Pareteum Corporation
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Elephant Talk Communications’ Shareholder Update Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] As a reminder, this conference is being recorded today, May 12, 2015. And now, I would like to turn the call over to Mr. Steve Gersten of Capital Markets Group. Please go ahead sir.

[Steve Gersten:]

Thank you. Good morning to everyone in the United States, and good afternoon to our European listeners, and thank you for joining us for the Elephant Talk Communications shareholder update conference call. On our call today will be Steven van der Velden, CEO of Elephant Talk; Mark Nije, CFO of Elephant Talk; and Paul Burmester, CEO of ValidSoft. Following management's discussion, there will be a Q&A session open to all participants on the call, as the operator has already mentioned. Now before we get started, I'm going to review the company's Safe Harbor statement. Remarks made on this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. All forward-looking statements are inherently uncertain, and they are based on current expectations and assumptions concerning future events or future performance of the company. Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions, and speak only of the date hereof. In evaluating such statements, perspective investors should review carefully various risks and uncertainties identified in this conference call and the matters stated in the company's SEC filings. These risks and uncertainties could cause the company's actual results to differ materially from those indicated in the forward-looking statements. With that out of the way, I would like now to turn the call over to Elephant Talk's Chairman and CEO, Mr. Steven van der Velden.

[Steven van der Velden:]

Thank you, Steve, and thanks to everyone for joining us today for our shareholder update call. The start of 2015 has been exciting, as we are witnessing the beginning of our expansion into new geographies in North America and South America. On April 29-30, 2015 Elephant Talk North America was invited to be present at the Verizon Partner Summit in Miami as one of three vendors participating, alongside with Coriant and Cisco. Elephant Talk North America was highlighted from the stage as the intended partner to power Verizon Partner Solutions’ new pre-paid MVNO offerings in North America. In the United States ETNA will, if selected, provide the platform for partner solutions of Verizon prepaid program as a branded Powered by Elephant Talk solution. Our North America model is now similar to the model we have been applying successfully with Vodafone in Spain. In exchange, for a monthly host subscriber to be paid by the operator, we help the operator to better serve their existing as well less future virtual operator partners, through making available ET’s highly reliable mobile platform, offering a broad portfolio of mobile service capabilities, specifically to suit agile, flexible needs of such mobile operator partners. Overseas, we have diligently been working with late along with Vodafone in Spain. We recently topped a critical mass user number for the LOWI brand, which is powered on our platform. This fast-growing volume is considered significant success, achieving these type of postpaid subscriber numbers in a relatively short timeframe since the launch of the LOWI brand around the event. The launch is considered by Vodafone as one of the most successful new MVNO license in Spain, and in the entire industry. Building on this success, we are working with Vodafone to not only increase the number of users on our platform in Spain, but to look to work with new brands in new geographic markets as well. Recently, we signed a new platform contract in Brazil, subject to our client obtaining an MVNO license from Anatel, the Brazilian telecoms regulator, with a substantial initial customer capacity. Our client entered into an agreement with one of the largest mobile operators in Brazil to use their network, covering all of Brazil as their host network. Last month, our clients submitted all required documents to the regulator to obtain all of the necessary licenses and permits to operate in this market, actually by far, the largest market in South America, which are expected to be granted over the next couple of weeks. If all goes well, we expect the platform to be up and running by the end of this year. As we previously filed in the 8-K, our 2014 Annual Report, as well as in this 10-Q, and discussed during our last earnings call, our relationship with the Iusacell/AT&T is coming to an end. At this time, we are in discussions regarding an amicable settlement and exit under the contract terms, and we expect a positive final settlement to take place shortly. The settlement will take into account the payment of outstanding receivables combined with payment for a portion of the work that was to be completed during the contract. The settlement will provide us the necessary means to move forward with our long-term growth strategy and to pay down a substantial part of the obligations to our debt lender. I want to reassure all of our shareholders that this is not based on the lack of success or inability of Elephant Talk to perform. The decision reflects AT&T's desire to maintain consistency within their global operations and choosing to use their legacy vendors as they enter this new geography. In fact, we expect to work with other brands in the Mexican marketplace in the very near future. Over the past two quarters, Zain has had significant business development in Saudi Arabia, and is now operating three brands on our network; Sky brand, an M2M brand, Matrix, an international roaming brand, and Simpati, a cross-border brand of Telecom Indonesia. We expect in the coming two quarters more brands to be launched jointly with Zain that likely will bring users in the six-digit host sales on our platform. Next week, we will announce a new MVNO in the Dutch market to be hosted on our mobile platform. It is specialized and offering secure connectivity services to the customer and enterprise markets. Elephant Talk provides this MVNO with voice and data services through its state of the art MVNO platform, using the latest software defined network and capability. The overall revenue impact most likely will be limited. This will be the fifth MVNO in the network enabled by Elephant Talk Communications. ValidSoft is continuing to make progress in deploying its product globally. I will turn the call over to Paul to discuss ValidSoft in further depth.

