Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-51805
ELANDIA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware | 71-0861848 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
8200 NW 52nd Terrace
Suite 102
Miami, FL 33166
(Address of principal executive offices, including zip code)
(305) 415-8830
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter time 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions 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 | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
As of November 13, 2009, the registrant had 27,630,220 shares of common stock, $0.00001 par value per share, outstanding.
Table of Contents
ELANDIA INTERNATIONAL INC AND SUBSIDIARIES
Page | ||
PART IFINANCIAL INFORMATION |
3 | |
ITEM 1. FINANCIAL STATEMENTS |
3 | |
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008 |
3 | |
5 | ||
6 | ||
7 | ||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
9 | |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
31 | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
49 | |
49 | ||
PART IIOTHER INFORMATION |
50 | |
50 | ||
52 | ||
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
52 | |
52 | ||
52 | ||
52 | ||
53 |
2
Table of Contents
PART IFINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
eLandia International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2009 | December 31, 2008 | |||||
(Unaudited) | ||||||
ASSETS |
||||||
Current Assets |
||||||
Cash and Cash Equivalents |
$ | 12,238,705 | $ | 37,368,768 | ||
Short-Term Investments |
| 8,157,104 | ||||
Restricted Cash |
4,424,527 | 6,277,374 | ||||
Accounts Receivable, Net |
47,371,763 | 69,806,170 | ||||
Inventories, Net |
17,127,412 | 13,863,542 | ||||
Prepaid Expenses and Other Current Assets |
7,506,792 | 7,169,541 | ||||
Deposits with Suppliers and Subcontractors |
6,319,881 | 2,321,540 | ||||
VAT Receivable, Net |
6,264,534 | | ||||
Assets Held for Sale |
| 7,421,078 | ||||
Total Current Assets |
101,253,614 | 152,385,117 | ||||
Property, Plant and Equipment, Net |
36,172,639 | 21,450,156 | ||||
Deferred Tax Asset |
12,100 | 12,100 | ||||
Telecommunications Licenses and Agreements |
858,743 | 858,743 | ||||
Customer Lists, Net |
1,885,310 | 1,371,532 | ||||
Contract Rights, Net |
1,557,460 | 2,680,845 | ||||
Trade Names, Net |
6,183,572 | 8,151,122 | ||||
Goodwill |
18,740,326 | 19,145,772 | ||||
Deferred Financing Costs, Net |
289,633 | 18,372 | ||||
Assets Held for Sale - Long-Term |
| 16,890,030 | ||||
VAT Receivable, Net |
| 4,350,738 | ||||
Other Assets |
5,297,450 | 5,739,885 | ||||
TOTAL ASSETS |
$ | 172,250,847 | $ | 233,054,412 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
eLandia International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Continued)
September 30, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 38,590,963 | $ | 52,267,986 | ||||
Accrued Expenses |
12,426,737 | 12,549,213 | ||||||
Lines of Credit |
14,801,219 | 27,359,321 | ||||||
Notes Payable |
14,279,285 | 14,501,645 | ||||||
Long-Term Debt - Current Portion |
5,685,978 | 6,700,044 | ||||||
Capital Lease Obligations - Current Portion |
855,097 | 562,318 | ||||||
Income Taxes Payable |
402,498 | 465,390 | ||||||
Deferred Tax Liability - Current Portion |
79,335 | 79,335 | ||||||
Customer Deposits |
3,739,935 | 5,510,050 | ||||||
Deferred Revenue |
1,988,179 | 3,289,152 | ||||||
Liabilities of Discontinued Operations |
693,259 | 6,039,739 | ||||||
Other Current Liabilities |
1,403,223 | 889,138 | ||||||
Total Current Liabilities |
94,945,708 | 130,213,331 | ||||||
Long-Term Liabilities |
||||||||
Long-Term Debt, Net of Current Portion |
22,744,354 | 1,071,157 | ||||||
Long-Term Debt - Related Party, Net of Current Portion |
506,247 | 12,000,000 | ||||||
Capital Lease Obligations, Net of Current Portion |
1,747,880 | 1,375,425 | ||||||
Liabilities of Discontinued Operations |
1,000,000 | 1,564,349 | ||||||
Other Long-Term Liabilities |
2,245,367 | 636,834 | ||||||
Total Long-Term Liabilities |
28,243,848 | 16,647,765 | ||||||
Total Liabilities |
123,189,556 | 146,861,096 | ||||||
Commitments and Contingencies |
||||||||
Noncontrolling Interest Purchase Price Obligation |
| 8,798,838 | ||||||
Common Stock, Subject to Possible Redemption, 433,333 shares at Redemption Value |
| 2,599,998 | ||||||
| 11,398,836 | |||||||
Stockholders Equity eLandia International Inc. Stockholders Equity |
||||||||
Preferred Stock, $0.00001 Par Value; 35,000,000 Shares Authorized; 4,118,263 and 2,340,485 Shares Issued and Outstanding at September 30, 2009 and December 31, 2008, Respectively |
||||||||
Series A Convertible Preferred Stock, $0.00001 Par Value; 6,500,000 Shares Authorized; -0- Shares Issued and Outstanding at September 30, 2009 and December 31, 2008 |
| | ||||||
Series B Convertible Preferred Stock, $0.00001 Par Value; 14,074,074 Shares Authorized; 4,118,263 and 2,340,485 Shares Issued and Outstanding at September 30, 2009 and December 31, 2008, Respectively. Liquidation preference of $27,798,275 and $15,798,273 at September 30, 2009 and December 31, 2008, Respectively |
16,679,962 | 15,785,517 | ||||||
Common Stock, $0.00001 par value; 200,000,000 Shares Authorized; 27,630,220 and 41,301,932 Shares Issued and 27,630,220 and 40,739,432 Shares Outstanding at September 30, 2009 and December 31, 2008, Respectively (Less 433,333 Shares Subject to Possible Redemption at December 31, 2008) |
275 | 402 | ||||||
Additional Paid-In Capital |
171,031,835 | 151,963,772 | ||||||
Accumulated Deficit |
(149,739,826 | ) | (101,562,481 | ) | ||||
Accumulated Other Comprehensive Income |
2,269,192 | 3,460,633 | ||||||
Total eLandia International Inc. Stockholders Equity |
40,241,438 | 69,647,843 | ||||||
Noncontrolling Interests |
8,819,853 | 5,146,637 | ||||||
Total Stockholders Equity |
49,061,291 | 74,794,480 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 172,250,847 | $ | 233,054,412 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
eLandia International Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
REVENUE |
||||||||||||||||
Product Sales |
$ | 22,948,094 | $ | 31,653,693 | $ | 56,946,178 | $ | 69,820,207 | ||||||||
Services |
17,542,021 | 13,390,688 | 43,365,277 | 33,909,487 | ||||||||||||
Total Revenue |
40,490,115 | 45,044,381 | 100,311,455 | 103,729,694 | ||||||||||||
COSTS AND EXPENSES |
||||||||||||||||
Cost of Revenue Product Sales |
18,990,864 | 26,137,091 | 44,047,470 | 56,925,713 | ||||||||||||
Cost of Revenue Services |
9,917,657 | 7,364,010 | 24,704,074 | 17,565,943 | ||||||||||||
Sales, Marketing and Customer Support |
7,172,679 | 6,609,263 | 21,052,494 | 19,265,210 | ||||||||||||
General and Administrative |
9,635,061 | 7,601,070 | 32,652,288 | 27,094,269 | ||||||||||||
Impairment of Goodwill |
| | 1,025,717 | 630,802 | ||||||||||||
Depreciation and Amortization |
1,685,326 | 501,098 | 3,986,421 | 1,983,296 | ||||||||||||
Amortization Intangible Assets |
1,008,661 | 1,056,733 | 3,452,266 | 2,433,841 | ||||||||||||
Total Operating Expenses |
48,410,248 | 49,269,265 | 130,920,730 | 125,899,074 | ||||||||||||
LOSS FROM CONTINUING OPERATIONS |
(7,920,133 | ) | (4,224,884 | ) | (30,609,275 | ) | (22,169,380 | ) | ||||||||
OTHER (EXPENSE) INCOME |
||||||||||||||||
Interest Expense and Other Financing Costs |
(1,288,975 | ) | (1,301,447 | ) | (3,776,507 | ) | (5,001,929 | ) | ||||||||
Interest Income |
19,014 | 334,118 | 448,790 | 771,316 | ||||||||||||
Other Income (Expense) |
(783,028 | ) | 770,135 | (583,913 | ) | 524,976 | ||||||||||
Gain on Sale Leaseback - Related Party |
| | | 19,830 | ||||||||||||
Loss on Swap |
(2,456,236 | ) | (742,180 | ) | (3,884,837 | ) | (302,385 | ) | ||||||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
814,127 | 93,750 | 814,127 | (3,000,000 | ) | |||||||||||
Foreign Exchange Loss |
(539,675 | ) | (207,046 | ) | (1,157,356 | ) | (381,392 | ) | ||||||||
Total Other Expense |
(4,234,773 | ) | (1,052,670 | ) | (8,139,696 | ) | (7,369,584 | ) | ||||||||
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (EXPENSE) BENEFIT |
(12,154,906 | ) | (5,277,554 | ) | (38,748,971 | ) | (29,538,964 | ) | ||||||||
Income Tax (Expense) Benefit |
(6,594 | ) | 8,097 | (7,970 | ) | (119,101 | ) | |||||||||
LOSS FROM CONTINUING OPERATIONS, NET OF INCOME TAX (EXPENSE) BENEFIT |
(12,161,500 | ) | (5,269,457 | ) | (38,756,941 | ) | (29,658,065 | ) | ||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX (EXPENSE) |
||||||||||||||||
BENEFIT |
(2,034 | ) | 144,444 | (9,507,171 | ) | (12,073,312 | ) | |||||||||
NET LOSS |
$ | (12,163,534 | ) | $ | (5,125,013 | ) | $ | (48,264,112 | ) | $ | (41,731,377 | ) | ||||
Less: Loss (Income) Attributable to Noncontrolling Interests |
422,066 | 15,676 | 86,767 | (535,189 | ) | |||||||||||
NET LOSS ATTRIBUTABLE TO ELANDIA INTERNATIONAL INC. |
$ | (11,741,468 | ) | $ | (5,109,337 | ) | $ | (48,177,345 | ) | $ | (42,266,566 | ) | ||||
AMOUNTS ATTRIBUTABLE TO ELANDIA INTERNATIONAL INC. |
||||||||||||||||
Loss from Continuing Operations |
$ | (11,739,434 | ) | $ | (5,253,781 | ) | $ | (38,670,174 | ) | $ | (30,193,254 | ) | ||||
Income (Loss) from Discontinued Operations |
(2,034 | ) | 144,444 | (9,507,171 | ) | (12,073,312 | ) | |||||||||
NET LOSS ATTRIBUTABLE TO ELANDIA INTERNATIONAL INC. |
$ | (11,741,468 | ) | $ | (5,109,337 | ) | $ | (48,177,345 | ) | $ | (42,266,566 | ) | ||||
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO ELANDIA INTERNATIONAL INC., |
||||||||||||||||
BASIC AND DILUTED |
||||||||||||||||
Continuing Operations |
$ | (0.44 | ) | $ | (0.13 | ) | $ | (1.40 | ) | $ | (1.14 | ) | ||||
Discontinued Operations |
| | (0.34 | ) | (0.45 | ) | ||||||||||
Net Loss per Common Share |
$ | (0.44 | ) | $ | (0.13 | ) | $ | (1.74 | ) | $ | (1.59 | ) | ||||
Weighted Average Number of Common Shares Outstanding, Basic and Diluted |
26,873,562 | 39,475,961 | 27,567,644 | 26,544,979 | ||||||||||||
OTHER COMPREHENSIVE LOSS, NET OF TAX |
||||||||||||||||
Net Loss |
$ | (12,163,534 | ) | $ | (5,125,013 | ) | $ | (48,264,112 | ) | $ | (41,731,377 | ) | ||||
Foreign Currency Translation Adjustment |
364,616 | 1,378,206 | (1,191,441 | ) | 4,524,284 | |||||||||||
Comprehensive Loss |
(11,798,918 | ) | (3,746,807 | ) | (49,455,553 | ) | (37,207,093 | ) | ||||||||
Comprehensive Loss (Income) Attributable to Noncontrolling Interest |
320,872 | 167,448 | 86,767 | (196,779 | ) | |||||||||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO ELANDIA INTERNATIONAL INC. |
$ | (11,478,046 | ) | $ | (3,579,359 | ) | $ | (49,368,786 | ) | $ | (37,403,872 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
eLandia International Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders Equity
For The Nine Months Ended September 30, 2009
(Unaudited)
Peferred Stock - Series A $0.00001 Par Value |
Peferred Stock - Series B $0.00001 Par Value |
Common Stock $0.00001 Par Value |
Additional Paid-In |
Accumulated | Accumulated Other Comprehensive |
Noncontrolling | Total Stockholders |
||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Interest | Equity | |||||||||||||||||||||||||||
BALANCES December 31, 2008 |
| $ | | 2,340,485 | $ | 15,785,517 | 40,306,099 | $ | 402 | $ | 151,963,772 | $ | (101,562,481 | ) | $ | 3,460,633 | $ | 5,146,637 | $ | 74,794,480 | |||||||||||||||||
Shares Received and Cancelled from Litigation Settlement |
| | | | (375,000 | ) | (4 | ) | (449,996 | ) | | | | (450,000 | ) | ||||||||||||||||||||||
Conversion of Promissory Note - Related Party to Series B Preferred Stock |
| | 1,777,778 | 894,445 | (16,148,612 | ) | (162 | ) | 11,078,506 | | | | 11,972,789 | ||||||||||||||||||||||||
Issuance of Restricted Common Stock to Executive |
| | | | 562,500 | 6 | (6 | ) | | | | | |||||||||||||||||||||||||
Issuance of Common Stock |
| | | | 1,900 | | 3,134 | | | | 3,134 | ||||||||||||||||||||||||||
Purchase of Subsidiary Shares by Noncontrolling Interest |
| | | | | | | | | 6,000,000 | 6,000,000 | ||||||||||||||||||||||||||
Sale of Subsidiary Shares to Noncontrolling Interest |
| | | | | | | | | (2,240,017 | ) | (2,240,017 | ) | ||||||||||||||||||||||||
Effect of Change in Warrant Liability Classification |
| | | | | | (269,629 | ) | | | | (269,629 | ) | ||||||||||||||||||||||||
Settlement of Noncontrolling Interest Purchase Price Obligation |
| | | | | | 6,134,711 | | | | 6,134,711 | ||||||||||||||||||||||||||
Issuance of Common Stock in Connection with Purchase of Remaining 30% Interest in Desca |
| | | | 2,500,000 | 25 | 849,975 | | | | 850,000 | ||||||||||||||||||||||||||
Issuance of Common Stock in Settlement of CTT Purchase Price |
| | | | 350,000 | 4 | 104,996 | | | | 105,000 | ||||||||||||||||||||||||||
Issunace of Common Stock in Settlement of Put/Call Agreement and Issuance of Promissory Note |
| | | | 433,333 | 4 | 146,246 | | | | 146,250 | ||||||||||||||||||||||||||
Foreign Currency Translation Adjustment |
| | | | | | | | (1,191,441 | ) | | (1,191,441 | ) | ||||||||||||||||||||||||
Share-Based Compensation |
| | | | | | 1,470,126 | | | | 1,470,126 | ||||||||||||||||||||||||||
Net Loss |
| | | | | | | (48,177,345 | ) | | (86,767 | ) | (48,264,112 | ) | |||||||||||||||||||||||
BALANCES September 30, 2009 |
| $ | | 4,118,263 | $ | 16,679,962 | 27,630,220 | $ | 275 | $ | 171,031,835 | $ | (149,739,826 | ) | $ | 2,269,192 | $ | 8,819,853 | $ | 49,061,291 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
eLandia International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net Loss from Continuing Operations |
$ | (38,756,941 | ) | $ | (29,658,065 | ) | ||
Adjustments to Reconcile Net Loss from Continuing Operations to Net Cash and Cash Equivalents Used in Operating Activities: |
||||||||
Provision for Doubtful Accounts |
(117,816 | ) | 934,386 | |||||
Provision for Non-Collectible VAT Receivable |
520,302 | 1,371,857 | ||||||
Impairment of Goodwill |
1,025,717 | 630,802 | ||||||
Share-Based Compensation |
1,470,126 | 1,396,952 | ||||||
Depreciation and Amortization |
3,986,421 | 1,983,296 | ||||||
Amortization Intangible Assets |
3,452,266 | 2,433,841 | ||||||
Amortization of Deferred Financing Costs and Discount on Long-Term Debt |
40,092 | 687,096 | ||||||
Issuance of Common Stock for Marketing Services |
3,134 | | ||||||
Change in Value of Warrant |
(269,629 | ) | | |||||
Gain on Sale Leaseback Related Party |
| (19,830 | ) | |||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
(814,127 | ) | 3,000,000 | |||||
Foreign Currency Loss |
1,157,356 | 381,392 | ||||||
Accrued Interest on Long-Term Debt Related Party |
6,247 | | ||||||
Accrued Interest on Convertible Promissory Note Related Party |
| 1,515,000 | ||||||
Changes in Operating Assets and Liabilities: |
||||||||
Accounts Receivable |
23,848,328 | (17,793,107 | ) | |||||
Inventories |
(2,848,163 | ) | (12,992,332 | ) | ||||
Prepaid Expenses and Other Current Assets |
174,403 | (4,013,876 | ) | |||||
Deposits with Suppliers and Subcontractors |
(3,933,213 | ) | 1,515,636 | |||||
VAT Receivable |
(2,434,098 | ) | (2,332,654 | ) | ||||
Other Assets |
479,117 | (2,625,202 | ) | |||||
Accounts Payable |
(14,239,691 | ) | 20,604,479 | |||||
Accrued Expenses |
(361,267 | ) | (3,324,135 | ) | ||||
Income Taxes Payable |
(62,892 | ) | (108,931 | ) | ||||
Customer Deposits |
(1,899,399 | ) | 1,821,471 | |||||
Deferred Revenue |
(1,300,973 | ) | (606,306 | ) | ||||
Other Liabilities |
2,072,202 | 689,310 | ||||||
TOTAL ADJUSTMENTS |
9,954,443 | (4,850,855 | ) | |||||
CASH AND CASH EQUIVALENTS USED IN OPERATING ACTIVITIES |
(28,802,498 | ) | (34,508,920 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Cash Acquired in Business Acquisitions |
| 553,168 | ||||||
Cash Paid for Acquisitions |
(3,564,534 | ) | (3,836,705 | ) | ||||
Proceeds from the Sale of Subsidiary |
5,587,573 | | ||||||
Settlement of CTT Purchase Price |
600,000 | | ||||||
Purchases of Property and Equipment |
(15,577,320 | ) | (2,462,739 | ) | ||||
Redemption of Certificates of Deposits |
8,157,104 | (11,160,523 | ) | |||||
Restricted Cash |
1,852,847 | (5,103,109 | ) | |||||
CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES |
(2,944,330 | ) | (22,009,908 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Table of Contents
eLandia International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from Lines of Credit, Net |
(14,164,390 | ) | 20,187,543 | |||||
(Payments) Proceeds from Notes Payable, Net |
(222,360 | ) | | |||||
Proceeds (Payments) from Long-Term Debt |
18,458,143 | (1,467,086 | ) | |||||
Principal Payments on Capital Leases |
(668,363 | ) | (487,383 | ) | ||||
Proceeds from Sale of Series B Preferred Stock, Net of Issuance Costs |
| 58,237,320 | ||||||
Financing Costs Paid Series B Preferred Stock |
| (24,496 | ) | |||||
Transaction Costs Paid Conversion of Promissory Note |
(226,829 | ) | | |||||
Proceeds from Exercise of Warrants |
| 4,898 | ||||||
Proceeds from Noncontrolling Interest Subscription Receivable |
6,000,000 | 2,500,000 | ||||||
Payment to Noncontrolling Interest for Settlement of Purchase Price Obligation |
(500,000 | ) | | |||||
Dividends Paid to Noncontrolling Interest |
| (531,808 | ) | |||||
Payment for Settlement of Put/Call Agreement |
(259,998 | ) | | |||||
Financing Costs Paid Long-Term Debt |
(304,115 | ) | | |||||
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES |
8,112,088 | 78,418,988 | ||||||
CASH FLOWS FROM DISCONTINUED OPERATIONS |
||||||||
Operating Cash Flows |
1,745,212 | (1,342,735 | ) | |||||
Investing Cash Flows |
| (1,873,055 | ) | |||||
Financing Cash Flows |
(1,129,692 | ) | (6,310,578 | ) | ||||
NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN) DISCONTINUED OPERATIONS |
615,520 | (9,526,368 | ) | |||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(2,110,843 | ) | 2,397,776 | |||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(25,130,063 | ) | 14,771,569 | |||||
CASH AND CASH EQUIVALENTSBeginning |
37,368,768 | 19,890,996 | ||||||
CASH AND CASH EQUIVALENTSEnding |
$ | 12,238,705 | $ | 34,662,565 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash Paid During the Periods For: |
||||||||
Interest |
