail system will be made by a personal user account and all the information that is required with respect to the use of e-mail will be stored, for if necessary, analyze it and be able to detect, in the event of incidents, if an inappropriate use of the mail is underway.

 

As a general rule, the e-mail should not be used for the sending of confidential or secret information over the Internet.

 

6.2 Safety measures for the use of the Internet

 

In the case of Internet, the following must be taken into account to ensure correct operation:

 

· All Internet access from VEE infrastructure will be maintained through the mechanisms provided by VEE and validated by ICT security, authenticating the user, through a personalized user account.

 

· Under no circumstances, no user will avoid security controls that regulate access to the Internet from VEE infrastructure.

 

· It is not allowed to download programs or Internet software, even of public consideration to VEE infrastructure, since it could contain viruses or any malicious code.

 

· Corporate Internet access is monitored and all accesses are recorded. The information necessary for its analysis and possibility of misuse detection is stored.

 

109 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES

Annex P: Security of Information general regulation

 

7. Antivirus and malware protection

 

In order to prevent and detect the introduction of malicious software all technological resource installed or connected to VEE susceptible of being infected by any virus or malicious code in general (client stations, laptops, servers, etc.) must have installed and active a antivirus program with antispam and antispyware functionality.

 

8 Data network connections

 

8.1 Connection of equipment to the data network

 

All stations, desktops and laptops, as well as the hardware associated with these, connecting directly to the corporate network will be provided, or must be homologated, by VEE.

 

8.2 Access from data network of VODAFONE.

 

These accesses must be made through Corporate connection services operating in every moment, approved by ICT security.

 

8.3 Access to VEE’s data network.

 

All connections from networks outside of the VEE network will be validated by ICT security through the procedures established for that purpose. No use of connection equipment to VEE network different than the validated by ICT security will be used. The configuration of the equipment used to connect to the network of VEE must incorporate at least one antivirus, antispam, antispyware and be updated with all security patches.

 

110 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK EUROPE HOLDING, BV FOR THE PROVISION OF OPERATIONAL AND TECHNICAL SERVICES
Annex P: Security of Information general regulation

 

9 Personal data legislation

 

There is a specific legislation (Data Protection Act and regulations and associated instructions) on the protection of data of personal nature which knowledge and compliance is mandatory to all external collaborators of the company.

 

10 Communication of incidences

 

Any user who has knowledge directly or indirectly of any actual or potential incident that might arise from a breach of the here described, shall immediately communicate such incidence, and the actions that had been taken urgently, to its immediate VEE manager or ICT security team.

 

And as proof of their conformity with the foregoing, both Parties appearing, in the representation in which they intervene, sign this Annex P in duplicate and for a single purpose on the date indicated in the header.

 

Signed: Mr. Paulo Da Silva Dourado Neves  Signed: D. Mark Dirk Marin Nije

/s/ José Paulo Da Silva Dourado Neves

/s/ Mark Dirk Marin Nije
By VEE ENABLER ESPAÑA S.L By ELEPHANT TALK EUROPE HOLDING, BV

 

111 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex Q: Anti-bribery

 

CONTRACT BETWEEN VODAFONE
ENABLER ESPAÑA, S.L. AND ELEPHANT
TALK EUROPE HOLDING, BV FOR THE
PROVISION OF OPERATIONAL AND
TECHNICAL SERVICES

 

 

Annex Q: anti-bribery

 

 

 

 

 

 

November 1 st , 2013

 

112 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex Q: Anti-bribery

 

ANNEX Q

 

VEE ANTI-CORRUPTION AND ANTI BRIBERY POLICY

 

VODAFONE’s anti-corruption and anti-bribery policy applies to all subsidiary companies of the Vodafone Group and Joint Ventures with a stake of 50% or more, employees, as well as providers, agents and other employees of the companies of the Vodafone Group. As a result, this policy shall apply to ELEPHANT TALK, in so far as this it acts on behalf or in the name of VEE as well as on all occasions in which it carries out acts related to the contract signed between VEE and ELEPHANT TALK.