[Paul Burmester:]

Thank you, Steven. After a very encouraging start to 2015 with two new contracts signed, we continue to go from strength to strength with our strategy to commercialize ValidSoft, and it’s very pleasing to see our momentum continue to gain pace, and as such I’m delighted to announce that a third major national contract for 2015. This latest contract has just been signed with ImageWare Systems, which is a US-based OTC-listed corporation. ImageWare Systems is a market leader in providing identity management solutions, delivering a single platform of best-in-class biometrics solutions to manage millions of identities worldwide, with a very client-partner portfolio, including TransUnion, Fujitsu, IBM and CA Technologies. After a rigorous process of trials, test and commercial review against other voice biometric vendors, ValidSoft has been selected as their preferred voice biometrics technology provider for ImageWare Systems going forward. Most importantly, this deal not only validates our superior technology and gives ValidSoft a leading channel partner of reseller for our voice biometric technology, but it also provides us with an existing channel pipeline as contracts that are already signed by ImageWare Systems on a currently under development and deployment with them. Therefore, we’re very excited by this new partnership with ImageWare Systems and its potential to complement and accelerate our growth in the voice biometrics marketplace. We look forward to providing further updates on this in the very near future. In our last earnings call, we announced a new commercial contract for our enhanced user-authentication platform, featuring our voice biometrics technology. The customer, a US-based NYSE listed corporation, will utilize our user authentication platform with voice biometric technology to authenticate their out-of-office-based agents in the U.S. in a secure and user-friendly manner. Not only is this a significant new customer for ValidSoft, but it was also pleasing to see our successful expansion into a new geography and a new industry sector and this is further validation of our new commercial strategy. As you will no doubt appreciate given the nature of our business, the confidentiality of our customers, the data and their deployment details is as paramount importance, and as such, it's not always possible to ValidSoft name and promote our customers in every instance so the point of contract execution. So very much appreciate your continued understanding and patience in this regard. As we continue to develop and enhance our product portfolio with some notable updates to our voice biometric technology at the start of this year, our endeavors are now bearing fruit, as they have enabled ValidSoft to displace the existing suppliers of voice biometric technology within two major customers, based on the technical performance and strength of our voice biometric engine, during comparative trials. And in fact the leading CTO of one of our customers described our performance and results as astounding. After being consistently recognized as a leader in voice biometrics industry by a wide range of analyst organizations, it's rewarding to see further praise endorsement from commercial customers as well. As you know, we recently announced the successful deployment of our Device Trust platform in partnership with FICO at a second major U.K. bank. Not only is our solution now in full commercial use, but we have seen a substantial increase in SIM swap detection transaction volumes from both deployments currently on the platform. And we’re also delighted to announce that during this quarter, we are going live with an extension of our Device Trust platform within one of our existing customers to include our international proximity correlation functionality, and we look forward to providing further update on the growth of our Device Trust deployment in the near future. Finally, we previously highlighted that ValidSoft is being successfully audited and recommended for ISO 27001, which is the industry standard for information security management. We are now pleased to announce that since that time, we have formally received full ISO 27001 certification. This enables us to promote our compliance and certification to a growing pipeline of commercial opportunities as a further and key endorsement of our approach to securing customer data. I will now hand over the call to Mark to discuss our financial data. Mark?

[Mark Nije:]

Thanks Paul. I will now discuss the company's financial results for the first quarter. As mentioned in the previous earnings call six weeks ago, as a result of the application of U.S. GAAP accounting rules, we will provide going forward investors, both GAAP and non-GAAP revenue information. The GAAP revenue was $5 million in the first quarter, compared to $5.4 million for the same quarter last year, a decrease. This revenue was negatively impacted by exchange rates impact of more than US$700,000 following the devaluation of the euro against the US dollar. The non-GAAP revenue, which is the GAAP revenue adjusted for changes in deferred revenue, was up by 23.4% from $6.5 million first quarter last year to $8 million this quarter. Part of this revenue increase was related to the revenue from our Iusacell contract. Upon termination of the Iusacell contract, the company will lose approximately $1.3 million non-GAAP revenue per month that it had been earning in the first quarter of 2015. Depending on the size of the settlement agreement with Iusacell, the company estimates that the non-GAAP revenue for the second quarter of 2015 will not be much negatively affected by this yet. At the same time the GAAP revenue is estimated for Q2 to be substantially impacted in a positive way, in case the Iusacell termination and settlement is concluded. Up on the settlement of full release of Elephant Talk’s obligations towards Iusacell, the full amount of deferred revenue related to the Iusacell contract, which resides on our balance sheet, will be released from the balance sheet and recognized as revenue. I will now briefly turn to a number of other items of the income statement. Cost and operating expenses for this quarter were $8.3 million, a decrease of approximately 7.8%, compared to the $9 million in expenses for the same period prior year. Other income and expense showed a gain of $1.1 million, compared to a loss of $1.5 million previous year's quarter. This gain was for the majority caused by the extinguishment of an old debt provision in our books that could finally be released this quarter. As a result, also of the other income and expense gain, net loss for the first quarter improved from a net loss of $5.2 million last year to a net loss of $2.1 million this year's quarter. Adjusted EBITDA, our other non-GAAP metric, improved from break-even last year's quarter to a positive $2.3 million first quarter this year. Lastly, as we have reported previously, the company was informed by its lenders through their agents, Atalaya Capital that we are in breach of certain covenants under the credit agreements following the intended termination of the Iusacell agreement. The company has been working closely over the past few months with Atalaya to resolve the situation and the associated Iusacell settlements. This will close our financial summary, and I would like now to turn the call back to Steven for his closing remarks. Steven?