$ | 2,400,971 | $ | 3,003,205 | ||||
Taxes |
$ | 1,855,535 | $ | 1,037,080 | ||||
NON-CASH INVESTING AND FINANCING ACTIVITES: |
||||||||
Conversion of Promissory Notes - Related Party to Series B Convertible Preferred Stock |
$ | 12,000,000 | $ | | ||||
Accrued Interest Contributed to Capital Upon Conversion of Promissory Note - Related Party |
$ | 199,618 | $ | | ||||
Cancellation of Common Stock Upon Conversion of Promissory Note - Related Party |
$ | 162 | $ | | ||||
Sale of Subsidiary Shares to Noncontrolling Interest |
$ | 2,240,017 | $ | | ||||
Acquisition of Equipment with Issuance of Capital Leases |
$ | 1,333,597 | $ | | ||||
Issuance of Common Stock in Connection with Settlement of CTT Purchase Price |
$ | 105,000 | $ | | ||||
Issuance of Promissory Note in Connection with Settlement of Put/Call Agreement |
$ | 2,340,000 | $ | | ||||
Value of Common Stock Issued in Connection with Promissory Note |
$ | 146,250 | $ | | ||||
Issuance of Promissory Note - Related Party in Connection with Settlement of Noncontrolling Interest Purchase Price Obligation |
$ | 500,000 | $ | | ||||
Settlement of Noncontrolling Interest Purchase Price Obligation |
$ | 6,134,711 | $ | | ||||
Issuance of Common Stock in Connection with Purchase of 30% Interest in Desca |
$ | 850,000 | $ | | ||||
Issuance of Common Stock |
$ | 6 | $ | 1 | ||||
Conversion of Convertible Promissory Notes - Related Party to Series A Convertible Preferred Stock |
$ | | $ | 30,300,000 | ||||
Forgiveness of Accrued Interest on Convertible Promissory Notes |
$ | | $ | 4,109,775 | ||||
Deferred Financing Fees and Debt Discounts Converted to Capital |
$ | | $ | 4,726,451 | ||||
Conversion of Series A Convertible Preferred Stock to Common Stock |
$ | | $ | 30,300,000 | ||||
Conversion of Series B Convertible Preferred Stock to Common Stock |
$ | | $ | 71,768,572 | ||||
Redeemable Common Stock Issued for Acquisition of Transistemas |
$ | | $ | 2,599,998 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Table of Contents
eLandia International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2009
(Unaudited)
NOTE 1 Organization and Business
eLandia International Inc. (eLandia, Company, we, us, and/or our), through its subsidiaries, sells information and communications technology (ICT) products and provides professional IT services including technology integration, managed services and education services, and offers telecommunications products and services in emerging markets, including Latin America and the South Pacific. The products and services we offer in each of these markets vary depending on the infrastructure, existing telecommunication and data communications systems and the needs of the local economy.
NOTE 2 Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements as of September 30, 2009, and for the three and nine months then ended, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (SEC) and on the same basis as the annual audited consolidated financial statements. The unaudited interim condensed consolidated balance sheet as of September 30, 2009, unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, the unaudited interim condensed consolidated statement of stockholders equity for the nine months ended September 30, 2009, and the unaudited interim condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2009 are not necessarily indicative of results to be expected for the year ending December 31, 2009 or for any future interim period. The condensed consolidated balance sheet at December 31, 2008 has been derived from audited consolidated financial statements; however, these notes to the condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC.
NOTE 3 Liquidity, Financial Condition and Managements Plans
We incurred a $30.6 million loss from continuing operations and used $28.8 million of cash in continuing operations for the nine months ended September 30, 2009. As of September 30, 2009, we have a $149.7 million accumulated deficit and working capital of $6.3 million.
Our net loss includes an aggregate of $10.5 million of non-cash charges, principally consisting of $7.5 million of depreciation and amortization, $1.5 million of share-based compensation, $1.2 million in foreign currency losses and $1.0 million of goodwill impairment charges. Offsetting these charges was $0.8 million in income from the change in the fair value of the Desca noncontrolling interest purchase price obligation.
Prior to 2009, our principal source of liquidity has been the issuances of equity and debt securities, including preferred stock and convertible promissory notes, to Stanford International Bank Ltd. (SIBL) (and its related entities), our former principal stockholder. However, as discussed in Note 12, due to the collective impact of the uncertainties surrounding SIBL they are no longer a source of funding. Other sources of funds include cash from external financing arrangements, including a term loan in the amount of $16.7 million and a revolving line of credit facility of up to $5 million from ANZ Finance American Samoa, Inc., various lines of credit with multiple local banks in South and Central America and trade payables financing provided by our principal supplier.
On June 8, 2009, we entered into a Loan Agreement (Term Loan Agreement) in the amount of $16,672,000 with ANZ Finance American Samoa, Inc. and ANZ Amerika Samoa Bank (jointly, ANZ). The term loan bears interest at a rate of 2% above the prime rate and is due on June 3, 2016. The proceeds of the term loan were used to fund the construction, installation and delivery to customers of a fully operational underwater fiber optic cable linking America Samoa and Samoa to Hawaii and providing improved long distance telecommunication and data services (see Note 11).
On April 17, 2009, we sold our 50% ownership in Datec PNG, Ltd. (Datec PNG) for an aggregate sales price of $5,610,000 in cash, less selling costs of $22,427 (see Note 8).
On February 6, 2009, SIBL converted $12.0 million of outstanding debt under a bridge loan agreement into our Series B Preferred Stock (see Note 11).
On July 17, 2009, we entered into a Securities Purchase Agreement, effective as of July 1, 2009, (the 30% Purchase Agreement) with Jorge Enrique Alvarado Amado (Alvarado). Pursuant to the 30% Purchase Agreement, we purchased 3,000,000 Common Units (30% Units) of Desca Holding, LLC (Desca) for an aggregate purchase price of $1.9 million,
9
Table of Contents
consisting of (i) $500,000 in cash, (ii) a $500,000 promissory note payable on July 1, 2010, and (iii) 2,500,000 shares of our common stock, valued at $0.9 million. As a result of our purchase of the 30% Units under the 30% Purchase Agreement, effective July 1, 2009, Desca became a wholly-owned subsidiary (see Note 6).
On July 1, 2009, the former owners of Transistemas S.A. (Sellers) exercised their option under the Put/Call Agreement entered into concurrently with the closing of our investment in Transistemas S.A. (Transistemas) effective July 1, 2008. As a consequence of the current worldwide economic crisis, we determined that it would not be in our best interests to comply with the terms and conditions of the Put/Call Agreement and, therefore, the Sellers claimed that we had breached our obligations under the Put/Call Agreement to purchase the 433,333 Put shares and we owed the Sellers $2.6 million. On August 27, 2009, we entered into a Settlement Agreement with the Sellers in full and final settlement of the Put/Call Agreement. Pursuant to the terms of the Settlement Agreement, we agreed to pay the Sellers $2.6 million as follows: (i) $260,000 in cash payable on the date of the Settlement Agreement, and (ii) $2,340,000 payable in the form of a non-interest bearing promissory note due on July 15, 2011. In addition, as an inducement to settle the Put obligation and execute the promissory note, we agreed to issue to the Sellers 433,333 shares of our common stock, valued at $156,000 (see Note 7).
On October 16, 2008, eLandia and the former owners of Center of Technology Transfer Corporation (CTT Sellers) entered into a Stock Purchase Agreement (the Purchase Agreement) and Escrow Agreement. Pursuant to the Purchase Agreement and Escrow Agreement, $600,000 of the purchase price was deposited with an escrow agent to satisfy our indemnification rights pursuant to the Purchase Agreement. On September 30, 2009, we agreed to settle certain claims relating to the Net Asset Value of Center of Technology Transfer Corporation (CTT) (as defined in the Purchase Agreement). Pursuant to the terms of the settlement, the CTT Sellers agreed to release the $600,000 escrow amount to us in exchange for the issuance of 350,000 shares of our common stock to the CTT Sellers, valued at $105,000 (see Note 9).
Management believes that our current level of working capital at September 30, 2009 will be sufficient to sustain operations through at least October 1, 2010. However, there can be no assurance that the plans and actions proposed by management will be successful or that unforeseen circumstances will not require us to seek additional funding sources in the future or effectuate plans to conserve liquidity. In addition, there can be no assurance that in the event additional sources of funds are needed they will be available on acceptable terms, if at all.
NOTE 4 Significant Accounting Policies
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of eLandia and all of its wholly-owned and majority owned subsidiaries. We have classified as discontinued operations for all periods presented (i) Latin Node Inc., the investment in which is recorded under the equity method of accounting because of a loss in control, and which has filed an assignment for the benefit of creditors, and (ii) the accounts of Datec PNG, which was sold on April 17, 2009. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited interim condensed consolidated financial statements are presented in United States Dollars. The financial statements of our foreign operations are stated in foreign currencies, referred to as the functional currency except for Desca, where the functional currency is the U.S. Dollar. Functional currency assets and liabilities are translated into the reporting currency, U.S. Dollars, using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income. Functional statements of operations amounts expressed in functional currencies are translated using average exchange rates for the respective periods. Remeasurement adjustments and gains or losses resulting from foreign currency transactions are recorded as foreign exchange gains or losses in the unaudited interim condensed consolidated statement of operations.
In determining whether we are required to consolidate investee businesses, we consider both the voting and variable interest models of consolidation. Accordingly, we consolidate investee entities when we own less than 50% of the voting interests but, based on the risks and rewards of our participation have determined that we are the primary beneficiary, primary obligor or both of the variable interest entity.
FASB Accounting Standards Codification
On July 1, 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (the ASC) as the source of authoritative principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. References to authoritative accounting literature contained in our financial statements will be made in accordance with the ASC commencing with this quarterly report for the period ending September 30, 2009.
Reclassification
We have reclassified certain prior year amounts to conform to the current periods presentation. We reclassified the minority interest purchase price obligation liability to noncontrolling interest purchase price obligation as temporary equity. These reclassifications have no effect on the financial position at December 31, 2008, the cash flows for the nine months ended September 30, 2008 or the results of operations for the three and nine months ended September 30, 2008.
10
Table of Contents
Subsequent Events
We evaluated subsequent events through November 16, 2009, which represents the date the condensed consolidated financial statements were issued.
Use of Estimates
The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited interim condensed consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount of uncollectible accounts receivable, the valuation of value added tax (VAT) receivable, deferred taxes and related valuation allowances, the valuation of noncontrolling interest purchase price obligations, the amount to be paid for the settlement of liabilities of discontinued operations, accrued expenses, the amount allocated to contract rights, customer lists, trade names and goodwill in connection with acquisitions, along with the estimated useful lives for amortizable intangible assets and property, plant and equipment, warrants granted in connection with various financing transactions, share-based payment arrangements, and the percentage of completion with respect to production contacts in circumstances where the use of that accounting method is deemed to be appropriate.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect on the consolidated financial statements of a condition, situation or set of circumstances that existed at the date of the unaudited interim condensed consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ from our estimates.
Revenue Recognition
We generate revenue from product sales and services. The products and services that we offer in each of the geographic areas we serve vary depending on the infrastructure, existing telecommunication systems and the needs of the region. All revenue is recognized net of discounts, returns and allowances.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. We enter into certain arrangements where we are obligated to deliver multiple products and/or services (multiple elements). In these arrangements, we generally allocate the total revenue among the elements based on the sales price of each element when sold separately (vendor specific objective evidence).
Revenues recognized in advance of amounts billable pursuant to contract terms, based on work performed and/or services provided to date, are recorded as unbilled receivables in the accompanying condensed consolidated balance sheet. Unbilled receivables are billable upon various events, including the attainment of performance milestones, delivery of equipment and/or services, or completion of the contract.
Products
Revenue generated from the sale of products is recorded when the products are delivered.
Revenue from sales of technology products includes, among other things, personal computers, servers, routers, switching systems, networking equipment and communications equipment. Revenues from sales of telecommunications products include hardware and other products supporting telecommunications services.
Information Technology Services
Professional IT services revenue includes professional consulting services pertaining to the planning, design, implementation, operation and optimization of our technology and telecommunications solutions as well as implementation of customized solutions such as application development, systems integration, training, maintenance and support. Revenue generated from professional consulting services is generally recognized as the services are rendered.
Revenue generated from professional IT services under periodic contracts such as maintenance and support services is generally recognized ratably over the term of the contract.
Telecommunications Services
Revenue generated from the provision of telecommunications services is recognized as the minutes we sell are used by our customers. Revenues generated from providing access to and usage of our undersea cable and cable television services consist of fixed monthly or quarterly recurring charges. We recognize revenue for services charged at fixed amounts ratably over the service period. Revenues generated for the installation of equipment is recognized in the period when the equipment is installed and ready for the customers use. We record payments received from customers in advance of usage as deferred revenue or customer deposits at the time payment is received.
11
Table of Contents
Education Services
Revenue from education services is generated through the provision of talent development and technical certification courses. Revenue generated from education services is generally recognized as the courses are completed and the certified testing services are rendered.
Production Type Contracts
From time to time, we enter into contracts that are accounted for using the percentage of completion method. Revenue recognized on contracts in process is based upon estimated contract revenue and related total cost of the project at completion. The extent of progress toward completion is generally measured based on the ratio of actual cost incurred to total estimated cost at completion. Labor hours incurred is used as the measure of progress towards completion. Revisions to cost estimates as contracts progress have the effect of increasing or decreasing profits each period. Provisions for anticipated losses are made in the period in which they become determinable.
We did not have any significant production contracts in effect during the nine months ended September 30, 2009 and 2008.
Vendor Rebates
We have arrangements to receive cash or consideration from certain of our vendors, including rebates. The amounts received or credited from our vendors are recorded as a reduction of the prices paid for these products and, therefore, such amounts are reflected as a reduction of the cost of revenue. Vendor rebates are typically dependent upon reaching minimum sales thresholds. We evaluate the likelihood of reaching sales thresholds using past experience and current forecasts and, when rebates can be reasonably estimated, we record a portion of the rebate as progress is made toward the sales threshold.