 

VEE’s anti-corruption and anti-bribery Policy obliges ELEPHANT TALK to meet the highest of legal and ethical standards in the conduct of its business with VEE. In addition, this policy focuses on one of the fundamental principles of Vodafone, called “ doing what's right” .

 

The objective of this policy is to ensure compliance with the standards, both national and international, on anti-corruption and anti-bribery, whose breach may involve the imposition of prison sentences and fines, resulting highly harmful to the business of VEE and its reputation.

 

VEE’s anti-corruption and anti-bribery policy is derived from the application, to all the subsidiaries of the Vodafone Group, of the following standards:

 

· United Kingdom anti-corruption rules ( Bribery Act 2010 f);

· United States rules on foreign corruption ( Foreign Corrupt Practices Act - FCPA );

· OECD rules established by the Convention against bribery of foreign public officials in international transactions, of 21 November 1997;

· National standards (in particular articles 286, 419, 428 and matching of the Spanish Penal Code, which includes the offences of corruption between individuals, bribery and influence peddling, respectively).

 

It is the policy of VEE that ELEPHANT TALK complies in all respects with national and international standards, laws, rules and principles relating to the fight against corruption and bribery in each of the jurisdictions where it operates or has any other activity.

 

To do this, ELEPHANT TALK undertakes to establish and implement procedures to effective compliance with these standards. VEE may at any time ask ELEPHANT TALK accrediting the existence and pursuant to such procedures, committing ELEPHANT TALK to certify these aspects.

 

As a result, any form of bribery or bribery, including offers of undue or improper payments made to ELEPHANT TALK or by it to a third party will not be tolerated.

 

113 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex Q: Anti-bribery

 

In this regard, bribe is referred a the giving, offering or promising of money or anything else of value, both directly and indirectly, to a civil servant, with the aim of influencing the official and thus gain an advantage when it comes to obtain or retain business. These type of payments are prohibited even if:

· They redound to the benefit of another person other than that makes the payment;
· the business to be obtained is not with the public administration;
· the payment does not derive finally in the obtaining of the business;
· is the official who initially suggested the payment;
· the amount paid or the delivered thing has little value.

 

Þ ELEPHANT TALK should not accept or never offer any form of bribery in order to speed up a process or make a profit. This applies if the payment is made directly or indirectly, through an agent or partner .

 

The contacts made on behalf of VEE with Governments, agencies or Government officials will be held so as to ensure compliance with the anti-corruption rules. Consultants, consultants, subcontractors or other agents contracted to assist or represent ELEPHANT TALK will be informed of this policy and forced to comply with its terms.

 

Corruption among individuals means promise or offer a benefit of any kind to any Director, Manager, employee or contributor to a company to make it conducive to it or one third party against others, in breach of its obligations in the purchase or sale of goods or the hiring of professional services. These behaviors are completely prohibited by VEE.

 

Þ ELEPHANT TALK should not never accept or offer a benefit not justified to achieve a contract .

 

Influence peddling means attempting to influence a public official or authority, prevailing of a personal relationship with this or with any other public officer or authority, to achieve a resolution that can generate an economic benefit for himself or for VEE. This behavior is strictly forbidden by VEE.

 

Þ ELEPHANT TALK must not, under no circumstances, benefit from a personal relationship with an officer or authority to get a resolution that interests him directly or to VEE .

 

To avoid any misconduct, ELEPHANT TALK must:

 

· Be careful when they are offered or received gifts and invitations.
· Even the charitable donations may constitute improper payments if they are made to facilitate a process or to acquire a commercial advantage.
· Pay special attention in the case of proposition of gift or invitation to an official.
· Business invitations must be moderate regarding the involved spending.
· Travel and accommodation costs must be moderate and be offered only for journeys directly related to the promotion of the services and products of ELEPHANT TALK.

 

114 de 152
Confidential Treatment has been requested as to certain portions of this document. Each such portion, which has been omitted herein and replaced with an asterisk [*], has been filed separately with the Securities and Exchange Commission.