[Steven van der Velden:]

Thank you, Mark. With the conclusion of our settlement with AT&T weeks away, we are focusing our attention on all of the new business opportunity we have in the U.S., in Brazil and in the Far East as well. We remain confident that we are poised to deliver on our strategic plans and secure large scale revenue producing projects. Looking out in 2015, a few key milestones are ahead of us. Our contract with Vodafone is growing and we recently topped a critical mass user number for the LOWI brand in a relatively short period of time, and we expect to deploy in new locations throughout the coming years. We have many options to continue to utilize our platform in Mexico, as we are currently working on all supported by our proven success in the market. We are very much looking forward to upscale our partnership with Verizon to a contractual level in the weeks ahead. It will give our North American market presence a substantial boost. We expect to launch new services in Brazil later this year once our partner goes through the formalities of achieving the license process, which should take a few more weeks. ValidSoft is now excelling on its global sales initiative, having launched with several financial institutions and other leading companies, for both Device Trust and on voice biometric products. Our long-term growth strategy is on track, and we have begun successful deployment in new markets around the world. We are working diligently to turn our hard work into positive results for our shareholders. This concludes management’s update portion of the call. I would now like to open the floor up for any questions that you may have. Thank you.

[Operator:]

[Operator Instructions] We’ll pause for just a moment to assemble our queue. And we'll take our first question from Robert Scaff [ph].

[Unidentified Analyst:]

Hi, Paul. Thanks for both Paul and Steven for the update. I have a question to follow on the SIM swap with the bank. So you’ve got two banks now with SIM swap and one of them is going to Proximity Correlation Logic. Years ago, when this product was launched, we always looked at the Proximity Correlation Logic service as generating a lot more revenues than the SIM swap. Is that still the case?

[Paul Burmester:]

Probably not. Obviously I can't really comment on things that predated me. But first of all, it's important to be clear this is international proximity correlation. So the experience or the process, if you like, will be when an individual is roaming in a foreign country. They are outside of their home country, and in many instances, their card might be declined at an ATM or point-of-sales terminal because they are roaming abroad and perhaps they didn't tell their bank that they were going abroad. In that instance, as part of the bank’s risk assessment and transaction verification, they can then choose to find out if the mobile number associated with that person and that account is actually live and roaming in the same country as the transaction is attempting to take place. So it's not domestic or granular correlation, its international roaming correlation, and it’s to avert that sort of international fraud and also the high volume of fault declines that might happen.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

We'll take our next question from John Nobile from Taglich Brothers.

[John Nobile:]

Hi good morning, or afternoon, depending on where you are. I just want to make sure I have that correct. Did you stated that without Iusacell in the first quarter, was that about $1.3 million a month in loss revenue. Is that correct?

[Steven van der Velden:]

Yes. Well, in Q1, we realized that revenue as non-GAAP revenue. And if the contract will finally terminate, as expected in Q2, that revenue will be indeed loss.

[John Nobile:]

Okay. And I just wanted to get an idea of how big Iusacell was to total revenue in 2014. I was wondering if you had that number of what percentage of total revenue was generated from the Iusacell contract?

[Steven van der Velden:]

Yes, it was somewhat less important as the business of course in Iusacell was ramping up. Mark, do you know more or less the percentage of that revenue base last year?

[Mark Nije:]

Well, it depends on GAAP revenue or non-GAAP revenue. The GAAP revenue was around 25%. If you talk about the non-GAAP revenue, it's more like 45%, 50%.

[John Nobile:]

Okay. On a non-GAAP, it was about 45%, 50%. But GAAP, the way you're still - the way you’re reporting now it’s about point. So it’s basically very significant customer. Now in regard to that AT&T plan. I was curious if they were looking to revert back to the legacy systems that the customers were ready on your system that migrated to your platform. Are they going to be maintained on those platforms, or do you think AT&T is going to take them off of that?

[Steven van der Velden:]

It's difficult for us to say what AT&T will ultimately do. And I think it's also not wise for us to comment on that. For the time being, they are bit-by-bit returning to their legacy systems. And from there onwards, I have to assume that AT&T will substantially improve for the time to come. And ultimately it might be a mix of legacy and their modeling systems. But again, I think we are not in the position to really comment on that.