Vendor rebates for which we have a contractual right of offset are recorded net of accounts payable in the accompanying unaudited interim condensed consolidated balance sheets. We accrued approximately $853,000 and $1,493,000 of rebates due from a single vendor that are being accounted for as a reduction of accounts payable at September 30, 2009 and December 31, 2008, respectively.
Inventory
Inventory consists predominantly of finished goods inventory, inclusive of technology equipment, products and accessories. Inventory is carried at the lower of cost or net realizable value. Cost is based on a weighted average or first-in-first-out method. All expenditures incurred in acquiring inventory, including transportation and custom duties, are included in inventory. Reserves for obsolete inventory are provided based on historical experience of a variety of factors including sales volume, product life, and levels of inventory at the end of the period. Our reserve for obsolete inventory at September 30, 2009 and December 31, 2008 amounted to approximately $374,000 and $313,000, respectively.
Long Lived Assets
We periodically review the carrying values of our long lived assets, when events or changes in circumstances would indicate that it is more likely than not that their carrying values may exceed their realizable values, and record impairment charges when considered necessary.
When circumstances indicate that impairment may have occurred, we test such assets for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of such assets and their eventual disposition to their carrying amounts. In estimating these future cash flows, assets and liabilities are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other such groups. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss, measured as the excess of the carrying value of the asset over its estimated fair value, is recognized.
Goodwill
We are required to test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach.
12
Table of Contents
As more fully discussed in Note 9, we undertook a review of the carrying amount of our goodwill and determined that the value of our goodwill related to our operations in Fiji had been impaired. Accordingly, we recorded an impairment charge of $1,025,717 in the accompanying unaudited interim condensed consolidated statement of operations during the nine months ended September 30, 2009.
We will continue to evaluate goodwill and intangible assets for impairment, at least annually. Other than as set forth above, during the nine months ended September 30, 2009, we did not identify any indication of goodwill or intangible asset impairment in our other reporting units.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss per common share attributable to eLandia by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the treasury stock and/or if converted methods as applicable. The computation of basic and diluted net loss per common share attributable to eLandia for the nine months ended September 30, 2009 and 2008 includes 28,125 and 1,027,825 unexercised warrants, respectively, each with an exercise price of $.001 per share.
The computation of basic loss per share for the three and nine months ended September 30, 2009 and 2008 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Convertible Preferred Stock |
4,118,263 | 2,340,485 | 4,118,263 | 2,340,485 | ||||
Common Stock Purchase Warrants |
1,409,259 | 1,409,259 | 1,409,259 | 1,409,259 | ||||
Non-Vested Restricted Stock |
| 625,000 | | 625,000 | ||||
Stock Options |
7,823,500 | 5,901,000 | 7,823,500 | 5,901,000 | ||||
13,351,022 | 10,275,744 | 13,351,022 | 10,275,744 | |||||
Fair Values
We have determined the estimated fair value amounts presented in these unaudited interim condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the unaudited interim condensed consolidated financial statements are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. We have based these fair value estimates on pertinent information available as of September 30, 2009 and December 31, 2008. As of September 30, 2009 and December 31, 2008, the carrying value of all financial instruments approximates fair value.
Recently Adopted Accounting Pronouncements
In April 2009, the FASB issued authoritative guidance that principally requires the disclosure of the date through which subsequent events have been evaluated for disclosure and recognition. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.
In April 2009, the FASB issued authoritative guidance requiring that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing accounting standards. This guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.
In December 2007, the FASB issued authoritative guidance to affirm that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The guidance defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. The guidance also requires an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Additionally, the guidance requires acquisition-related costs to be expensed in the period in which the costs are incurred and the services are received instead of including such costs as part of the acquisition price. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements, as the acquisitions made during the nine months ended September 30, 2009 were not material.
13
Table of Contents
In February 2008, the FASB issued authoritative guidance as it relates to non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value in the consolidated financial statements on at least an annual basis. The guidance defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of this guidance, as it relates to non-financial assets and non-financial liabilities had no impact on our condensed consolidated financial statements. The provisions of this guidance will be applied at such time a fair value measurement of a non-financial asset or non-financial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of this guidance (Note 5).
In December 2007, the FASB issued authoritative guidance which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The guidance requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parents equity; consolidated net income to be reported at amounts inclusive of both the parents and noncontrolling interests shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The presentation and disclosure requirements of the guidance were applied retrospectively. Effective January 1, 2009, upon the adoption of this guidance, we now record the change in fair value of the noncontrolling interest purchase price obligation through stockholders equity. Prior to the adoption of this guidance, the change in fair value of the noncontrolling interest purchase price obligation was recorded in the statement of operations.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 (SFAS 166). As of September 30, 2009, SFAS 166 has not been incorporated within the FASB ASC. SFAS 166 eliminates the concept of a QSPE (Qualified Special Purpose Entity) and eliminates the exception from applying FIN 46(R). Additionally, SFAS 166 clarifies that the objective of paragraph 9 of SFAS 140 is to determine whether a transferor has surrendered control over transferred financial assets. That determination must consider the transferors continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. SFAS 166 modifies the financial-components approach used in SFAS 140 and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. SFAS 166 is effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). As of September 30, 2009, SFAS 167 has not been incorporated within the FASB ASC. SFAS 167 amends FIN 46(R) to require an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity. The analysis identifies the primary beneficiary of a variable interest entity (VIE) as the enterprise that has both: a) the power to direct the activities that most significantly impact the entitys economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity which could potentially be significant to the VIE. SFAS 167 requires enhanced disclosures to provide users of financial statements with more transparent information about and enterprises involvement in a VIE. Further, this statement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. SFAS 167 is effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
NOTE 5 Fair Value
We have categorized our assets and liabilities recorded at fair value based upon the following fair value hierarchy:
| Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. |
14
Table of Contents
| Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals. |
| Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
The following are the major categories of assets measured at fair value on a nonrecurring basis during the nine month period ended September 30, 2009, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
Level 1: Quoted Prices in Active Markets for Identical Assets |
Level 2: Significant Other Observable Inputs |
Level 3: Significant Unobservable Inputs |
Total at September 30, 2009 |
Total Impairment for the Nine Months Ended September 30, 2009 | |||||||||
Goodwill |
-0- | -0- | $ | 18,740,326 | $ | 18,740,326 | $ | 1,025,717 | |||||
Intangible Assets |
-0- | -0- | 10,485,085 | 10,485,085 | -0- | ||||||||
Total |
-0- | -0- | $ | 29,225,411 | $ | 29,225,411 | $ | 1,025,717 | |||||
We recorded a goodwill impairment charge of $1,025,717 during the nine months ended September 30, 2009 to write down goodwill to its implied fair value (Note 9).
NOTE 6 Acquisitions
During 2008, we completed three acquisitions:
| Transistemas, S.A. (Transistemas), a network and system integrator operating in Argentina, under a similar business model as Desca; |
| Center of Technology Transfer Corporation (CTT), an education services integrator in information and communications technologies, business skills and best practices in Latin America; and, |
| The acquisition of an additional 40% membership interest in Pac-Rim Redeployment, LLC (PRR), and an additional 26 2/3% membership interest in American Samoa Hawaii Cable, LLC (ASHC), which were formed for the redeployment and operation of an undersea fiber optic cable system providing telecommunications and internet services to American Samoa. |
The following unaudited interim condensed consolidated pro forma information gives effect to the acquisitions listed above as if these transactions had occurred on January 1, 2008. The following pro-forma information is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisition of these businesses been completed on January 1, 2008, nor are they indicative of results that may occur in any future periods.
For the Three Months Ended September 30, 2008 |
For the Nine Months Ended September 30, 2008 |
|||||||
Revenues |
$ | 46,827,485 | $ | 119,068,538 | ||||
Loss from Operations |
$ | (5,358,875 | ) | $ | (24,692,810 | ) | ||
Net Loss from Continuing Operations |
$ | (5,836,854 | ) | $ | (32,236,687 | ) | ||
Basic and Diluted Loss from Continuing Operations per Share |
$ | (0.15 | ) | $ | (1.21 | ) | ||
Weighted Average Shares Outstanding - Basic and Diluted |
39,475,961 | 26,544,979 |
In addition, we made two acquisitions during 2009: (1) Center of Technology Transfer Corporation Peru and (2) American Samoa Entertainment, Inc. The total aggregate consideration for these acquisitions was $3,564,534.
15
Table of Contents
On April 29, 2009, we acquired an additional 20% interest in PRR, increasing our ownership to 100%, and a 13.33% interest in ASHC, increasing our ownership interest to 66.67%. The total consideration paid for the acquisition of these interests was nominal.
On July 17, 2009, we consummated a purchase and sale transaction under a Securities Purchase Agreement effective as of July 1, 2009 (the 30% Purchase Agreement) with Alvarado. Pursuant to the 30% Purchase Agreement, we purchased 3,000,000 Common Units (30% Units) of Desca for an aggregate purchase price of $1.9 million, as described below. As a result of our purchase of the 30% Units under the 30% Purchase Agreement, effective July 1, 2009, we settled the noncontrolling interest purchase price obligation with Alvarado and Desca became our wholly-owned subsidiary. For the nine months ended September 30, 2009, the change in fair value of the noncontrolling interest purchase price obligation of $814,127 was recorded in the statement of operations. The settlement of the noncontrolling interest purchase price obligation in the amount of $6,134,711 was recorded as a credit to additional paid in capital as of September 30, 2009.
Under the terms of the 30% Purchase Agreement we have: (i) made a payment to Alvarado of $500,000 in cash, (ii) executed and delivered to Alvarado a $500,000 promissory note payable on July 1, 2010, and (iii) issued to Alvarado 2,500,000 shares of our common stock, valued at $0.9 million based on the closing stock price of $0.34 on July 17, 2009, of which (A) one-half of such shares were deposited with an escrow agent to be held and released in accordance with the terms of an escrow agreement, as described below, and (B) one-half of such shares were delivered to Alvarado. The promissory note provides for interest to accrue at 6% per annum and all payments of principal and accrued interest to be paid on the maturity date of July 1, 2010. The 30% Purchase Agreement provides that the purchase price will be reduced to the extent that the value of Descas net assets at closing is determined to be less as compared to June 30, 2010. Alvarado will be responsible to pay us an amount equal to 30% of any deficiency and such amount will be deemed a claim for indemnification under the 30% Purchase Agreement.
In addition to the purchase price described above, we will be required to pay to Alvarado contingent consideration (the Contingent Consideration) in the event Desca achieves certain financial performance targets for 2009 identified in the 30% Purchase Agreement. The aggregate amount of the Contingent Consideration will be (i) up to an additional maximum amount of 5,000,000 restricted shares of our common stock, (ii) payment of up to a maximum amount of $8,000,000 in cash to be evidenced by an additional non-interest bearing promissory note payable on December 31, 2013, or (iii) up to an additional maximum amount of 2,500,000 restricted shares of our common stock and payment of up to an additional maximum amount of $4,000,000 in cash to be evidenced by an additional non-interest bearing promissory note payable on December 31, 2013. We have not recorded contingent consideration payable as of September 30, 2009 as we do not believe that it is probable for Desca to achieve the financial performance targets.
All but 1,250,000 shares of our common stock constituting part of the purchase price, as well as any additional shares of our common stock constituting amounts of Contingent Consideration, will be deposited with an escrow agent to be held and released over a 4-year period, as described below. All shares of our common stock held in escrow shall be available to satisfy any claim by us for indemnification under the 30% Purchase Agreement. All shares of our common stock constituting part of the purchase price will be held in escrow for a period of two years following the closing; however, if such shares become eligible for resale by Alvarado pursuant to Rule 144 under the Securities Act of 1933, such shares may be sold by Alvarado, but only so long as Alvarado makes arrangements acceptable to us for the immediate deposit of the net cash proceeds into escrow to be held in accordance with the terms thereof. All shares of our common stock constituting part of the Contingent Consideration, if any, will be held in escrow for a period of four years following the closing; however, eight equal semi-annual distributions of Contingent Consideration, commencing on July 1, 2010, will be made to Alvarado until the entire amount of Contingent Consideration has been paid. In addition, all promissory notes issued by us in connection with the 30% Purchase Agreement, are subject to setoff to satisfy any indemnification claims we may have against Alvarado.
At the closing of the 30% Purchase Agreement, Alvarado also entered into a two-year amended and restated employment agreement pursuant to which he will serve as chief executive officer of our Networking Group. Alvarado also executed a non-compete agreement containing customary non-compete, non-solicitation, non-disclosure and non-disparagement covenants. Finally, eLandia and Alvarado executed a termination and release agreement pursuant to which each of the parties agreed to terminate certain prior agreements and to release any claims the parties may have against one another arising prior to the date of the 30% Purchase Agreement.
NOTE 7 Transistemas Put/Call Agreement Settlement
Effective July 1, 2008, the Company acquired 100% of Transistemas for an aggregate purchase price of $5,688,946 comprised of:
a. | 433,333 shares of our common stock, valued at $2,599,998, or $6.00 per share; |
b. | a $2,693,148 cash payment; and |
c. | transaction expenses of $395,800 |
16
Table of Contents
Concurrent with the closing of our investment in Transistemas, we entered into a Put/Call Agreement with the former owners of Transistemas (Sellers) which provided for a put and call right pursuant to which on July 1, 2009, subject to certain terms as defined in the agreement, (a) the Sellers could require that we purchase the 433,333 shares of our common stock for a cash purchase price of $6.00 per share (the Put), or (b) we could require that the Sellers sell us the 433,333 shares of common stock for a cash purchase price calculated in accordance with the agreement (the Call). As a result of the put rights and obligations, we classified the 433,333 shares of common stock, valued at $2,599,998, as common stock subject to potential redemption.
On July 1, 2009, the Sellers delivered notice to us of their intention to exercise the Put. Due to affects on our operations of the current worldwide economic crisis, we determined that it would not be in our best interests to comply with the terms and conditions of the Put/Call Agreement and, therefore, the Sellers claimed that we had breached our obligations under the Put/Call Agreement to purchase the Put shares and, as a result, we owed the Sellers $2.6 million.
On August 27, 2009, we entered into a Settlement Agreement with the Sellers in full and final settlement of the Put/Call Agreement. Pursuant to the terms of the Settlement Agreement, we agreed to pay the Sellers $2.6 million as follows:
(i) | $260,000 in cash payable on the date of the Settlement Agreement, and |
(ii) | $2,340,000 payable in the form of a non-interest bearing promissory note due on July 15, 2011. The promissory note requires 22 equal monthly payments of $52,000, with the first payment due on September 15, 2009. The remaining principal balance of $1,196,000 is due on July 15, 2011. |
In addition, as an inducement to settle the Put obligation and execute the promissory note, we agreed to issue to the Sellers 433,333 shares of our common stock, valued at $156,000. We allocated a portion of the note amount of $2,340,000 to the shares based on the relative fair value of the note and shares. The relative fair value of the shares, which amounted to $146,250, was recorded as a discount to the promissory note and a corresponding increase to additional paid in capital. This amount is being accreted into interest expense over the contracted term of the note. For the nine months ended September 30, 2009, accretion of the discount amounted to $7,238, which was recorded as a component of interest expense in the accompanying unaudited interim condensed consolidated statement of operations. As of September 30, 2009, the carrying value of the note was $2,148,988.
NOTE 8 Discontinued Operations
Our discontinued operations are comprised of (i) our investment in Latin Node, Inc. (Latin Node), which filed an assignment for the benefit of creditors in June 2008, the investment in which is recorded under the equity method of accounting because of a loss in control; (ii) our 50% interest in Datec PNG, over which we had management influence and guaranteed a portion of Datec PNGs debt; and (iii) certain eLandia predecessor companies that no longer conduct any operations.
Through April 17, 2009, we held a 50% interest in Datec PNG. Due to our management influence, we consolidated Datec PNG within our consolidated financial statements. Datec PNG provides technology products, Internet access services and IT services to large corporate organizations. Datec PNG had an overdraft facility account with a maximum borrowing limit of approximately $1.9 million. This overdraft facility account was secured by the assets of Datec PNG. On April 17, 2009 we sold our 50% ownership interest in Datec PNG to Steamships Ltd. As a result of the sale of Datec PNG, we re-measured the value of the net assets to be sold at the lower of the carrying amount or fair value less selling costs. We determined that the sale price of $5,610,000 in cash, less selling costs of $22,427, was the best indicator of the fair value of the assets to be sold. Accordingly, we recorded an impairment charge related to the goodwill and intangible assets of $10,827,252 during the three months ended March 31, 2009 and a gain upon the closing of the sale, including the results of operations for the 17 day period ending April 17, 2009, of $734,909. The write off of the goodwill and the gain resulted in an aggregate loss on the sale of Datec PNG of $10,092,343, which is included in discontinued operations.