 

CONTRACT BETWEEN VODAFONE ENABLER ESPAÑA, S.L. AND ELEPHANT TALK HOLDING BV, FOR THE PROVISION OF TECHNICAL AND OPERATIONAL SERVICES
Annex Q: Anti-bribery

 

· In case of doubt to a certain conduct, require the approval of VEE.

 

And in conformity with the above, both appearing in the representation that involved, sign the present annex Q in duplicate form and a single effect on the designated date in the header,

 

Signed: Mr. Paulo Da Silva Dourado Neves  Signed: D. Mark Dirk Marin Nije
/s/ José Paulo Da Silva Dourado Neves /s/ Mark Dirk Marin Nije
By VEE ENABLER ESPAÑA S.L. By ELEPHANT TALK EUROPE HOLDING, BV

 

115 de 152

 

 

ET Business Services W.L.L. Bahrain ETC Europe GmbH Switzerland ETC Schweiz GmbH Switzerland ETC Carrier Services GmbH Switzerland ETC Premium Rate Services Netherlands BV Netherlands ET Mobile Services BV Netherlands ETC Italy SRL Italy ET Telekom GmbH Austria 100% 100% 100% 100% 99.9975% 51% ETC PRS U.K. Ltd UK ET - STREAM GmbH Switzerland 100% ETC Holding AG Switzerland ETC Schweiz GmbH Branch Belgium ETC Carrier Services GmbH Branch Netherlands 100% 100% Elephant Talk Communications Corp. ETC, SLU Spain ETC France SAS France ET Limited Hong Kong 100% 90% 100% 51% 100% ET Europe Holding BV Netherlands ETC Luxembourg S.A. Luxemburg 100% ET Bahrain W.L.L. Bahrain ET ME&A (Holding) Jordan L.L.C. Jordan 99% ET ME&A (Holding) W.L.L. Bahrain 100% 100% ET Guangzhou IT Ltd. China 100% ET UTS NV Curaçao 51% Validsoft Limited Ireland Validsoft (UK) Limited United Kingdom 100 % 100 % 100 % ET Deutschland GmbH Germany ET Belgium BVBA Belgium 100% 100% 100% ET Telecom. do Basil LTDA Brasil 10% 0.0025% ET de Mexico S.A.P.I de C.V. Mexico ET Group International BV Netherlands 100 % 100% Morodo Group Ltd. UK 100 % Elephant Talk North America Corp. USA 100% 100% ET ME&A FZ - L.L.C. Dubai 50.54% 100%

 

 

 

 

EXHIBIT 23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

Board of Directors

Elephant Talk Communications Corp.

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-180977, 333-181320 and 333-181738) and Form S-8 (Nos. 333-135971, 333-152276 and 333-177205) of Elephant Talk Communications Corp. of our reports dated March 31, 2014, relating to the consolidated financial statements and the effectiveness of Elephant Talk Communications Corp.’s internal control over financial reporting which appear in this Annual Report on Form 10-K. Our report contains an explanatory paragraph regarding the company’s ability to continue as a going concern. Our report on the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013.

 

 

/s/ BDO USA, LLP

 

Los Angeles, California

 

March 31, 2014

 

 

 

Exhibit 31.1

  

CERTIFICATION

I, Steven van der Velden, 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(s) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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 (or persons performing the equivalent functions):
     
  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.

 

Dated: March 31, 2014
 
/s/ Steven van der Velden     
Steven van der Velden
President and Chief Executive Officer
 

 

 

 

 

Exhibit 31.2

 

CERTIFICATION

I, Mark Nije, 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(s) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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 (or persons performing the equivalent functions):
     
  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.

 

Dated: March 31, 2014
 
/s/ Mark Nije     
Mark Nije
Chief Financial Officer
 

 

 

 

 

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 2002 (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, 2013 (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 31, 2014 /s/ Steven van der Velden  
  Steven van der Velden, President and
Chief Executive Officer
 

 

 

 

 

 

 

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 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, 2013 (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 31, 2014 /s/ Mark Nije  
  Mark Nije, Chief Financial Officer