[John Nobile:]

Okay. And could you shed some light as to how the subscriber growth with Zain has been, more specifically subscriber growth over the quarter now that Zain is operating three brands on your platform, and that's really over the last one or two quarters that they based on to really increase. So I wanted to get an idea of the growth over the quarter?

[Steven van der Velden:]

Well, that information - we are not privilege to disclose that. But as we indicated, we expect that growth to materialize into the six digit number by the end of this year, and we are quite well on track on reaching that. So it's a substantial number that we answer this very generically. It’s somewhere between let's say zero and $100,000. But as I said, we are really on track on reasonably rapid growth and we would be more than happy by the end of this year we would indeed be on that six digit level.

[John Nobile:]

Okay. And you anticipate obviously with growth in Zain and looking at Vodafone also growing, that it should successfully replace maybe what might be loss for Iusacell would - can actually grew revenue in the second of the year half of the year. I believe you mentioned on the prior call that you were looking at that?

[Steven van der Velden:]

Yes. But I think it's a little bit overdone to expect that the growth at Vodafone and Zain can make up for the loss in non-GAAP Iusacell revenues. As we indicated earlier, we have consulted this with a combination of cost-cutting on one hand and looking for additional revenues on the other hand. And the additional revenues are a mix of the growth of existing customers, but it definitely coupled with new customers that we want to see getting online, like for example the Brazilian contracts that we mentioned.

[John Nobile:]

Thanks. Could you shed some light into that Brazilian contract, the size of that new contract?

[Steven van der Velden:]

Well, again also here Elephant Talk is a B2B supplier through our customer partner in Brazil. So at the end of the day, we depend on how successful our partner will be in attractive MVNO business in the Brazilian market. But the platform has a substantial dimension and we believe that given the size of the Brazilian market and the lot of mature state of MVNO is checking that market that our customer has very likelihood of becoming a very successful player in that market. And that would ultimately after we’ve made one or two years, reflect very positively on our revenue base. But I think it's really - it will be too optimistic to give you just a number like that, but I think it could ultimately grow into one of our largest customers.

[John Nobile:]

Does any of the deferred revenue that's on the book contain Iusacell currently, and if so, how much of that?

[Steven van der Velden:]

I would rather leave that question to Mark.

[Mark Nije:]

Yes. It’s substantial, if not the largest part in the deferred revenue is related to Iusacell. So it will have a substantial impact going forward.

[John Nobile:]

Okay.

[Mark Nije:]

I think double the amount of deferred revenue is around $13 million now. And the largest - by far the largest part of that is Iusacell.

[John Nobile:]

Okay. That’s helpful. And maybe if you could quantify exactly what part of that was Iusacell?

[Mark Nije:]

No. We did not disclose that.

[John Nobile:]

Just one quick question. Any idea of when you expect to settle with AT&T? Are we looking at the days, weeks, months at this point?

[Steven van der Velden:]

Well, it's very difficult to exactly plan those roadmaps, but both sides are working diligently to watch an amicable solution. And if I would have to give it my best guess, matter of days is too optimistic, matter of months is clearly too pessimistic. I would say a matter of weeks.

[John Nobile:]

Okay, all right. I’m looking forward to seeing how that shapes. Thank you.

[Steven van der Velden:]

Thank you.

[Operator:]

And we’ll go next to Joe Peters [ph].

[Unidentified Analyst:]

Yes, hi. Thank you for taking the call. My first question is really for Mark in regards to the balance sheet. I know yesterday’s 10-K basically stated there is about $1 million left on the balance sheet. And I just want to kind of tie it into a related to the loan that was taken in November, which from what I understand was about $12 million; $3 million of which was immediately used to pay off a prior loan, which should show a balance of somewhere in the $9 million range. So basically it seems like maybe there was like $8 million cash burn on that loan, or was not the full $12 million used or taken from the loan initially?

[Mark Nije:]

No, the primary cause of us not having more money in the bank is caused by the fact that we have almost $10 million in AR outstanding from Iusacell. So if the business relationship with Iusacell had continued in a normal manner, then our bank balance would have been more in the area of $8 million to $9 million

[Unidentified Analyst:]

Right. So was the original $12 million taken in full, back in November on that loan?

[Mark Nije:]

It was taken in full with a $2 million held back, which was dependent on us completing a number of post-closing conditions. So we received $10 million, out of which, I think it was around $3 million to $3.5 million we repaid. We had about $1 million to $2 million outstanding overdue payables that we needed to repay. So out of the $12 million, we had around $7 million to $8 million actually came in. And then in January upon concluding the post-closing conditions, we receive from our lender the remaining $2 million that was held back initially.

[Unidentified Analyst:]

Got you. And Steven this question is for you, if you could give some sort of update as it relates to Zain and the Axiom deal.