17
Table of Contents
A summary of our assets and liabilities from discontinued operations as of September 30, 2009 and December 31, 2008 and our results of discontinued operations for the three and nine months ended September 30, 2009 and 2008 is as follows:
Assets and Liabilities of Discontinued Operations
As of September 30, 2009 |
As of December 31, 2008 | |||||
Cash |
$ | | $ | 623,116 | ||
Accounts Receivable, net |
| 2,231,117 | ||||
Inventory, net |
| 2,806,027 | ||||
Prepaid Expenses and Other Current Assets |
| 678,300 | ||||
Deposits with Suppliers |
| 26,988 | ||||
Deferred Tax Assets - Current |
| 1,055,530 | ||||
Assets Held for Sale - Current |
$ | | $ | 7,421,078 | ||
Property, Plant and Equipment, net |
| 3,266,629 | ||||
Customer Lists, Net |
| 1,465,425 | ||||
Contract Rights, Net |
| 483,727 | ||||
Goodwill |
| 11,356,388 | ||||
Other Assets |
| 317,861 | ||||
Assets Held for Sale - Long-Term |
$ | | $ | 16,890,030 | ||
Accounts Payable |
$ | | $ | 1,757,501 | ||
Accrued Expenses |
183,259 | 1,061,927 | ||||
Deferred Gain on Sale Leaseback - Current |
| 257,397 | ||||
Accrued FCPA Penalty |
500,000 | 500,000 | ||||
Long-Term Debt |
| 1,129,692 | ||||
Capital Lease Obligations |
10,000 | 10,000 | ||||
Deferred Revenue |
| 1,323,222 | ||||
Liabilities from Discontinued Operations - Current |
$ | 693,259 | $ | 6,039,739 | ||
Deferred Gain on Sale Leaseback, Net of Current Portion |
| 64,349 | ||||
Accrued FCPA Penalty |
1,000,000 | 1,500,000 | ||||
Liabilities from Discontinued Operations - Long Term |
$ | 1,000,000 | $ | 1,564,349 | ||
Results of Discontinued Operations
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 180 | $ | 9,091,326 | $ | 9,819,365 | $ | 57,478,099 | ||||||||
Cost of Revenue |
| (5,560,656 | ) | (5,851,239 | ) | (47,561,358 | ) | |||||||||
Sales, Marketing and Customer Support |
| (1,690,328 | ) | (1,573,803 | ) | (5,701,353 | ) | |||||||||
General and Administrative Expenses |
| (1,194,202 | ) | (1,175,353 | ) | (11,254,014 | ) | |||||||||
Impairment of Goodwill and Intangible Assets |
| | (10,827,252 | ) | | |||||||||||
Depreciation and Amortization |
| (379,192 | ) | (435,232 | ) | (2,329,305 | ) | |||||||||
Amortization Intangible Assets |
| (258,420 | ) | (263,639 | ) | (775,260 | ) | |||||||||
Interest Expense, net |
| (51,587 | ) | (324 | ) | (942,943 | ) | |||||||||
Other (Loss) Income |
(2,214 | ) | 187,503 | 800,306 | (987,178 | ) | ||||||||||
(Loss) Income from Discontinued Operations |
$ | (2,034 | ) | $ | 144,444 | $ | (9,507,171 | ) | $ | (12,073,312 | ) | |||||
AST Telecom, LLC
In December 2007, our Board of Directors approved former managements proposal to dispose of AST Telecom, LLC (AST), which is one of our subsidiaries that principally conducts operations in American Samoa providing wireless coverage and Internet access. Based on a written agreement with a prospective buyer, we expected to complete the disposal within one year from the date of such approval. As such, the results of these activities were classified as discontinued operations as of December 31, 2007. The proposed sale did not occur and, during the quarter ended June 30, 2008, we determined that AST no longer met the requirements for classification as an asset held for sale under SFAS 144. Accordingly, the September 30, 2008 unaudited interim condensed consolidated financial statements have been presented to include AST as a part of continuing operations.
18
Table of Contents
NOTE 9 Goodwill
Goodwill represents the excess of the purchase price paid over the cost of net assets acquired in business combinations accounted for under the purchase method of accounting. Changes in the carrying amount of goodwill for the nine months ended September 30, 2009 were as follows:
Latin America | South Pacific | Total | ||||||||||
Balance at December 31, 2008 |
$ | 16,088,787 | $ | 3,056,985 | $ | 19,145,772 | ||||||
Acquisitions in 2009 |
183,374 | 885,332 | 1,068,706 | |||||||||
Purchase Price Adjustment |
(495,000 | ) | | (495,000 | ) | |||||||
Impairment charge |
| (1,025,717 | ) | (1,025,717 | ) | |||||||
Foreign currency translation effect |
64,881 | (18,316 | ) | 46,565 | ||||||||
Balance at September 30, 2009 |
$ | 15,842,042 | $ | 2,898,284 | $ | 18,740,326 | ||||||
In April 2009, the Reserve Bank of Fiji announced that Fijis currency had been devalued by 20% effective immediately. Also, in April 2009, the President of Fiji annulled the countrys constitution, terminated all the judges in the country and declared himself the head of state. As a result of the Ah Koy litigation discussed in Note 12 and Fijis current economic instability and uncertain business climate, we undertook a review of the carrying amount of our goodwill as of March 31, 2009 and determined that the value of our goodwill related to Fiji had been impaired. Accordingly, we recorded a goodwill impairment charge of $1,025,717 in the accompanying unaudited interim condensed consolidated statement of operations during the nine months ended September 30, 2009.
On October 16, 2008, eLandia and the CTT Sellers entered into a Purchase Agreement and Escrow Agreement. Pursuant to the Purchase Agreement and Escrow Agreement, $600,000 of the purchase price was deposited with an escrow agent to satisfy our indemnification rights pursuant to the Purchase Agreement. On September 30, 2009, we agreed to settle certain claims relating to the Net Asset Value of CTT (as defined in the Purchase Agreement). Pursuant to the terms of the settlement, the CTT Sellers agreed to release the $600,000 escrow amount to us in exchange for the issuance of 350,000 shares of our common stock to the CTT Sellers, valued at $105,000. We have recorded the net settlement amount of $495,000 as a purchase price adjustment to the goodwill of CTT in the accompanying unaudited interim condensed consolidated balance sheet as of September 30, 2009.
NOTE 10 Intangible Assets
Intangible asset values and the related accumulated amortization are as follows:
Definite Lived Assets | Indefinite Lived Assets | ||||||||||||||
Customer Lists |
Contract Rights |
Trade Names | Telecommunications Licenses and Agreements | ||||||||||||
Gross Value at December 31, 2008 |
$ | 2,004,251 | $ | 4,988,209 | $ | 10,493,604 | $ | 858,743 | |||||||
Accumulated Amortization at December 31, 2008 |
(632,719 | ) | (2,307,364 | ) | (2,342,482 | ) | | ||||||||
Net Value at December 31, 2008 |
$ | 1,371,532 | $ | 2,680,845 | $ | 8,151,122 | $ | 858,743 | |||||||
Gross Value at September 30, 2009 |
$ | 2,879,351 | $ | 4,904,721 | $ | 10,493,604 | $ | 858,743 | |||||||
Accumulated Amortization at September 30, 2009 |
(994,041 | ) | (3,347,261 | ) | (4,310,032 | ) | | ||||||||
Net Value at September 30, 2009 |
$ | 1,885,310 | $ | 1,557,460 | $ | 6,183,572 | $ | 858,743 | |||||||
Acquired intangibles with a definite life are amortized on a straight-line basis over weighted average lives. Telecommunications licenses and agreements are generally perpetual in nature and therefore are not amortized.
Amortization expense amounted to $1,008,661 and $1,056,733 for the three months ended September 30, 2009 and 2008, respectively, and $3,452,266 and $2,433,841 for the nine months ended September 30, 2009 and 2008, respectively.
NOTE 11 Long-Term Debt
Term Loan Agreement
On June 8, 2009, we entered into a Loan Agreement (Term Loan Agreement) with ANZ whereby ANZ provided $16,672,000 in the form of a term loan to our subsidiaries, ASHC and Samoa American Samoa Cable, LLC (SAS). ASHC and SAS are the borrowers under the facility and eLandia and our subsidiary, American Samoa Hawaii Undeployed Cable, LLC (ASHUC) are the guarantors. The loan is principally secured by substantially all of the assets and operations of ASHC, SAS and ASHUC. The loan bears interest at the prime rate plus 2% and is due on June 3, 2016. The Term Loan Agreement requires seven monthly installments of interest only, followed by 77 monthly installments of $187,319, including principal and interest, through the maturity date. The remaining unpaid principal balance is due on the maturity date. In the event that a United States Department of Agriculture (USDA) Rural Development Conditional Commitment for Guarantee (USDA Guaranty) is obtained in favor of ANZ covering the outstanding amount of the term loan then, as of the effective date of the USDA Guaranty in
19
Table of Contents
favor of ANZ, the interest rate will be decreased to the prime rate plus 1.10%. The loan will be subject to certain financial and non-financial covenants beginning with the period ended March 31, 2011. The proceeds of the loan were used to fund the construction, installation and delivery to customers of a fully operational underwater fiber optic cable linking America Samoa and Samoa to Hawaii and providing improved long distance telecommunication and data services. In connection with the Term Loan Agreement, we executed a guaranty in favor of ANZ (the Guaranty). Pursuant to the Guaranty, we have unconditionally guaranteed the repayment and other obligations of ASHC and SAS under the Term Loan Agreement.
We own 66.6% of ASHC and the remaining 33.3% is owned by the American Samoa Government. SAS and ASHUC are wholly owned subsidiaries of ASHC.
Bridge Loan Agreement
On July 21, 2008, we entered into a credit agreement with SIBL (the Bridge Loan Agreement), pursuant to which SIBL agreed to provide a loan to us in the principal amount of up to $40 million. The Bridge Loan Agreement was amended on September 5, 2008, September 17, 2008 and November 14, 2008. Pursuant to these amendments, the maturity date was extended to June 30, 2011. Also, the interest rate was modified to 6% with payments of interest due on December 31, 2009, December 31, 2010 and on June 30, 2011. In addition, we had the option, with respect to any interest payment, to pay interest in cash or in shares of our common stock based upon the average closing bid and asked prices for our common stock for the 20 trading days prior to the applicable interest payment date. In addition, the loan funding schedule for the unfunded balance of the loan as of the November 14, 2008 amendment, in the amount of $28 million, was modified to provide for nine installments during the first quarter of 2009 commencing on February 5, 2009.
On February 6, 2009, as part of a modification to our capital structure, we entered into a Modification Agreement and a Fourth Amendment with SIBL. Pursuant to the Modification Agreement:
| we agreed to further amend the Bridge Loan Agreement (Fourth Amendment) to terminate SIBLs obligation to fund the balance of $28 million committed by SIBL under the Bridge Loan Agreement; |
| in partial consideration of our agreement to terminate the Bridge Loan Agreement, SIBL agreed to convert the $12 million outstanding principal amount under the Bridge Loan Agreement into 1,777,778 shares of our Series B Preferred Stock and the accrued interest was cancelled; |
| as a result of the Fourth Amendment and the termination of the Bridge Loan Agreement, all related loan, security and collateral documents were also released and terminated. This included the release of guarantees granted by our subsidiaries, eLandia South Pacific Holdings, Inc. and eLandia Technologies, Inc. (the Guarantors), for the benefit of SIBL. In addition, pursuant to the Fourth Amendment, all security interests and other liens granted to SIBL under securities pledge agreements executed by us and each of the Guarantors were satisfied and discharged and all collateral pledged was released; |
| SIBL agreed to surrender for cancellation 16,148,612 shares of our common stock thereby reducing to 49.9% SIBLs ownership of our outstanding common stock; |
| we granted SIBL an option, exercisable through March 31, 2009, to purchase an additional 592,593 shares of our Series B Preferred Stock for an aggregate purchase price of $4 million (the Option). The Option expired unexercised; |
| SIBL agreed to modify the Series B Preferred Stock as follows: |
| setting the initial conversion rate (the Conversion Rate) for the shares of the Series B Preferred Stock at a rate of seven shares of our common stock for each eight shares of Series B Preferred Stock; |
| providing for an adjusted Conversion Rate of 3.5 shares of common stock for every eight shares of series B preferred stock in the event that SIBL did not exercise the Option; |
| providing that the shares of Series B Preferred Stock would be automatically converted into shares of our common stock at the then effective Conversion Rate to the extent necessary for SIBL to maintain ownership of 49.9% of the then total amount of issued and outstanding shares of our common stock; |
| removing all voting rights of the Series B Preferred Stock; |
| providing that the shares of Series B Preferred Stock would have no more rights than our common stock, other than a liquidation preference; and |
| adding certain protective provisions providing that the following actions cannot be taken without prior approval of the holders of the majority of the Series B Preferred Stock outstanding: (a) any change to the rights, preferences or privileges of the Series B Preferred Stock; or (b) the creation of a new class or series of stock superior to the Series B Preferred Stock. |
| SIBL agreed to place all of its shares of our common stock and Series B Preferred Stock in a voting trust pursuant to a voting trust agreement; |
20
Table of Contents
| all registration rights agreements between us and SIBL were terminated with no further obligation on our part to file any registration statement for the benefit of SIBL; |
| we agreed to amend the employment agreement of Pete R. Pizarro, our Chief Executive Officer (Mr. Pizarro), who would have otherwise been entitled to terminate his employment for Good Reason; and |
| SIBL agreed to the transfer to us, by February 28, 2009, of $2.35 million of indebtedness of our subsidiary, Desca, due to an affiliate of SIBL in exchange for 344,444 shares of Series B Preferred Stock, or, if such transfer did not occur, a further cancellation of 1,801,740 shares of our common stock held under the voting trust agreement. Such transfer and exchange was not made by SIBL, but the Voting Trustee has not surrendered the 1,801,740 shares of common stock for cancellation pending relief from a February 16, 2009 court order in the matter of SIBL (Note 12). |
In accordance with the court order issued by the United States District Court on February 16, 2009, we have not canceled any shares of our common stock, nor have we issued any shares of our Series B Preferred Stock or converted any shares of our Series B Preferred Stock into common stock pursuant to the terms of the Modification Agreement.
We evaluated the issuance of the 1,777,778 shares of Series B Preferred Stock and the option to purchase 592,593 shares of Series B Preferred Stock in exchange for the $12,000,000 bridge loan, the forgiveness of the related accrued interest payable of $199,618 and the cancellation of the 16,148,612 shares of common stock utilizing the criteria enumerated in APB No. 26, Early Extinguishment of Debt, and FTB 80-1, Early Extinguishment of Debt through Exchange for Common or Preferred Stock. Accordingly, we recorded:
1) | $894,445 for the value of the Series B Preferred Stock issued to SIBL; |
2) | $-0- for the value of the Option; and |
3) | A contribution to capital of $11,078,506, representing the excess of the fair value of the securities and options issued over the net carrying value of the debt and common stock surrendered, including $199,618 of accrued interest payable forgiven, $162 for the cancellation of common stock upon conversion of the promissory note, and $226,829 of costs incurred in connection with the conversion of the promissory note. |
Promissory Notes
On March 2, 2009, we entered into an agreement with Telecom New Zealand, Ltd. (TNZ), pursuant to which PRR converted a $1,500,000 payable to TNZ at December 31, 2008 into a promissory note. The note bears interest at 7% per annum and is due on the earlier of (i) the date upon which funds are available for payment to TNZ pursuant to the terms of a limited liability agreement with TNZ and (ii) July 1, 2010. The note is secured by our membership interests in PRR and ASHC.
On March 2, 2009, we entered into another agreement with TNZ, pursuant to which PRR converted a $2,500,000 payable to TNZ at December 31, 2008 into a promissory note. The note bears interest at 7% per annum and is due on the date upon which the Pac-Rim East undersea fiber optic cable that runs between New Zealand and Hawaii (PRE Cable) is redeployed and ASHC determines that the PRE Cable is ready to carry commercial traffic. The note is secured by our membership interests in PRR and ASHC.
The promissory notes were satisfied in June 2009 using the proceeds from the Term Loan Agreement with ANZ described above.
NOTE 12 Commitments and Contingencies
Financial Collapse of SIBL and its Affiliates
On or about February 16, 2009, pursuant to an action brought by the SEC against SIBL and certain of its affiliates, including its owner Robert Allen Stanford, alleging, among other things, securities law fraud under both the Securities Act of 1933 and the Securities Exchange Act of 1934, the United States District Court for the Northern District of Texas, Dallas Division issued orders to freeze the assets of SIBL and certain of its affiliates and to appoint a receiver to prevent the waste and disposition of such assets. On or about February 17, 2009, the SEC formally charged Mr. Stanford and three of his companies, including SIBL, alleging a fraudulent, multi-billion dollar investment scheme.
Prior to the aforementioned action and the Modification Agreement on February 6, 2009, SIBL had served as the primary source of financing and liquidity to us and was recognized as such by our investors, vendors, and customers. Not only did these adverse events relating to SIBL eliminate a material source of financing and liquidity for us, but our association with SIBL has had, and may continue to have, other adverse effects on our business, results of operations, liquidity, and financial condition, including, among other things:
| Because of uncertainties stemming from the appointment of receivers for Stanford and the global economic crisis in general, several of our banks in Latin America have restricted access to revolving credit facilities or have prevented us from accessing existing and open credit lines. These actions have required us to utilize our cash reserves to stay current with certain vendors. |
| Similarly, certain of our vendors that provide us with trade credit have insisted on more punctual payment and have required additional deposits or security requirements. |
21
Table of Contents
| We have had a material proposed acquisition halted due to the uncertainty surrounding actions that may in the future be taken by the receivers. As a result, we expensed approximately $1.5 million of costs related to this failed acquisition during the nine months ended September 30, 2009. |
The collective impact of the uncertainties surrounding possible future actions of the SIBL receivers is that our cash flow position is being negatively affected and our ability to draw on existing credit lines or obtain other sources of financing are being adversely affected as a result of the perceived uncertainty as to how our association with SIBL impacts our business. If we are unable to resolve these issues to the satisfaction of our customers, vendors, creditors, and lenders, we may be unable to satisfy our cash requirements and may need to curtail certain operations or revise our business and growth plans.
On May 15, 2009, the district court in Dallas ruled that the Antiguan liquidators for SIBL may seek Chapter 15 bankruptcy protection for SIBL under U.S. law. A Chapter 15 filing assists in resolving cases involving debtors, assets and claimants in multiple countries. The Antiguan liquidators for SIBL are seeking the authority to file for bankruptcy as a means of safeguarding SIBLs assets. The potential impact on us from such a bankruptcy filing is uncertain.
On June 2, 2009, we received a letter from the U.S. receiver clarifying that the assets and business operations of eLandia and our subsidiaries are not part of the Stanford Financial Group Receivership Estate. The receivers letter did state that the voting trust certificates issued to SIBL, representing SIBLs interest in the shares of our capital stock deposited in the voting trust, did constitute part of the Stanford Financial Group Receivership Estate.
On June 19, 2009, a federal criminal indictment was issued against Mr. Stanford and several other executives and officers of SIBL, including the former chief investment officer, former chief accounting officer and former global controller. The indictment charges these individuals with fraud, obstruction and other crimes related to SIBL and other Stanford Financial companies.
On July 16, 2009, the receiver requested approval from the court to engage a private equity advisor to assist the receiver to properly manage the investments in the Receivership Estate, assess their value and identify potential buyers, thereby maximizing the value to the Receivership Estate. These investments include the voting trust certificates issued to SIBL representing SIBLs interest in the shares of our capital stock deposited in the voting trust.
Foreign Operations
Our operations in various geographic regions expose us to risks inherent in doing business in each of the countries in which we transact business. Operations in countries other than the United States are subject to various risks particular to each country. With respect to any particular country, these risks may include:
| Expropriation and nationalization of our assets or of our customers in that country; |
| Political and economic instability; |
| Civil unrest, acts of terrorism, force majeure, war or other armed conflict; |
| Natural disasters including those related to earthquakes, hurricanes, tsunamis and flooding; |
| Inflation; |
| Currency fluctuations, devaluations, conversion and expropriation restrictions; |
| Confiscatory taxation or other adverse tax policies; |
| Governmental activities that limit or disrupt markets, payments, or limit the movement of funds; |
| Governmental activities that may result in the deprivation of contract rights; and |
| Trade restrictions and economic embargoes imposed by the United States and other countries. |
Venezuela
In recent years Venezuela has experienced political challenges, difficult economic conditions, relatively high levels of inflation, and foreign exchange and price controls. The President of Venezuela has the authority to legislate certain matters by decree, and the government has nationalized or announced plans to nationalize certain industries and to expropriate certain companies and property. These factors may have a negative impact on our business and our financial condition.
Since 2003, Venezuela has imposed currency controls and created the Commission of Administration of Foreign Currency (CADIVI) with the task of establishing detailed rules and regulations and generally administering the exchange control regime. These controls fix the exchange rate between the Bolivar and the U.S. Dollar, and restrict the ability to exchange Bolivars for dollars and vice versa. The near-term effect has been to restrict our ability to repatriate funds from Venezuela in order to meet our cash requirements. In particular, the currency controls in Venezuela have restricted our ability to make payments to certain vendors in U.S. Dollars, causing us to borrow money to meet these obligations and to be subject to credit holds, which have caused delays in the delivery of customer orders thus delaying or causing the loss of sales.
22
Table of Contents
Fiji
In April 2009, the Reserve Bank of Fiji announced that Fijis currency had been devalued by 20% effective April 16, 2009, the President of Fiji annulled the countrys constitution, terminated all the judges in the country and declared himself the head of state. This triggered an impairment charge to our goodwill in Fiji and is expected to result in economic instability and an uncertain business climate in Fiji. These political events and any subsequent developments may have a negative impact on our business. Our former director, with whom we are in litigation, as described below, is Fijis ambassador to China.
As a result of the factors discussed above and the uncertainty caused by such factors, our management is reviewing all options with respect to our operations in Fiji. At September 30, 2009, assets in Fiji amounted to approximately $1.8 million and liabilities amounted to approximately $1.1 million. Any decision with respect to these operations is not expected to have a material adverse impact on our operations as a whole.
American Samoa
On September 29, 2009, a major earthquake in the South Pacific created a tsunami that sent a surge of water of up to 15 feet into parts of American Samoa. This resulted in power outages and major damage to parts of the island, including portions of our service territory. Our cellular network has been experiencing service delivery issues in the highly affected areas and our cable TV network has been completely destroyed in some areas. Our undersea cable is operational, although it has sustained some minor damage.
We continue to assess the extent of the damage and its effect on our operations. We are developing a recovery plan, but are currently unable to estimate the time or costs of restoration. Such restoration costs may be mitigated through insurance; however, at this time, we are unsure if we will be able to secure any amounts of insurance reimbursement. Based on information known at this time, we do not believe these events will have a material adverse impact on our results of operations or financial condition as a whole; however, it is uncertain whether these events will have any long-term impact on our operations in American Samoa.
In addition to the tsunami in September 2009 which affected our operations in American Samoa, one of the major tuna canneries in the territory has recently shut down its operations. Tuna canneries represent a majority of all economic activity in American Samoa. The closing of a principal cannery has resulted in an increase in unemployed workers in the territory. As a result, our operating results from our American Samoa operations may be negatively affected.
Current Economic Crisis
The recent global economic crisis has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These conditions not only limit our access to capital, but also make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and could cause U.S. and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers may face issues, including:
| the inability to obtain credit to finance purchases of our products; |
| customer insolvencies; |
| decreased customer confidence to make purchasing decisions; |
| decreased customer demand; and |
| decreased customer ability to pay their trade obligations. |
In addition, the recent economic crisis could adversely impact our suppliers ability to provide us with materials and components, either of which may negatively impact our business, financial condition and results of operations.
Ah Koy Litigation
Fiji Action
On February 24, 2009, Kelton Investments Ltd. (Kelton) and Datec Group Ltd. (Datec), as plaintiffs, filed in the High Court of Fiji at Suva (the Fiji Court) an Ex Parte Notice of Motion for Interim Injunction (the Motion). The Motion named as defendants Generic Technology Limited (Generic), Datec Pacific Holdings Ltd., eLandia, the Receiver for Stanford, and the Registrar of Companies. The Motion sought an interim injunction preventing certain defendants from, among other things, appointing new directors or removing existing directors from the board of directors of Generic and other entities and also preventing certain defendants from disposing of shares in Generic or its subsidiaries. On February 27, 2009, the Fiji Court entered an order granting this relief on an ex parte basis.
On March 31, 2009, Kelton and Datec filed a Statement of Claim in the Fiji Action. In essence, the Statement of Claim alleges that the Amended and Restated Arrangement Agreement dated August 8, 2005 (Arrangement Agreement) pursuant to which eLandia acquired the subsidiaries of Datec was induced by untrue representations related to the capital to be devoted to those subsidiaries and alleged investigations of Stanford. It asserts claims for fraudulent misrepresentation, proper construction and enforceability of certain Stock Purchase Agreements in which claims against eLandia were released, breach of Stock Purchase
23
Table of Contents
Agreements, breach of the Arrangement Agreement, and equitable estoppel. As relief, it seeks, among other things, rescission of the Arrangement Agreement and Stock Purchase Agreements, a declaration as to the scope of the Stock Purchase Agreements, injunctive relief, and damages. We are currently requesting details and particulars of the claims made ahead of the next appearance in the Fiji Court.
A hearing to review the order granting the interim injunction was scheduled for April 20, 2009. That hearing was cancelled due to the closure of the Fiji courts by the military led Fiji government. The hearing has been rescheduled a number of times and is now set to be held on December 2, 2009.
eLandia International Inc. v. Sir James Ah Koy, et al.
On March 9, 2009, we filed an action in the United States District Court for the Southern District of Florida, Miami Division (the Court), against Sir James Ah Koy, Michael Ah Koy, Kelton, and Datec. On March 17, 2009, we filed an Amended Complaint in that suit. In essence, we have alleged that Sir James Ah Koy and his son, Michael Ah Koy, Kelton, and Datec have improperly acted to frustrate the sale of our interests in the South Pacific. Among other things, we assert that the defendants have improperly employed claims and complaints about the Arrangement Agreement that they have released to favor their own interests at the expense of the Companys. We assert claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conspiracy to breach fiduciary duty, declaratory judgment under various agreements, breach of the implied covenant of good faith and fair dealing, breach of contract, and tortious interference with business relations. We seek a declaratory judgment, an injunction, compensatory damages (which we view as including all damages defendants have caused, including loss of sales proceeds and other costs), punitive damages, attorneys fees, and costs.
On April 15, 2009, we filed a motion seeking a preliminary injunction to preclude defendants from prosecuting the Fiji Action or causing that action to be prosecuted. On April 17, 2009, the defendants filed a motion to dismiss for lack of personal jurisdiction and a memorandum in opposition to our motion for a preliminary injunction on grounds of personal jurisdiction with the court and we, in turn, filed, among others, our opposition to said motion on May 4, 2009. A hearing was held on July 7, 2009, on the personal jurisdiction issue and preliminary injunction. On August 24, 2009, the Court entered a Report and Recommendation on Motion to Dismiss recommending that the defendants motion for lack of personal jurisdiction be dismissed and an Order stating that our preliminary injunction motion would not be adjudicated at this stage and denied the same without prejudice. On September 11, 2009, the defendants filed objections to the Courts Report and Recommendation and on October 5, 2009 we filed our response to such objections. On September 8, 2009, we filed a Second Amended Complaint to which the defendants filed an Answer and Affirmative Defenses on October 9, 2009. On October 9, 2009, the defendants also filed a Motion for Summary Judgment based on our alleged lack of standing. Orders on the pending objections and motions have not yet been entered by the Court. Additionally, on August 22, 2009, the Court issued a Scheduling Order setting forth a timeline for this case.
Latin Node FCPA Investigation
On September 14, 2007, we engaged in a review of Latin Nodes internal controls and legal compliance procedures within its finance and accounting departments as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments made to third parties in Central America prior to our acquisition of Latin Node on June 28, 2007 were identified as having been made in the absence of adequate records and controls for a U.S. public company. We conducted an internal investigation to determine whether any direct or indirect payments by employees of Latin Node or consultants used by Latin Node prior and subsequent to its acquisition by us were made in violation of the FCPA. The internal investigation of the FCPA matter was conducted by a Special Committee of our Board of Directors. The Special Committee retained independent legal counsel to assist in the investigation of the FCPA matter.
The internal investigation preliminarily revealed that certain payments from Latin Node prior to our acquisition of Latin Node may have been made in violation of the FCPA. We voluntarily and proactively reported these potential violations to the SEC, the United States Department of Justice, and the Federal Bureau of Investigation and cooperated fully with these agencies regarding this matter. Following settlement discussions with the Department of Justice, Latin Node agreed to enter into a plea agreement to resolve the matter by the payment of a monetary penalty of $2 million for the actions that occurred prior to Latin Nodes acquisition by us. On March 23, 2009, the Department of Justice filed charges in the United States District Court for the Southern District of Florida against Latin Node for actions taken by Latin Node prior to the time that we made our investment in Latin Node. On April 3, 2009, the matter was resolved and the court approved the plea agreement reached with the Department of Justice. In accordance with the terms of the settlement agreement, we paid $500,000 promptly following the settlement date, and the remaining $1,500,000 will be paid in three equal installments of $500,000 each by January 31, 2010, January 31, 2011 and January 31, 2012, respectively.
Latin Node Litigation
On January 22, 2008, an action was commenced against Latin Node, Inc. in the 11th Judicial Circuit in and for Miami-Dade County, Florida, by Juan Pablo Vasquez, Olivia de la Salas, and Gloria Vasquez, former employees of Latin Node, Inc. (the Plaintiffs). The Plaintiffs were terminated with cause by Latin Node and have brought an action for breach of contract. The
24
Table of Contents
Plaintiffs seek damages (including but not limited to severance pay and compensation for accrued but unused vacation pay), together with attorneys fees. On June 26, 2009, the court entered a notice of lack of prosecution in this case and directed the parties to appear on September 18, 2009 for a hearing on the courts motion of dismissal for lack of prosecution in the case. On September 21, 2009, the court issued an order dismissing the action for lack of prosecution.
Assignment for the Benefit of Creditors Latin Node
On June 12, 2008, Latin Node filed for an assignment for benefit of creditors in the 11th Judicial Circuit in and for Miami-Dade County, Florida (case no. 08-33495 CA11). As part of this proceeding, all of the assets of Latin Node were transferred to Michael Phelan, Esq., assignee. On July 17, 2008, most of these assets were sold to the highest bidder, Business Telecommunications Services, Inc. (BTS). Since we were the principal secured creditor of Latin Node, we had the right to receive all of the proceeds from such sale after the payment of the costs of administration. The immediate proceeds from the sale of these assets were used to pay administrative costs. A final court order approving the disposition of the proceeds from the sale of all other assets was scheduled for May 21, 2009. However, on May 20, 2009, Empresa Hondurena de Telecomunicaciones filed a Motion for Continuance or in the alternative, Motion to Stay the Assignees Motion to Approve Final Report and Fees to Assignee, Assignees Counsel and Assignors Counsel, Disburse Remaining Funds to Priority and Unsecured Creditors, Discharge Assignee and Close Case. At a hearing held on August 28, 2009 on said motions, the court ordered the parties to select a forensic examiner to conduct an examination and determine whether the claims made by Hondutel are valid. On September 17, 2009, the court appointed a forensic examiner, whose report is expected to be completed by the end of 2009.
Action Against Granados et al., for Indemnification
On June 27, 2008, we filed an action against Jorge Granados, individually and Retail Americas VoIP, LLC, a Delaware limited liability company (RAV) in the 11th Judicial Circuit in and for Miami-Dade County, Florida (Case No. 08-37352 CA20). The action asserted claims for contractual indemnification, breach of contract, breach of the obligation of good faith and fair dealing, fraud, fraudulent inducement, unjust enrichment, and specific performance against the escrow agent.
These claims arose from the transaction where we purchased 80% of the equity of Latin Node for $20 million pursuant to a preferred stock purchase agreement. The gravamen of the action was that Jorge Granados and RAV failed to disclose as part of the preferred stock purchase agreement that Latin Node had made payments to various parties in Central America in violation of the Foreign Corrupt Practices Act and one of Latin Nodes vendors claimed that it was owed $4.4 million. In connection with the transaction, 375,000 shares of our common stock had been deposited with an escrow agent to secure the indemnification obligations of the selling parties.
On February 12, 2009, we entered into a Settlement Agreement with Jorge Granados and RAV pursuant to which (i) the 375,000 shares of our common stock were returned to us by the escrow agent (Note 13), (ii) we exchanged mutual general releases with Jorge Granados and RAV, (iii) Jorge Granados resigned as a director of Latin Node, Inc. and a manager of RAV, and (iv) Jorge Granados agreed to be subject to certain non-competition, non-solicitation and non-disclosure covenants. The action was dismissed on March 13, 2009.
General Legal Matters
From time to time, we are involved in legal matters arising in the ordinary course of business. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are, or could be, involved in litigation, will not have a material adverse effect on our business, financial condition or results of operations.
Modification to Mr. Pizarros Employment Agreement
We entered into an amendment to Mr. Pizarros Executive Employment Agreement (the Amendment) on February 6, 2009. Under the Amendment, Mr. Pizarro waived any breach by us by reason of our entry into the Modification Agreement and released us of any liabilities resulting from such breach. In consideration of Mr. Pizarro agreeing to enter into the Amendment, we agreed to provide certain additional compensatory benefits to Mr. Pizarro as follows:
| The exercise price with respect to options to purchase 3,122,000 shares of our common stock previously granted pursuant to the Mr. Pizarros Executive Employment Agreement was reduced from $3.07 to $0.45 per share; |
| Mr. Pizarro was granted options to purchase an additional 1,000,000 shares of our common stock at $0.45 per share, which options vest equally on a monthly basis over a three-year period beginning February 2009, if and only if Mr. Pizarro remains continuously employed by us until each vesting date, subject to other terms and conditions; |
| All unvested shares of our common stock granted pursuant to Mr. Pizarro as part of a 750,000 share restricted stock award pursuant to Mr. Pizarros Executive Employment Agreement immediately vested, and all contractual restrictions with respect to such shares were terminated (see Note 15); and |
| Mr. Pizarros full bonus for 2008 in the amount of $375,000, as provided in his Executive Employment Agreement, was paid promptly following the execution of the Amendment. |
25
Table of Contents
In addition, Mr. Pizarros Executive Employment Agreement was further amended to provide as follows:
| during 2009, Mr. Pizarro will be paid a guaranteed bonus of $375,000, payable in equal bi-monthly installments commencing in February 2009; |
| we amended our Policy Governing Insider Trading (the Policy) to permit, with our approval, (a) the adoption of written plans for trading our securities in accordance with SEC Rule 10b5-1(c) (a Trading Plan), and (b) exempt transactions made pursuant to approved Trading Plans from the Policy; |
| following the amendment to the Policy described above, we agreed to approve a Trading Plan for Mr. Pizarro for certain shares of our common stock owned by Mr. Pizarro; and |
| by no later than December 2009, we agreed to adopt a written Senior Management Incentive Compensation Plan applicable to years 2010 and beyond. |
Resignation of Officer
On March 31, 2009, we entered into a Separation Agreement with Oscar Coen, our former Vice President of Business Development (the Separation Agreement). The Separation Agreement was effective February 28, 2009 and provides for, among other things, severance pay for a period of 12 months and contains a mutual release. The Separation Agreement terminates the employment agreement previously entered into by us and Mr. Coen except, among other provisions, the confidentiality, non-competition and non-solicitation covenants which survive the termination of the employment agreement. In connection with the Separation Agreement, we have recorded a liability for the severance pay, which is included in accrued expenses in the accompanying unaudited interim condensed consolidated balance sheet at September 30, 2009.