[Steven van der Velden:]

Well, Zain, we just discussed, we have currently three brands on the platform. We sincerely hope that we will have a few more in the next couple of months that should bring the growth to what we discussed earlier, the six-digits hopefully by the end of this year. Axiom is still hanging a little bit in the air. They seem not to be getting their official MVNO license. So they may not be able to start and get quality. However they may choose to start a different qualities like for an example our brand [ph]. But of course these decisions as the B2B supplier to their Zain and Axiom are outside of our domain. We are just supplying them the service as soon as they are up and running. We have developed a very expensive, very strong proposition that Axiom can put into the marketplace. And I would expect at the end of the day, left or right that ultimately to hit the market in Saudi Arabia and ultimately bring customers to our platform. However it maybe in a somewhat different format than we had originally envisioned, if Axiom would have been granted the official MVNO license.

[Unidentified Analyst:]

Right. And what about the three U.S. MVNOs that you had spoken about quarter three conference call last year, in which you basically stated that you had hoped to announce something in quarter one of this year, which I don't believe I heard anything comment on that?

[Steven van der Velden:]

That's correct. Those are still very small activities. And as we already communicated during our last call, we have refocused virtually all of our attention to service, what we then call is tier-1 an old partner in the United States, and us having been invited to their conference in Miami a couple of weeks ago that actually I personally attended as well, we are now really focusing on this model, the same model as we have with Vodafone in Spain, basically helping the mobile operator to better serve their existing in future virtual operator partners. And we believe we have been very successfully deploying that model in Spain. That's where the strength of the company is. So we really look forward to allocate virtually all of our resources into that same direction into the North American market, ultimately bringing hopefully the same success as we have had with that in Spain.

[Unidentified Analyst:]

Okay. Thank you.

[Steven van der Velden:]

Welcome.

[Operator:]

We'll go next to Ed Woo from Ascendiant Capital.

[Ed Woo:]

Yes, thank you for taking my question. Going back to the Verizon Partners agreement, can you talk a little bit about what does that entail? Do you guys have an exclusive relationship? Are there any contracts that are up and running already?

[Steven van der Velden:]

As we stated, we have not yet have this finalized into a contractual relationship. That’s one of the milestones we hope to achieve in the next couple of weeks and months. We do not believe that this will be an exclusive relationship. We might be the kind of default preferred partner, but even MVNO would like to bring their own technology. I would certainly assume that Verizon would be very much open to that. So we will be helping Verizon Partner Services to better help their existing and future customers. And we believe that, that will become a very substantial business over time. But the exact contractual format is still up for discussion in the next few weeks and months.

[Ed Woo:]

How big is the Verizon MVNO business in the U.S.? Is it very big right now?

[Steven van der Velden:]

Well, I think of all the carriers, Verizon is probably the smallest virtual operator player in the U.S., which interestingly enough brings many opportunities, because if you imagine that Verizon would become rather aggressive in that market as well like some of their competitors, there is quite some growth to be foreseen in that space.

[Ed Woo:]

Great. And then the last question I have is going back to Iusacell. I know you guys are potentially working on the settlement. Are you allowed to pitch more business in Mexico while this contract is still being settled or is it pretty much a effort on completion and you guys are already out trying to get new partners in Mexico?

[Steven van der Velden:]

Well, a very good question by the way. No, actually the exclusivity that we have contacted for with Iusacell run out, I assume some time we are indeed allowed to compete for a lot of business. Unfortunately we missed quite a few opportunities in the Mexico marketplace due to the exclusivity in the past. And we definitely hope to catch up in the next couple of months to make sure that we can regain that position in that marketplace. But so since quite sometime now, we are able to look at other opportunities, and actually we are. And we are seeing an interesting sales funnel and hopefully a couple of opportunities will pop out of that in the not-too-distant future.

[Ed Woo:]

Great. Well, thank you and good luck.

[Steven van der Velden:]

Thank you.

[Operator:]

We'll go next to Alaine Turner [ph].

[Unidentified Analyst:]

Yes. Hello Steven. It’s your [indiscernible] speaking. Look, on the financials side. Do you hear me?

[Steven van der Velden:]

Yes, I do hear you. Yes, please go ahead.

[Unidentified Analyst:]

On the financial side, the reason why the share price is acting in a very different way from what the company is doing. Is it that because there is such an enormous overhang of shares to be sold by QAT [ph] and that this has nothing to do with the way the company is performing, but this is just a pressure downwards. And I don’t know how that can stop, because obviously the results are different from what the share prices stay.

[Steven van der Velden:]

Yes, but I think we should look at the developments that have taken place recently. The loss of the Iusacell contract as we discussed a little earlier, has a severe impact on our revenues, at least on our non-U.S. GAAP revenues, and thereby on our cash flows. So I can very well understand that there was some hesitation in the marketplace about the ability of Elephant Talk to replace that revenue with new revenue, either from existing customers or new customers as just discussed somewhat earlier. And that of course in combination with the fact that we have been informed by our lenders that we didn’t lose after all of the components which requires a discussion with the lenders to reset the conditions. And as we stated before, we are now in parallel to discussing the Iusacell settlement, also discussing the settlement or the reset with the lenders. And all that together, so let's say the uncertainty about replacing the Iusacell revenues, about the settlement with AT&T/Iusacell, about the reset with the lenders. I can imagine that altogether provides definitely a certain overhang that gives some hesitance to the marketplace. Regarding QAT [ph] selling stock or not. I think they have in the past hardly sold any stock, and for sure at some moment at any front would need to do, they would like to exit this investment. But I’m not sure if that’s going to happen at this time. So from that perspective, I think the overhang is probably mostly due to the fact that we are losing the Iusacell contract and that we have not yet been able to clearly communicate about the settlement with AT&T, as well as to reset of the conditions with the lender. And I strongly believe that once those elements are out of the way and we are able to clearly show our growth path forward, that a lot of this overhang will be settled.