Customer and Vendor Concentrations
For the three months ended September 30, 2009, we had one customer that represented approximately 11% of our consolidated revenues. For the nine months ended September 30, 2009, we did not have any customers that exceeded 10% of our consolidated revenues. At September 30, 2009, we did not have any customers that exceeded 10% of our gross accounts receivable.
During the three and nine months ended September 30, 2009, approximately 74% and 87% of our cost of revenue for product sales, respectively, was purchased from a single vendor. At September 30, 2009, the amount due to this vendor was approximately 67% of our total accounts payable.
NOTE 13 Stockholders Equity
Voting Trust Agreement
In connection with the termination of the Bridge Loan Agreement, SIBL agreed to place 12,364,377 shares of our common stock and 4,118,263 shares of Series B Preferred Stock, representing all shares of our capital stock then owned by SIBL, into a voting trust. Pursuant to a Voting Trust Agreement, SIBL appointed Mr. Pizarro to act as the trustee. With certain limited exceptions, Mr. Pizarro was granted discretionary voting power with respect to all shares of stock placed in the voting trust by SIBL. However, Mr. Pizarro is required to vote the shares in accordance with and in the same proportion as the holders of the remaining outstanding shares of our common stock voting on any of the following matters (which will be determined by a vote of the shares other than those represented by the voting trust certificates): (i) the sale of the Company whether by merger, consolidation, sale of all or substantially all the assets or other similar transaction; and (ii) if the Company desires to increase the amount of shares of our common stock issuable pursuant to any stock option or other equity plan in an amount exceeding the greater of 9,500,000 shares of our common stock or 15% of the total amount of outstanding common stock. Additionally, SIBL retained its right to vote with respect to certain issues pertaining to the Series B Preferred Stock including any change to the rights, preferences or privileges of the Series B Preferred Stock or the creation of a new class or series of stock superior to the Series B Preferred Stock.
Under the Voting Trust Agreement, SIBL has agreed that the shares in the voting trust may not be transferred during the term of the voting trust. Notwithstanding these lock up provisions, SIBL may instruct the trustee to transfer, during any three month period, an amount of shares of our common stock equivalent to 1% of the then total outstanding shares of common stock. Any such transfers must be made in compliance with the limitations of Rule 144 under the Securities Act of 1933. The Voting Trust Agreement will terminate on the earlier of (a) five years from the date of the agreement, (b) the consummation of a change in control transaction, or (c) the date upon which SIBL owns less than 25% of our common stock.
26
Table of Contents
Amended and Restated Certificate of Designation of Series B Preferred Stock
Effective February 6, 2009, we amended our Certificate of Incorporation with the filing of an Amended and Restated Certificate of Designations, Rights and Preferences of Series B Preferred Stock (Amended and Restated Certificate of Designation). Under the Amended and Restated Certificate of Designation, all voting rights of the Series B Preferred Stock were removed. As a result of the Amended and Restated Certificate of Designation, the Series B Preferred Stock has the following protective provisions:
| a liquidation preference; and |
| at all times that shares of Series B Preferred Stock remain outstanding, we may not, without prior approval of the holders of the majority of the Series B Preferred Stock outstanding: |
| change the rights, preferences or privileges of the Series B Preferred Stock; or |
| create a new class or series of stock having a preference over or otherwise being superior to the Series B Preferred Stock. |
In addition, the Conversion Ratio for the Series B Preferred Stock, previously one share of our common stock for each share of Series B Preferred Stock, was modified such that the shares of Series B Preferred Stock are now convertible into common stock based on a ratio of 3.5 shares of common stock for every eight shares of Series B Preferred Stock.
On February 16, 2009, the United States District Court issued a temporary restraining order on behalf of the SEC against R. Allen Stanford, three Stanford companies, including SIBL, and two company executives freezing all corporate and personal assets of the companies and the three executives. Subsequent to the issuance of the court order, and in accordance with such order, we have not canceled any shares of our common stock, nor have we issued any shares of our Series B Preferred Stock or converted any shares of our Series B Preferred Stock into common stock pursuant to the terms of the Modification Agreement.
Series B Convertible Preferred Stock
On February 6, 2009, in connection with the Modification Agreement with SIBL (see Note 11), we issued 1,777,778 shares of our Series B Preferred Stock. In addition, we granted SIBL the Option, exercisable through March 31, 2009, to purchase an additional 592,593 shares of our Series B Preferred Stock for an aggregate purchase price of $4 million. The Option expired unexercised.
Common Stock Issuances
On February 6, 2009, in connection with the Modification Agreement with SIBL, we cancelled 16,148,612 shares of our common stock (see Note 11).
On February 6, 2009, in connection with Mr. Pizarros Amendment relating to the 750,000 restricted common shares granted to Mr. Pizarro under his Executive Employment Agreement, 562,500 shares of the restricted common stock were vested and issued to him (see Note 15).
In connection with the Settlement Agreement with Jorge Granados and RAV, we cancelled 375,000 shares of our common stock. The shares were valued at $450,000, based on the closing price of our common stock on February 12, 2009, the settlement date. Accordingly, we recorded a gain on the settlement of the litigation in the amount of $450,000, which is included in discontinued operations in the accompanying unaudited interim condensed consolidated statement of operations for the nine months ended September 30, 2009.
In May 2009, we issued 1,900 shares of our common stock to persons attending an eLandia marketing event.
On July 17, 2009, under the terms of the 30% Purchase Agreement, we issued to Alvarado 2,500,000 shares of our common stock, valued at $0.9 million based on the closing stock price of $0.34 on July 17, 2009 (see Note 6).
On September 30, 2009, we issued 350,000 shares of our common stock to the CTT Sellers, valued at $105,000 based on the closing stock price of $0.30 on September 30, 2009 (see Note 9).
On August 27, 2009, pursuant to the terms of the Settlement Agreement, we issued to the former owners of Transistemas 433,333 shares of our common stock valued of $156,000 based on a closing stock price of $0.36 on August 27, 2009 (see Note 7).
NOTE 14 Income Taxes
At December 31, 2008, we had federal and Florida net operating loss (NOL) carryovers of $33,208,721 and $28,435,615, respectively, which expire through 2028. We also had a capital loss in 2008 totaling $33,153,111, which expires December 31, 2013. In addition, at December 31, 2008, we had foreign net operating loss carryovers of approximately $13,182,235 which will expire through 2016.
27
Table of Contents
We have $5,606,156 of NOLs that are subject to limitations under Internal Revenue Code Section 382.
As of December 31, 2008, our NOL and capital loss carryovers were completely offset by valuation allowances.
We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our condensed consolidated statements of operation. Similarly, our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.
There have not been any material changes in our liability for unrecognized tax benefits, including interest and penalties, during the nine months ended September 30, 2009. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
NOTE 15 Share Based Payments
Stock Options
On June 4, 2009, we approved amendments to our 2008 Executive Incentive Plan (the 2008 Plan) and our 2007 Stock Option and Incentive Plan (the 2007 Plan). The 2008 Plan was amended to permit the repricing of stock options granted thereunder and to increase the number of shares of our common stock authorized and reserved for issuance thereunder to 9,500,000. The 2007 Plan was amended to permit the repricing of stock options granted thereunder.
On June 4, 2009, we approved a modification to the exercise price of all options outstanding under the 2008 Plan and 2007 Plan, whereby the exercise price of all such options was decreased to $0.45 per share, representing the average of the high and the low trading price on that date. All other terms of the outstanding options remained the same. The fair market value of our common stock on the date of modification was $0.30 per share. The weighted-average grant date fair value of the modified options utilizing the original exercise prices was $0.05 per share. The weighted-average grant date fair value of the modified options utilizing the modified exercise price was $0.16 per share. Weighted-average assumptions relating to the estimated fair value of these stock options on the date of modification, which we estimated using the Black-Scholes option pricing model are as follows: risk-free interest rate of 2.56%; expected dividend yield of zero percent; expected option life of 4.9 years; and volatility of 77%. The modification resulted in an incremental fair value of $638,025, of which, $39,524 and $231,114 was recorded as compensation expense during the three and nine months ended September 30, 2009. The remaining $406,911 will be amortized over the remaining expected option life of 4.9 years.
Restricted Stock Awards
On March 10, 2008, we granted 750,000 restricted common shares to Mr. Pizarro, who was then serving as our President, prior to his appointment as Chief Executive Officer. The restricted shares vest monthly over a three-year period. The fair value of the common stock at the date of grant was $0.75 per share based upon the closing market price of our common stock on the date of the grant. The aggregate grant date fair value of the award amounted to $562,500, which was to be recognized ratably as compensation expense over the vesting period. In connection with Mr. Pizarros Amendment, 562,500 unvested shares of our common stock granted to Mr. Pizarro immediately vested, and all contractual restrictions with respect to such shares were terminated. We recorded $0 and $46,878 of compensation expense during the three months ended September 30, 2009 and 2008, respectively, and $411,458 and $104,170 of compensation expense during the nine months ended September 30, 2009 and 2008, respectively, with respect to this award.
NOTE 16 Segment Information
Effective April 1, 2008, we modified our segment reporting. We now operate in, and will report financial information for the following three segments: Latin America, South Pacific and Corporate (including discontinued operations). These segments reflect the manner in which we now manage our operations. Prior periods have been restated to reflect the new segment reporting structure.
Our discontinued operations are comprised of (i) our investment in Latin Node; (ii) our 50% interest in Datec PNG; and (iii) certain eLandia predecessor companies that no longer conduct any operations.
28
Table of Contents
Below is a summary of the results by segment for the three and nine months ended September 30, 2009 and identifiable assets as of September 30, 2009:
For the Three Months Ended September 30, 2009 | ||||||||||||||||
Latin America | South Pacific |
Corporate and Discontinued Operations |
Consolidated | |||||||||||||
Revenue |
||||||||||||||||
Product Sales |
$ | 21,968,975 | $ | 979,119 | $ | | $ | 22,948,094 | ||||||||
Services |
13,763,446 | 3,778,575 | | 17,542,021 | ||||||||||||
Total Revenue |
35,732,421 | 4,757,694 | | 40,490,115 | ||||||||||||
Cost of Revenue |
||||||||||||||||
Product Sales |
18,049,696 | 941,168 | | 18,990,864 | ||||||||||||
Services |
8,610,169 | 1,307,488 | | 9,917,657 | ||||||||||||
Total Cost of Revenue |
26,659,865 | 2,248,656 | | 28,908,521 | ||||||||||||
Gross Profit |
9,072,556 | 2,509,038 | | 11,581,594 | ||||||||||||
25.4 | % | 52.7 | % | 0.0 | % | 28.6 | % | |||||||||
Expenses |
||||||||||||||||
Sales, Marketing and Customer Support |
6,106,898 | 1,065,781 | | 7,172,679 | ||||||||||||
General and Administrative |
7,330,617 | 929,115 | 1,375,329 | 9,635,061 | ||||||||||||
Depreciation and Amortization |
576,910 | 1,083,880 | 24,536 | 1,685,326 | ||||||||||||
Amortization Intangible Assets |
870,386 | 138,275 | | 1,008,661 | ||||||||||||
Total Expenses |
14,884,811 | 3,217,051 | 1,399,865 | 19,501,727 | ||||||||||||
Operating Income (Loss) |
(5,812,255 | ) | (708,013 | ) | (1,399,865 | ) | (7,920,133 | ) | ||||||||
Interest Expense, Net |
(921,432 | ) | (409,772 | ) | 61,243 | (1,269,961 | ) | |||||||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
814,127 | | | 814,127 | ||||||||||||
Other Income (Expense) |
(3,624,971 | ) | 333,670 | (72,166 | ) | (3,363,467 | ) | |||||||||
Income (Loss) from Discontinued operations |
| | (2,034 | ) | (2,034 | ) | ||||||||||
Net Income (Loss) Attributable to eLandia |
$ | (9,544,531 | ) | $ | (784,115 | ) | $ | (1,412,822 | ) | $ | (11,741,468 | ) | ||||
For the Nine Months Ended September 30, 2009 | ||||||||||||||||
Latin America | South Pacific | Corporate and Discontinued Operations |
Consolidated | |||||||||||||
Revenue |
||||||||||||||||
Product Sales |
$ | 54,054,423 | $ | 2,891,755 | $ | | $ | 56,946,178 | ||||||||
Services |
32,686,783 | 10,678,494 | | 43,365,277 | ||||||||||||
Total Revenue |
86,741,206 | 13,570,249 | | 100,311,455 | ||||||||||||
Cost of Revenue |
||||||||||||||||
Product Sales |
41,432,550 | 2,614,920 | | 44,047,470 | ||||||||||||
Services |
20,850,720 | 3,853,354 | | 24,704,074 | ||||||||||||
Total Cost of Revenue |
62,283,270 | 6,468,274 | | 68,751,544 | ||||||||||||
Gross Profit |
24,457,936 | 7,101,975 | | 31,559,911 | ||||||||||||
28.2 | % | 52.3 | % | 0.0 | % | 31.5 | % | |||||||||
Expenses |
||||||||||||||||
Sales, Marketing and Customer Support |
18,801,816 | 2,250,678 | | 21,052,494 | ||||||||||||
General and Administrative |
19,791,346 | 2,580,442 | 10,280,500 | 32,652,288 | ||||||||||||
Impairment of Goodwill |
| 1,025,717 | | 1,025,717 | ||||||||||||
Depreciation and Amortization |
1,987,719 | 1,948,136 | 50,566 | 3,986,421 | ||||||||||||
Amortization Intangible Assets |
2,611,158 | 841,108 | | 3,452,266 | ||||||||||||
Total Expenses |
43,192,039 | 8,646,081 | 10,331,066 | 62,169,186 | ||||||||||||
Operating Income (Loss) |
(18,734,103 | ) | (1,544,106 | ) | (10,331,066 | ) | (30,609,275 | ) | ||||||||
Interest Expense, Net |
(2,741,291 | ) | (641,605 | ) | 55,179 | (3,327,717 | ) | |||||||||
Change in Value of Noncontrolling Interest Purchase Obligation |
814,127 | | | 814,127 | ||||||||||||
Other Income (Expense) |
(5,974,192 | ) | 259,576 | 167,307 | (5,547,309 | ) | ||||||||||
Income (Loss) from Discontinued Operations |
| | (9,507,171 | ) | (9,507,171 | ) | ||||||||||
Net Income (Loss) Attributable to eLandia |
$ | (26,635,459 | ) | $ | (1,926,135 | ) | $ | (19,615,751 | ) | $ | (48,177,345 | ) | ||||
Total Assets |
$ | 125,292,354 | $ | 43,687,626 | $ | 3,270,867 | $ | 172,250,847 | ||||||||
29
Table of Contents
Below is a summary of the results by segment for the three and nine months ended September 30, 2008 and identifiable assets as of December 31, 2008:
For the Three Months Ended September 30, 2008 | ||||||||||||||||
Latin America | South Pacific | Corporate and Discontinued Operations |
Consolidated | |||||||||||||
Revenue |
||||||||||||||||
Product Sales |
$ | 29,459,207 | $ | 2,194,486 | | $ | 31,653,693 | |||||||||
Services |
10,133,889 | 3,256,799 | | 13,390,688 | ||||||||||||
Total Revenue |
39,593,096 | 5,451,285 | | 45,044,381 | ||||||||||||
Cost of Revenue |
||||||||||||||||
Product Sales |
24,192,118 | 1,944,973 | | 26,137,091 | ||||||||||||
Services |
6,312,113 | 1,051,897 | | 7,364,010 | ||||||||||||
Total Cost of Revenue |
30,504,231 | 2,996,870 | | 33,501,101 | ||||||||||||
Gross Profit |
9,088,865 | 2,454,415 | | 11,543,280 | ||||||||||||
23.0 | % | 45.0 | % | 0.0 | % | 25.6 | % | |||||||||
Expenses |
||||||||||||||||
Sales, Marketing and Customer Support |
5,852,364 | 756,899 | | 6,609,263 | ||||||||||||
General and Administrative |
4,116,113 | 1,274,527 | 2,210,430 | 7,601,070 | ||||||||||||
Depreciation and Amortization |
169,095 | 323,422 | 8,581 | 501,098 | ||||||||||||
Amortization Intangible Assets |
870,386 | 186,347 | | 1,056,733 | ||||||||||||
Total Expenses |
11,007,958 | 2,541,195 | 2,219,011 | 15,768,164 | ||||||||||||
Operating Income (Loss) |
(1,919,093 | ) | (86,780 | ) | (2,219,011 | ) | (4,224,884 | ) | ||||||||
Interest Expense, Net |
(1,005,418 | ) | (131,741 | ) | 169,830 | (967,329 | ) | |||||||||
Settlement of Noncontrolling Interest Purchase Price Obligation |
| | | | ||||||||||||
Change in Value of Noncontrolling Interest Purchase Obligation |
93,750 | | | 93,750 | ||||||||||||
Other Income (Expense) |
(645,396 | ) | 589,813 | (99,735 | ) | (155,318 | ) | |||||||||
Income (Loss) from Discontinued Operations |
| | 144,444 | 144,444 | ||||||||||||
Net Income (Loss) Attributable to eLandia |
$ | (3,476,157 | ) | $ | 371,292 | $ | (2,004,472 | ) | $ | (5,109,337 | ) | |||||
For the Nine Months Ended September 30, 2008 | ||||||||||||||||
Latin America | South Pacific | Corporate and Discontinued Operations |
Consolidated | |||||||||||||
Revenue |
||||||||||||||||
Product Sales |
$ | 64,530,095 | $ | 5,290,112 | | $ | 69,820,207 | |||||||||
Services |
23,188,413 | 10,721,074 | | 33,909,487 | ||||||||||||
Total Revenue |
87,718,508 | 16,011,186 | | 103,729,694 | ||||||||||||
Cost of Revenue |
||||||||||||||||
Product Sales |
52,460,250 | 4,465,463 | | 56,925,713 | ||||||||||||
Services |
14,338,177 | 3,227,766 | | 17,565,943 | ||||||||||||
Total Cost of Revenue |
66,798,427 | 7,693,229 | | 74,491,656 | ||||||||||||
Gross Profit |
20,920,081 | 8,317,957 | | 29,238,038 | ||||||||||||
23.8 | % | 52.0 | % | 0.0 | % | 28.2 | % | |||||||||
Expenses |
||||||||||||||||
Sales, Marketing and Customer Support |
16,707,567 | 2,557,643 | | 19,265,210 | ||||||||||||
General and Administrative |
13,220,487 | 3,854,860 | 10,018,922 | 27,094,269 | ||||||||||||
Impairment of Goodwill |
| 630,802 | | 630,802 | ||||||||||||
Depreciation and Amortization |
922,450 | 1,044,834 | 16,012 | 1,983,296 | ||||||||||||
Amortization Intangible Assets |
1,874,799 | 559,042 | | 2,433,841 | ||||||||||||
Total Expenses |
32,725,303 | 8,647,181 | 10,034,934 | 51,407,418 | ||||||||||||
Operating Income (Loss) |
(11,805,222 | ) | (329,224 | ) | (10,034,934 | ) | (22,169,380 | ) | ||||||||
Interest Expense, Net |
(1,969,123 | ) | (418,734 | ) | (1,842,756 | ) | (4,230,613 | ) | ||||||||
Change in Value of Noncontrolling Interest Purchase Obligation |
(3,000,000 | ) | | | (3,000,000 | ) | ||||||||||
Other Income (Expense) |
(1,194,040 | ) | 491,753 | (90,974 | ) | (793,261 | ) | |||||||||
Income (Loss) from Discontinued Operations |
| | (12,073,312 | ) | (12,073,312 | ) | ||||||||||
Net Income (Loss) Attributable to eLandia |
$ | (17,968,385 | ) | $ | (256,205 | ) | $ | (24,041,976 | ) | $ | (42,266,566 | ) | ||||
Total Assets |
$ | 147,860,439 | $ | 25,893,723 | $ | 59,300,250 | $ | 233,054,412 | ||||||||
30
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Special Note About Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), which are based on managements exercise of business judgment, as well as assumptions made by and information currently available to management. When used in this document, the words may, will, anticipate, believe, estimate, expect, intend and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as described in eLandia International Inc.s (eLandia), Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.