[Operator:]

We'll go next to Kevin Dede from H.C. Wainwright.

[Kevin Dede:]

Hi Steven, I hope you don't mind if I go back to the Brazil contract you talked about, understanding you are hoping it will be one of your largest customers, I would imagine that would include nationwide deployment there, and that your client is well capitalized. But what I don't understand quite yet is whether or not your client has an established brand name, and if acting as an MVNO who you might expect them fully airtime from or if they're expecting you to perform that, and when you think you might be able to recognize revenue from that deal?

[Steven van der Velden:]

Yes. Okay, Kevin. Thanks. Perfectly fine to get that to the Brazilian situation, because actually it’s one of the part of the highlights that we are able to communicate. First of all, I think our partner is pretty well capitalized. He himself is a successful entrepreneur and he has the backing of privately equity funds in Brazil. Secondly, as we actually stated a little earlier, our client has already contracted with one of the largest mobile operators in Brazil that has indeed national coverage. And the only element he is still waiting for is the formal MVNO license to be submitted by Anatel, the Brazilian telecoms regulator. And as we indicated, we expect that still to take a few more weeks. I think altogether now the original application was submitted three or four weeks ago, and in general, these processes tend to take about seven, eight, nine weeks altogether. So as far as that's concerned, all signs are on green. As far as brands and so were not confirmed. Yes we have been discussing with our partner how he wants to penetrate the market, and there are actually a couple of impressive brands partnering with him. However it's not up to us to announce that. And I hope that as soon as the Anatel license will be granted to our partner that there will be a news flow about the whole contract. And then it’s been of course up to our partner to announce these more specific details. Your last question was about revenues. I would believe that non-GAAP revenues mostly consisting of a variety of platform inflation revenues may come in early as the next quarter, of course subject to the approval by the regulator over the next couple of weeks. We then aim to have the platform fully operational by the end of the year. So really recurring U.S. GAAP revenue should start early next year, and then ramp up over the couple of years to come. And as I said before, yes, indeed, given the size of the market, given the position that our partner has in that market or can achieve in that market, indeed being well capitalized, we feel very positive that he can ultimately reach a very substantial position in that market.

[Kevin Dede:]

Okay. On the Verizon deal, curious to know if you think they will market with you once you finalize your contract. I know you mentioned that being the big milestone. But once you find that contract in place, do you think that they'll actually market with you, or do you think that maybe they are thinking that they run or have you run an MVNO for them?

[Steven van der Velden:]

I would suggest that we wait till we have the final contracts in place. But as an indication of their interest to create a bit of a higher profile in the marketplace, the very fact that Tim [ph] and myself and two of our staff of ETNA were invited to this conference in Miami two weeks ago, and were introduced to some 200 of their existing and future partners. I think is a very good indication of their willingness to expose the capabilities that we will jointly be able to bring into the marketplace. But again we are here as B2B supplier. And at the end of the day, it's the willingness of our partner to create a more high or lower profile in the marketplace and the efforts that will come with that. But so far, the indications are reasonably positive I would say.

[Kevin Dede:]

I would agree. Last question for me, and really for, I guess, just your insight on corporate strategy. I'm monitoring how you see ongoing synergies between Elephant Talk and ValidSoft, particularly as each company seems to be gaining more theme, like your ValidSoft new deal with ImageWare. I was just wondering if you would mind offering how you see those two companies working together or what do you think happens longer-term?

[Steven van der Velden:]

Yes, a very good question of course. Not so easy to address in a call like this quickly, because there are many different thoughts about how that might work out best. It's clear that various converging market interest, because mobile services and security are two elements that are probably top priority of many mobile operators, many enterprises, many virtual customers, many users in the cloud. And I believe that ultimately just offering great mobile services is simply not enough. They need to be very secure at the same time. On the other hand, a lot of the customers that ValidSoft currently and hopefully in the future is servicing, are people, are companies that offer a solution for other companies that are active in the cloud. And in the cloud, it's all a matter of combination of connectivity and security again. So I clearly see converging interest in that respect. On the other hand, the markets we are servicing are somewhat different as the companies like ImageWare and some of the banks and other contract parties of ValidSoft, reflect those are not mobile operators. They are a different type of enterprise customers. However, I believe that there is more and more interest from mobile operators also outside of the Elephant Talk mobile platform to deal directly with ValidSoft to deploy very powerful capabilities to ID customers, because the mobile operators at the end of the day is in the business of authenticating a connection, a line, a handset and why not also play the role of identifying the user behind that handset. And that could be a very neat addition to the overall portfolio mobile operators could offer in the marketplace and become kind of a gateway, a kind of single sign-on platform, behind which, all kind of OTT players could make sure that they know exactly who they are dealing with, and mobile operators could probably create an interesting business model surrounding that model. So as far as just concerned, there are converging elements. There are standalone elements taken into the business and it’s little bit unclear how this maybe building, but I think for the time being, ValidSoft and Elephant Talk are clearly together, although we will always consider any reasonable alternatives where the ultimate value of those companies will be better unlocked for our shareholders.

[Kevin Dede:]

Thank you very much for the thoughtful response, Steven. I appreciate it. And thank you for answering my questions.

[Operator:]

We'll go next to Lee Opper from Hammock Investments [ph].

[Unidentified Analyst:]

Good morning. Could you give us a little more color on your deferred revenue? How you have to account for? What the turnaround period it is for?

[Steven van der Velden:]

Mark, I believe that’s more a question for you to answer.

[Mark Nije:]

Yes. The deferred revenue in our situation is tied to the contract duration that we have with our customers. With the result of certain elements of the invoicing that we do to our customers, they cannot be recognized, they need to be spread over the usually between four to five years because that's difficult duration of a contract that we have with our customers. And that means that the deferred revenue related for interest to Iusacell, which is a sizeable portion. It's double-digits, meaning that, if for instance, the contract with Iusacell is indeed finally terminated in the coming few weeks and all the obligations that we have are released, then basically it means that more than $10 million in revenue is going to be recognized immediately, since that's how the deferred revenue operates. So you need to defer over the estimated life of the customer relationship, if however the relationship is terminated, then that's a buildup of deferred revenue needs to be released to revenue immediately upon termination.

[Unidentified Analyst:]

Okay. I guess what I'm confused, you’re showing about $14.5 million on the balance sheet. $13 million of it being in current and $2 million is being in deferred - in long-term. What portion of the revenue normally would be deferred between one year and the rest - longer than one year, because it looks like most of the predominant was within 12 months?

[Mark Nije:]

Yes. And that's related to the Iusacell contract, since the estimated life of the contract with Iusacell has been dramatically reduced from five years to basically a few months as a result of the termination discussions, it automatically meant that we needed to reclassify the longer-term deferred revenue to short-term.

[Unidentified Analyst:]

Okay. But in the normal contract, what percentage is going to be recognized currently and what's going to be deferred?

[Mark Nije:]

That depends on the face of the contract. If at the beginning of the contract, we charge implementation fee, settlement fees, stuff like that, then initially 100% of that revenue is deferred and will only start to be released into revenue once the platform is live and since start running. Once a contract is live and up and running and we have monthly recurring revenues, then in general depending on the amount and the type of custom work that we do and whether there is any hardware involved, that will determine how much of a certain one-off invoice needs to be deferred. So it's a little bit difficult to give a key metric on how much of revenue is going to end up in deferred revenue. It needs to be evaluated per single contract, per purchase order. And with our relative little amount of history, it's very difficult to make general assumptions on that going forward.

[Unidentified Analyst:]

Okay. Thanks for that clarification. Are you guys still doing work for Iusacell?

[Steven van der Velden:]

Yes. We are still doing some work for Iusacell, but it's on a limited basis.

[Unidentified Analyst:]

By what I'm hearing from you and looking at the numbers, it looks like they really haven't paid you in about six months. Is that true?

[Steven van der Velden:]

I'm not exactly sure of six months, but they have paid us - not paid us for a substantial amount of time, actually since it's clear that AT&T was taking over.

[Unidentified Analyst:]

From a negotiating standpoint, the AT&T just trying to put you in a hard place, or should you have just told them you're walking out if you don't get paid?

[Steven van der Velden:]

Yes, well that's of course all these things always cost your mind. In the telecom space, it's usually the customer comes first, and it's normally not done to put that kind of pressure on your customer, on your - let's say a member because at the end of the day communications is all about being connected, having open lines. And it's really not considered as a pressure means to try to forge your hand. So from that respect, we have always taken the position that the end-customer comes first and we need to take care of connecting them.

[Unidentified Analyst:]

And one last question. Can you give a little more color to what you mean that you met critical mass at LOWI, or the LOWI’s met critical mass?

[Steven van der Velden:]

Yes. Well, it's not up to us to disclose all kind of subscriber levels in detail. That's of course up to our customer. But we know from the original projections that we cleared a pretty sizeable critical mass aspect. That's very good because we know that this gives trust to our customers that they are indeed going in the right direction and aggregating sufficient customers to look forward to this whole deployment with a positive mind. And I think that's why we are very happy that this critical mass has been reached and it's actually up to our customer to possibly announce an exact number in the near future.