Overview
eLandia is a provider of information and communications technology (ICT) products and services to small, medium-sized and large businesses as well as government entities, primarily in Latin America. Through our subsidiaries, we offer products and services in over 17 countries, including Argentina, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru, Trinidad & Tobago, Venezuela and the United States. eLandia also operates in the South Pacific region, providing ICT products and services in Fiji and other Pacific Island nations and, through April 17, 2009, in Papua New Guinea through our 50% interest in Datec PNG Pty Limited which, as discussed below, has been sold effective April 17, 2009. In American Samoa we offer a broad range of communications services including mobile communications and Internet access. In addition, we have invested in an underwater fiber optic cable service terminating in American Samoa which began generating revenue during May 2009 and we recently acquired the assets of Pacific Island Cable, a cable TV provider on American Samoa.
We provide innovative technology solutions that help customers increase efficiency, improve business agility, decrease costs, and maximize their existing IT investments in order to achieve competitive advantages. Our service portfolio currently consists of three core business lines: Technology Integration Services, Education Services, and Managed Services, all of which help our customers compete effectively in the global economy. We also hold more than 40 certifications and specializations from leading technology companies, including Cisco Systems, Inc. (Cisco) and Microsoft Corporation (Microsoft).
eLandia corporate headquarters are located at 8200 NE 52nd Terrace, Suite 102, Miami, Florida 33166. The telephone number is (305) 415-8830.
Recent Developments
Modification to Mr. Pizarros Employment Agreement
We entered into an amendment with Mr. Pizarro to his employment agreement on February 6, 2009 (the Amendment). Under the Amendment, Mr. Pizarro waived any breach by us by reason of our entry into the Modification Agreement and released us of any liabilities resulting from such breach. In consideration of Mr. Pizarro agreeing to enter into the Amendment, we agreed to provide certain additional compensatory benefits to Mr. Pizarro as follows:
| The exercise price with respect to options to purchase 3,122,000 shares of our common stock previously granted pursuant to the Mr. Pizarros Employment Agreement was reduced to $0.45 per share; |
| Mr. Pizarro was granted options to purchase an additional 1,000,000 shares of our common stock at an exercise price of $0.45 per share, which options vest equally on a monthly basis over a three-year period beginning February 2009, if and only if Mr. Pizarro remains continuously employed by us until each vesting date, subject to other terms and conditions; |
| All unvested shares of our common stock granted pursuant to Mr. Pizarro as part of a 750,000 share restricted stock award pursuant to Mr. Pizarros Executive Employment Agreement immediately vested, and all contractual restrictions with respect to such shares were terminated; and |
| Mr. Pizarros full bonus for 2008 in the amount of $375,000, as provided in his Employment Agreement, was paid promptly following the execution of the Amendment. |
31
Table of Contents
In addition, Mr. Pizarros Employment Agreement was further amended to provide as follows:
| during 2009, Mr. Pizarro will be paid a guaranteed bonus of $375,000, payable in equal bi-monthly installments commencing in February 2009; |
| we amended our Policy Governing Insider Trading (the Policy), to permit, with our approval, (a) the adoption of written plans for trading our securities in accordance with SEC Rule 10b5-1(c) (a Trading Plan), and (b) exempt transactions made pursuant to approved Trading Plans from the Policy; |
| following the amendment to the Policy described above, we agreed to approve a Trading Plan for Mr. Pizarro for certain shares of our common stock owned by Mr. Pizarro; and |
| by no later than December 2009, we agreed to adopt a written Senior Management Incentive Compensation Plan applicable to years 2010 and beyond. |
Modification of Financing Arrangements with Stanford International Bank Ltd. and Restructuring of Capital.
At the end of 2008 and the beginning of 2009, without any advance warning, we were advised by Stanford International Bank Ltd. (SIBL), our then principal stockholder, that due to the deteriorating global economic conditions it would not be able to extend the full amount of its $40 million loan commitment to us under a Credit Agreement, dated June 21, 2008 (the Credit Agreement) (referred to herein as the Stanford Funding). As a result of these developments, on February 6, 2009, as part of a modification to our capital structure, we entered into a Modification Agreement (the Modification Agreement) with SIBL. Pursuant to the Modification Agreement, our financing arrangement with SIBL was substantially revised. Specifically, under the terms of the Modification Agreement:
| we agreed to further amend the Credit Agreement (Fourth Amendment) to terminate SIBLs obligation to fund the balance of $28 million committed by SIBL under the Credit Agreement; |
| in partial consideration of our agreement to terminate the Credit Agreement, SIBL agreed to convert the $12 million outstanding principal amount under the Credit Agreement into 1,777,778 shares of our Series B Convertible Preferred Stock (Series B Preferred Stock) and the accrued interest was cancelled; |
| as a result of the Fourth Amendment and the termination of the Credit Agreement, all related loan, security and collateral documents were also released and terminated. This included the release of guarantees granted by our subsidiaries, eLandia South Pacific Holdings, Inc. and eLandia Technologies, Inc. (the Guarantors), for the benefit of SIBL. In addition, pursuant to the Fourth Amendment, all security interests and other liens granted to SIBL under securities pledge agreements executed by us and each of the Guarantors were satisfied and discharged and all collateral pledged was released; |
| SIBL agreed to surrender for cancellation 16,148,612 shares of our common stock thereby reducing to 49.9% SIBLs ownership of our outstanding common stock; |
| we granted SIBL an option, exercisable through March 31, 2009, to purchase an additional 592,593 shares of our Series B Preferred Stock for an aggregate purchase price of $4 million (the Option). This Option has expired unexercised; |
| SIBL agreed to modify the Series B Preferred Stock as follows: |
| setting the initial conversion rate (the Conversion Rate) for the shares of the Series B Preferred Stock at a rate of seven shares of our common stock for each eight shares of Series B Preferred Stock; |
| providing for an adjusted Conversion Rate of 3.5 shares of common stock for every eight shares of series B preferred stock in the event that SIBL did not exercise the Option; |
| providing that the shares of Series B Preferred Stock would be automatically converted into shares of our common stock at the then effective Conversion Rate to the extent necessary for SIBL to maintain ownership of 49.9% of the then total amount of issued and outstanding shares of our common stock; |
| removing all voting rights of the Series B Preferred Stock; |
| providing that the shares of Series B Preferred Stock would have no more rights than our common stock, other than a liquidation preference; and |
| adding certain protective provisions providing that the following actions cannot be taken without prior approval of the holders of the majority of the Series B Preferred Stock outstanding: (a) any change to the rights, preferences or privileges of the Series B Preferred Stock; or (b) the creation of a new class or series of stock superior to the Series B Preferred Stock. |
| SIBL agreed to place all of its shares of our common stock and Series B Preferred Stock in a voting trust pursuant to a voting trust agreement; |
| all registration rights agreements between us and SIBL were terminated with no further obligation on our part to file any registration statement for the benefit of SIBL; |
32
Table of Contents
| we agreed to amend the employment agreement of Pete R. Pizarro, our Chief Executive Officer (Pizarro), who would have otherwise been entitled to terminate his employment for Good Reason; and |
| SIBL agreed to the transfer by February 28, 2009 to us of $2.35 million of indebtedness of our subsidiary, Desca Holding LLC (Desca), due to an affiliate of SIBL in exchange for 344,444 shares of Series B Preferred Stock, or, if such transfer does not occur, a further cancellation of 1,801,740 shares of our common stock held under the voting trust agreement. Such transfer and exchange was not made by SIBL but the Voting Trustee has not surrendered the 1,801,740 shares of common stock for cancellation pending relief from the February 16, 2009 court order described below. |
In connection with the termination of the Credit Agreement, pursuant to a certain Voting Trust Agreement, dated February 6, 2009, by and between the Company, Pizarro, and SIBL (the Voting Trust Agreement), SIBL agreed to deposit 12,364,377 shares of our common stock and 4,118,263 shares of Series B Preferred Stock, representing all shares of our capital stock then owned by SIBL, into a voting trust (the Voting Trust). Pursuant to the Voting Trust Agreement, SIBL appointed Pizarro, to act as the trustee. With certain limited exceptions, Pizarro was granted discretionary voting power with respect to all shares of stock placed in the Voting Trust by SIBL, except that Pizarro is required to vote the shares in accordance with and in the same proportion as the holders of the remaining outstanding shares of our common stock voting on any of the following matters (which will be determined by a vote of the shares other than those represented by the voting trust certificates): (i) the sale of the Company whether by merger, consolidation, sale of all or substantially all the assets or other similar transaction; and (ii) if the Company desires to increase the amount of shares of our common stock issuable pursuant to any stock option or other equity plan in an amount exceeding the greater of 9,500,000 shares of our common stock or 15% of the total amount of outstanding common stock. Additionally, SIBL retained its right to vote with respect to certain issues pertaining to the Series B Preferred Stock including any change to the rights, preferences or privileges of the Series B Preferred Stock or the creation of a new class or series of stock superior to the Series B Preferred Stock.
As part of the arrangements with SIBL, effective February 6, 2009, we amended our Certificate of Incorporation with the filing of an Amended and Restated Certificate of Designations, Rights and Preferences of Series B Preferred Stock (Amended and Restated Certificate of Designation). Under the Amended and Restated Certificate of Designation, all voting rights of the Series B Preferred Stock were removed. As a result of the Amended and Restated Certificate of Designation, the Series B Preferred Stock has the following protective provisions:
| a liquidation preference; and |
| at all times that shares of Series B Preferred Stock remain outstanding, we may not, without prior approval of the holders of the majority of the Series B Preferred Stock outstanding: |
| change the rights, preferences or privileges of the Series B Preferred Stock; or |
| create a new class or series of stock having a preference over or otherwise being superior to the Series B Preferred Stock. |
In addition, the Conversion Ratio for the Series B Preferred Stock, previously one share of our common stock for each share of Series B Preferred Stock, was modified such that the shares of Series B Preferred Stock are now convertible into common stock based on a ratio of 3.5 shares of common stock for every eight shares of Series B Preferred Stock.
Financial Collapse of SIBL and its Affiliates
On or about February 16, 2009, pursuant to an action brought by the SEC against SIBL and certain of its affiliates, including its owner Robert Allen Stanford, alleging, among other things, securities law fraud under both the Securities Act of 1933 and the Securities Exchange Act of 1934, the United States District Court for the Northern District of Texas, Dallas Division, issued an order appointing a Receiver for all the assets and records (the Receivership Estate) of SIBL, Stanford Group Company, Stanford Capital Management, LLC, R. Allen Stanford, James M. Davis and Laura Pendergest-Holt and of all entities they own or control. The order directs the Receiver to take control and possession of and to operate the Receivership Estate, and to perform all acts necessary to conserve, hold, manage and preserve the value of the Receivership Estate. Subsequent to the issuance of the court order, and in accordance with such order, the Voting Trustee has not (i) surrendered for cancellation any shares of our common stock, or (ii) converted any shares of our Series B Preferred Stock into common stock. On or about February 17, 2009, the SEC formally charged Mr. Stanford and three of his companies, including SIBL, alleging a fraudulent, multi-billion dollar investment scheme. The SEC also charged SIBL chief financial officer James Davis and Stanford Financial Group chief investment officer Laura Pendergest-Holt in the enforcement action.
In addition, on February 19, 2009, the Antiguan Financial Services Regulatory Commission appointed two joint-receivers for all of the undertaking, property and assets of SIBL and Stanford Trust Corporation, Ltd. (STCL) and said appointment was subsequently ratified by the Eastern Caribbean Supreme Court in the High Court of Justice of Antigua and Barbuda on February 26, 2009. The order directs (i) the joint-receivers to take into their custody and control all the property, undertakings and other assets of SIBL and STCL, and (ii) SIBL and STCL to restrain from disposing of or otherwise dealing with any of their assets, entering into any agreements or arrangement to sell, transfer or otherwise dispose of any of their assets, or carrying on of transacting business of any kind whatsoever under the license granted by the Financial Services Regulatory Commission without the consent, management and supervision of the Financial Services Regulatory Commission.
33
Table of Contents
On May 15, 2009, the district court in Dallas ruled that the Antiguan liquidators for SIBL may seek Chapter 15 bankruptcy protection for SIBL under U.S. law. A Chapter 15 filing assists in resolving cases involving debtors, assets and claimants in multiple countries. The Antiguan liquidators for SIBL are seeking the authority to file for bankruptcy as a means of safeguarding SIBLs assets. The potential impact on us from such a bankruptcy filing is uncertain.
On June 2, 2009, we received a letter from the U.S. receiver clarifying that the assets and business operations of eLandia and our subsidiaries are not part of the Stanford Financial Group Receivership Estate. The receivers letter did state that the voting trust certificates issued to SIBL, representing SIBLs interest in the shares of our capital stock deposited in the voting trust, did constitute part of the Stanford Financial Group Receivership Estate.
On June 19, 2009, a federal criminal indictment was issued against Mr. Stanford and several other executives and officers of SIBL, including the former chief investment officer, former chief accounting officer and former global controller. The indictment charges these individuals with fraud, obstruction and other crimes related to SIBL and other Stanford Financial companies.
On July 16, 2009, the receiver requested approval from the court to engage a private equity advisor to assist the receiver to properly manage the investments in the Receivership Estate, assess their value and identify potential buyers, thereby maximizing the value to the Receivership Estate. These investments include the voting trust certificates issued to SIBL representing SIBLs interest in the shares of our capital stock deposited in the voting trust.
Sale of South Pacific Subsidiary
Through April 17, 2009, we held a 50% interest in Datec PNG. On April 17, 2009 we sold our 50% ownership interest in Datec PNG to Steamships Ltd. As a result of the sale of Datec PNG, we re-measured the value of the net assets to be sold at the lower of the carrying amount or fair value less selling costs. We determined that the sale price of $5,610,000 in cash, less selling costs of $22,427, was the best indicator of the fair value of the assets to be sold. Accordingly, we recorded an impairment charge related to the goodwill and intangible assets of $10,827,252 during the three months ended March 31, 2009 and a gain upon the closing of the sale, including the results of operations for the 17 day period ending April 17, 2009, of $734,909. The write off of the goodwill and the gain resulted in an aggregate loss on the sale of Datec PNG of $10,092,343, which is included in discontinued operations.