[Unidentified Analyst:]

Okay. One final question on ValidSoft. How do you see that being monetized? At what point do you see significant revenues coming in?

[Steven van der Velden:]

Basically ValidSoft is already bringing and growing revenue base, and with the long-term voice biometric contracts that are already signed and poised to be signed in the near future, we believe it will become more and more important contributor to our overall revenues and margin mix. The exact timing of all these elements will mostly depend on the deployment by channel partners, like ImageWare as Paul explained. Paul, maybe you can provide some more color on this?

[Paul Burmester:]

Yes. At this point in time, our focus is to do two things, really to prove ourselves, and that means winning a number of probably direct deals in some of the industry sectors and we’ve displayed that ability with the first big U.S. corporate win. And the second aspect is to get our channels in place, because ultimately we are a technology provider as opposed to purely a solution provider. And so companies like ImageWare Systems can be a fantastic channel for us. They are proven experts in the identity and transactional vindication and have a complete suite of solutions around multi-factor multimodal biometrics and identity. So they already have contracts in place and that can really accelerate our growth. And we will be seeking additional channel partners in those different industry segments to really accelerate that.

[Operator:]

We'll go next to Robert Scaff [ph].

[Unidentified Analyst:]

Thanks. Steven, a few months ago when you were giving a presentation, you talked about, yes, we lost AT&T, we’d see a dip and then the revenues would be recovered pretty quickly. And then last month, we kind of came to the conclusion that by the end of this year, we’d be back to sort of where we were before Iusacell goes online. Is that still the case?

[Steven van der Velden:]

Yes. As we indicated, it’s a mix. It’s not just that we can easily replace the $1.3 million in monthly revenues as we discussed before. It's a mix of lower expenses, especially lower cash expenses. It's a mix of existing customers growing and hopefully new customers coming online. And not only creating non-GAAP revenues from the initial through the space, but ultimately moving into the recurring revenue space, which as Mark explained are mostly recognizable revenues under U.S. GAAP. And we still believe that, let's say, from an overall perspective, that by the end of this year, we could be at a similar level where we were around year-end, beginning of this year, and whether this is exactly going to be Q4 or Q1, needs on a lot of timings and we are of course dependent on many other players that determine real timing. But we feel comfortable that with the cost cutting on one hand, with the growth of our existing customers, with the new contracts that we have already partly announced and that we hope to announce in the near future, that all these elements together will provide that balance that we are indeed at the end of this year is somewhere close to where we were at the end of last year.

[Unidentified Analyst:]

And at what point do you think to be cash flow positive?

[Steven van der Velden:]

Well, that's of course very good question. But it’s a mix, because there are so many different elements that play a role. But as we reported, we had adjusted EBITDA of some $2.3 million positive in Q1, which was actually the best result ever. That is a kind of naturally debt resembles our operational cash flow. Yes, the loss in Iusacell revenue might be larger than that current adjusted EBITDA level. However in combination with our cost-cutting, the growth of customers and new customers altogether, we hope to be reach that relatively soon and actually we hope to not get to the point that we cash flow negative. We really hope that we can stay positive. Although as I said before, there are so many elements that play a role here, that is difficult to say. But even if we do get into a negative operational cash flow, it should be limited and we should be able to recover pretty quickly, and that's also where we referred to as we were discussing the situation that we hope to be in by the end of this year.

[Unidentified Analyst:]

This year’s $2.4 million of EBITDA, is most of that the Hong Kong notes being released?

[Steven van der Velden:]

I don't think that has any influence on the adjusted EBITDA, because those non-cash items are not included. But Mark maybe you can shed some light on that?

[Mark Nije:]

So the Hong Kong release of that is not included in there.

[Unidentified Analyst:]

Okay. All right. Thank you.

[Steven van der Velden:]

Thank you.

[Operator:]

We'll go next to George Melas from MKH Management.

[George Melas:]

Good afternoon guys. I've missed most of the call. I have just one question regarding to the AT&T settlement. Once you settle the release, the receivables and also pay you a settlement to compensate for loss - for revenues that you would not get in the future. Is that right? So it should be - the receivables, I think you said is close to $10 million plus a certain settlement. Do I hear this right?

[Steven van der Velden:]

Yes, that's correct. The idea is that through the settlement, both all the outstanding receivables from Iusacell towards Elephant Talk will be paid as well as some additional compensation for what it originally was planned to be done by us over the next few years, and that combination hopefully will materialize in the very near future.

[George Melas:]

Okay, very good. Thank you. That's all.

[Steven van der Velden:]

You're welcome.

[Operator:]

And at this time, I would like to turn the call back over to Steven van der Velden for any additional or closing remarks.

[Steven van der Velden:]

Again, on behalf of everyone at Elephant Talk Communications and ValidSoft, I would like to thank everyone for joining us on today's call. And thank you to all of our long-term shareholders for their patience and commitment to the company. We look forward to providing additional updates on future developments in the very near future. Thank you very much, and all have a great day.

[Operator:]

This does conclude today's conference. We thank you for your participation.