Term Loan Agreement
On June 8, 2009, we entered into a Loan Agreement (Term Loan Agreement) with ANZ whereby ANZ provided $16,672,000 in the form of a term loan to our subsidiaries, ASHC and Samoa American Samoa Cable, LLC (SAS). ASHC and SAS are the borrowers under the facility and eLandia and our subsidiary, American Samoa Hawaii Undeployed Cable, LLC (ASHUC) are the guarantors. The loan is principally secured by substantially all of the assets and operations of ASHC, SAS and ASHUC. The loan bears interest at the prime rate plus 2% and is due on June 3, 2016. The Term Loan Agreement requires seven monthly installments of interest only, followed by 77 monthly installments of $187,319, including principal and interest, through the maturity date. The remaining unpaid principal balance is due on the maturity date. In the event that a United States Department of Agriculture (USDA) Rural Development Conditional Commitment for Guarantee (USDA Guaranty) is obtained in favor of ANZ covering the outstanding amount of the loan then, as of the effective date of the USDA Guaranty in favor of ANZ, the interest rate will be decreased to the prime rate plus 1.10%. The proceeds of the loan were used to fund the construction, installation and delivery to customers of a fully operational underwater fiber optic cable linking America Samoa and Samoa to Hawaii and providing improved long distance telecommunication and data services. In connection with the Term Loan Agreement, we executed a guaranty in favor of ANZ (the Guaranty). Pursuant to the Guaranty, we have unconditionally guaranteed the repayment and other obligations of ASHC and SAS under the Term Loan Agreement.
We own 66.6% of ASHC and the remaining 33.3% is owned by the American Samoa Government. SAS and ASHUC are wholly-owned subsidiaries of ASHC.
Purchase of Remaining Portion of Desca
On July 17, 2009 we consummated a purchase and sale transaction under a Securities Purchase Agreement effective July 1, 2009 (the 30% Purchase Agreement) with Jorge Enrique Alvarado Amado (Alvarado). Pursuant to the 30% Purchase Agreement, we purchased 3,000,000 Common Units (30% Units) of Desca for an aggregate purchase price of $1.9 million, as described below. As a result of our purchase of the 30% Units under the 30% Purchase Agreement, effective July 1, 2009, Desca became our wholly-owned subsidiary.
Under the terms of the 30% Purchase Agreement we have: (i) made a payment to Alvarado of $500,000 in cash, (ii) executed and delivered to Alvarado a $500,000 promissory note payable on July 1, 2010, and (iii) issued to Alvarado 2,500,000 shares of our common stock, valued at $0.9 million based on the closing stock price of $0.34 on July 17, 2009, of which (A) one-half of such shares were deposited with an escrow agent to be held and released in accordance with the terms of an escrow agreement, as
34
Table of Contents
described below, and (B) one-half of such shares were delivered to Alvarado. The promissory note provides for interest to accrue at 6% per annum and all payments of principal and accrued interest to be paid on the maturity date of July 1, 2010. The 30% Purchase Agreement provides that the purchase price will be reduced to the extent that the value of Descas net assets at closing is determined to be less as compared to June 30, 2010. Alvarado will be responsible to pay us an amount equal to 30% of any deficiency and such amount will be deemed a claim for indemnification under the 30% Purchase Agreement.
In addition to the purchase price described above, we will be required to pay to Alvarado contingent consideration (the Contingent Consideration) in the event Desca achieves certain financial performance targets for 2009 identified in the 30% Purchase Agreement. The aggregate amount of the Contingent Consideration will be (i) up to an additional maximum amount of 5,000,000 restricted shares of our common stock, (ii) payment of up to a maximum amount of $8,000,000 in cash to be evidenced by an additional non-interest bearing promissory note payable on December 31, 2013, or (iii) up to an additional maximum amount of 2,500,000 restricted shares of our common stock and payment of up to an additional maximum amount of $4,000,000 in cash to be evidenced by an additional non-interest bearing promissory note payable on December 31, 2013.
All but 1,250,000 shares of our common stock constituting part of the purchase price, as well as any additional shares of our common stock constituting amounts of Contingent Consideration, will be deposited with an escrow agent to be held and released over a 4-year period in accordance with the terms of an escrow agreement, as described below. All shares of our common stock held in escrow shall be available to satisfy any claim by us for indemnification under the 30% Purchase Agreement. All shares of our common stock constituting part of the purchase price will be held in escrow for a period of two years following the closing; however, if such shares become eligible for resale by Alvarado pursuant to Rule 144 under the Securities Act of 1933, such shares may be sold by Alvarado, but only so long as Alvarado makes arrangements acceptable to us for the immediate deposit of the net cash proceeds into escrow to be held in accordance with the terms thereof. All shares of our common stock constituting part of the Contingent Consideration, if any, will be held in escrow for a period of four years following the closing; however, eight equal semi-annual distributions of Contingent Consideration, commencing on July 1, 2010, will be made to Alvarado until the entire amount of Contingent Consideration has been paid. In addition, all promissory notes issued by us in connection with the 30% Purchase Agreement, are subject to setoff to satisfy any indemnification claims we may have against Alvarado.
At the closing of the 30% Purchase Agreement, Alvarado also entered into a two-year amended and restated employment agreement pursuant to which he will serve as chief executive officer of our Networking Group. Alvarado also executed a non-compete agreement containing customary non-compete, non-solicitation, non-disclosure and non-disparagement covenants. Finally, eLandia and Alvarado executed a termination and release agreement pursuant to which each of the parties agreed to terminate certain prior agreements and to release any claims the parties may have against one another arising prior to the date of the 30% Purchase Agreement.
Transistemas Put/Call Agreement
On July 1, 2009, the former owners of Transistemas S.A. (Sellers) exercised their option under the Put/Call Agreement entered into concurrently with the closing of our investment in Transistemas S.A. (Transistemas) effective July 1, 2008. Due to affects on our operations of the current worldwide economic crisis, we determined that it would not be in our best interests to comply with the terms and conditions of the Put/Call Agreement and, therefore, the Sellers claimed that we had breached our obligations under the Put/Call Agreement to purchase the Put shares and, as a result, we owed the Sellers $2.6 million. On August 27, 2009, we entered in to a Settlement Agreement with the Sellers in full and final settlement of the Put/Call Agreement. Pursuant to the terms of the Settlement Agreement, we agreed to pay the Sellers $2.6 million as follows: (i) $260,000 in cash payable on the date of the Settlement Agreement, and (ii) $2,340,000 payable in the form of a non-interest bearing promissory note due on July 15, 2011. In addition, as an inducement to settle the Put obligation and execute the promissory note, we agreed to issue to the Sellers 433,333 shares of our common stock, with a fair value of $156,000.
CTT Purchase Price Adjustment
On October 16, 2008, eLandia and the former owners of Center of Technology Transfer Corporation (CTT Sellers) entered into a Stock Purchase Agreement (the Purchase Agreement) and Escrow Agreement. Pursuant to the Purchase Agreement and Escrow Agreement, $600,000 of the purchase price was deposited with an escrow agent to satisfy our indemnification rights pursuant to the Purchase Agreement.
On September 30, 2009, we agreed to settle certain claims relating to the Net Asset Value of Center of Technology Transfer Corporation (CTT) (as defined in the Purchase Agreement). Pursuant to the terms of the settlement, the CTT Sellers agreed to release the $600,000 escrow amount to us in exchange for the issuance of 350,000 shares of our common stock to the CTT Sellers, valued at $105,000.
American Samoa
On September 29, 2009, a major earthquake in the South Pacific created a tsunami that sent a surge of water of up to 15 feet into parts of American Samoa. This resulted in power outages and major damage to parts of the island, including portions of our service territory. Our cellular network has been experiencing service delivery issues in the highly affected areas and our cable TV network has been completely destroyed in some areas. Our undersea cable is operational, although it has sustained some minor damage.
35
Table of Contents
We continue to assess the extent of the damage and its effect on our operations. We are developing a recovery plan, but are currently unable to estimate the time or costs of restoration. Such restoration costs may be mitigated through insurance; however, at this time, we are unsure if we will be able to secure any amounts of insurance reimbursement. Based on information known at this time, we do not believe these events will have a material adverse impact on our results of operations or financial condition as a whole; however, it is uncertain whether these events will have any long-term impact on our operations in American Samoa.
In addition to the tsunami in September 2009 which affected our operations in American Samoa, one of the major tuna canneries in the territory has recently shut down its operations. Tuna canneries represent a majority of all economic activity in American Samoa. The closing of a principal cannery has resulted in an increase in unemployed workers in the territory. As a result, our operating results from our American Samoa operations may be negatively affected.
Significant Ecuador Customer
We have recently accepted an order aggregating approximately $32 million from a major customer in Ecuador. We expect to deliver this order during the fourth quarter of 2009 and the first quarter of 2010. As discussed in our periodic filings with the SEC, there are certain risks in operating in Latin America due to the economic and political volatility of the region. These risks are present in Ecuador. Further, because of the size of this order, it will result in fluctuations in sales and operating income from quarter to quarter. Significant fluctuations in our operating results in Latin America could have a disproportionate impact on our results of operations in future periods. If a large customer were to experience financial difficulty, it could have a material adverse effect on our financial condition, liquidity and results of operations.
Critical Accounting Policies and Estimates
The preparation of our unaudited interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the financial statements.
On an ongoing basis, we evaluate our estimates and judgments. Areas in which we exercise significant judgment include, but are not necessarily limited to, the amount of uncollectible accounts receivable, the valuation of value added taxes (VAT) receivable, deferred taxes and related valuation allowances, the valuation of noncontrolling interest purchase price obligations, the amount to be paid for the settlement of liabilities of discontinued operations, accrued expenses, valuation of assets acquired and liabilities assumed such as, but not limited to, the amount allocated to contract rights, customer lists, trade names and goodwill along with the estimated useful lives for amortizable intangible assets and property, plant and equipment, warrants granted in connection with various financing transactions, share based payment arrangements, and the percentage of completion with respect to production contacts in circumstances where the use of that accounting method is deemed to be appropriate.
We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our services and products and the regulatory environment. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC for a discussion of our critical accounting policies. During the nine months ended September 30, 2009, there were no material changes to these policies.
Results of Operations Overview
For the nine months ended September 30, 2009, our sales decreased by approximately 3% compared with the same period in 2008. Throughout the first half of 2009, our results were impacted by deterioration in the global macroeconomic environment. In the third quarter of 2009, certain of our customers indicated to us that they had begun to notice some signs of economic stability, though at lower overall levels of economic activity compared with the corresponding period in 2008. In the third quarter of 2009, we experienced an increase in revenue, as compared to our first and second quarter of 2009. Our order backlog suggests that our revenues for the fourth quarter of 2009 are expected to exceed the revenue levels experienced in the third quarter of 2009.
36
Table of Contents
Sales in a particular period may be significantly impacted by several factors related to revenue recognition, including large and sporadic purchases by customers; the complexity of transactions such as multiple element arrangements; and final acceptance of the product, system, or solution, among other factors.
Net loss attributable to eLandia increased by 14% during the nine months ended September 30, 2009 compared with the same period in 2008. Net loss was impacted by an increase in operating expenses, attributable primarily to our initiatives to expand our market presence and related offerings of products and services. Higher losses on foreign currency swap and foreign exchange loss during the first nine months of 2009 compared with the same period in 2008 also contributed to the increase in net loss. These factors were partially offset by the change in the fair value of the Desca noncontrolling interest purchase price obligation and lower net loss from discontinued operations Net loss per share increased by 9% as of September 30, 2009 compared with September 30, 2008.
Results of Operations Latin America
In addition to various lines of traditional and advanced information technology products, we currently offer a broad range of technology services and solutions within our three core areas including;
| Technology integration services that integrate and leverage our partners cutting-edge technologies by combining the business knowledge and industry expertise of our professional staff and the technical knowledge and implementation skills of our delivery teams to develop, integrate and install IT solutions; |
| Managed services offered through a subscription based model for IT services including unified communications, security services, network monitoring services, and other services currently under development, that combined, allow us to centralize a shared services infrastructure to help our customers reduce the capital costs associated with new technology deployments and benefit from economies of scale; |
| Education services by providing talent development and technical certification courses for our industry leading partners such as Cisco and Microsoft, throughout Latin America, via a comprehensive delivery platform that combines instructor lead training with e-learning and distance learning tools. |
In support of our broad range of offerings we currently hold more than 40 certifications and specializations in the various markets that we serve. We also maintain the designation of Gold Certified Partner with Cisco and Microsoft as well as representations and certifications from more than 20 technology providers. The products and services we offer in each of these markets vary depending on the infrastructure, existing data communications systems and the needs of the local economy.
Our operations in Latin America were established, and have grown primarily, through acquisition. Excluding discontinued operations, our first acquisition in the Latin America segment was in November 2007 (Desca), followed by additional acquisitions in July 2008 (Transistemas, S.A., a network and system integrator operating in Argentina) and October 2008 (Center of Technology Transfer Corporation (CTT), an education services integrator in information and communications technologies, business skills and best practices in Latin America). During the nine months ended September 30, 2009, we made two additional acquisitions that were immaterial both individually and in aggregate. We used the purchase method of accounting in connection with each of these acquisitions and accordingly, our unaudited interim condensed consolidated financial statements include the results of operations from the dates of acquisition onward. Actual results of continuing operations for our Latin American segment are as follows:
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
||||||||||||||||
Product Sales |
$ | 21,968,975 | $ | 29,459,207 | $ | 54,054,423 | $ | 64,530,095 | ||||||||
Services |
13,763,446 | 10,133,889 | 32,686,783 | 23,188,413 | ||||||||||||
Total Revenue |
35,732,421 | 39,593,096 | 86,741,206 | 87,718,508 | ||||||||||||
Cost of Revenue |
||||||||||||||||
Product Sales |
18,049,696 | 24,192,118 | 41,432,550 | 52,460,250 | ||||||||||||
Services |
8,610,169 | 6,312,113 | 20,850,720 | 14,338,177 | ||||||||||||
Total Cost of Revenue |
26,659,865 | 30,504,231 | 62,283,270 | 66,798,427 | ||||||||||||
Gross Profit |
9,072,556 | 9,088,865 | 24,457,936 | 20,920,082 | ||||||||||||
25.4 | % | 23.0 | % | 28.2 | % | 23.8 | % | |||||||||
Expenses |
||||||||||||||||
Sales, Marketing and Customer Support |
6,106,898 | 5,852,364 | 18,801,816 | 16,707,567 | ||||||||||||
General and Administrative |
7,330,617 | 4,116,113 | 19,791,346 | 13,220,487 | ||||||||||||
Depreciation and Amortization |
576,910 | 169,095 | 1,987,719 | 922,450 | ||||||||||||
Amortization Intangible Assets |
870,386 | 870,386 | 2,611,158 | 1,874,799 | ||||||||||||
Total Expenses |
14,884,811 | 11,007,958 | 43,192,039 | 32,725,302 | ||||||||||||
Operating Income (Loss) |
(5,812,255 | ) | (1,919,093 | ) | (18,734,103 | ) | (11,805,220 | ) | ||||||||
Interest Expense, Net |
(921,432 | ) | (1,005,418 | ) | (2,741,291 | ) | (1,969,123 | ) | ||||||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
814,127 | 93,750 | 814,127 | (3,000,000 | ) | |||||||||||
Other Income (Expense) |
(3,624,971 | ) | (645,396 | ) | (5,974,192 | ) | (1,194,040 | ) | ||||||||
Net Income (Loss) Attributable to eLandia |
$ | (9,544,531 | ) | $ | (3,476,157 | ) | $ | (26,635,460 | ) | $ | (17,968,383 | ) | ||||
37
Table of Contents
To provide a more meaningful discussion regarding the comparison of the results of operations for the three and nine months ended September 30, 2009 as compared to the same periods in 2008, we have provided the following supplemental pro forma information. The discussion below includes the results of continuing operations on a pro-forma basis as if the material acquisitions mentioned above had all been completed on January 1, 2008. This information is not necessarily indicative of the financial results had the acquisitions actually occurred on January 1, 2008 or the financial results of our company as they may be in the future.
Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008
The following table sets forth, for the periods indicated, pro forma unaudited interim condensed consolidated statements of operations information for our continuing operations in Latin America.
For the Three Months Ended September 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Revenue |
|||||||||||||||
Product Sales |
$ | 21,968,975 | $ | 29,459,207 | $ | (7,490,232 | ) | (25.4 | )% | ||||||
Services |
13,763,446 | 11,916,993 | 1,846,453 | 15.5 | % | ||||||||||
Total Revenue |
35,732,421 | 41,376,200 | (5,643,779 | ) | (13.6 | )% | |||||||||
Cost of Revenue |
|||||||||||||||
Product Sales |
18,049,696 | 24,192,118 | (6,142,422 | ) | (25.4 | )% | |||||||||
Services |
8,610,169 | 7,042,236 | 1,567,933 | 22.3 | % | ||||||||||
Total Cost of Revenue |
26,659,865 | 31,234,354 | (4,574,489 | ) | (14.6 | )% | |||||||||
Gross Profit |
9,072,556 | 10,141,846 | (1,069,290 | ) | (10.5 | )% | |||||||||
25.4 | % | 24.5 | % | 0.9 | % | ||||||||||
Expenses |
|||||||||||||||
Sales, Marketing and Customer Support |
6,106,898 | 5,852,364 | 254,534 | 4.3 | % | ||||||||||
General and Administrative |
7,330,617 | 5,470,524 | 1,860,093 | 34.0 | % | ||||||||||
Depreciation and Amortization |
576,910 | 259,477 | 317,433 | 122.3 | % | ||||||||||
Amortization Intangible Assets |
870,386 | 870,386 | | (0.0 | )% | ||||||||||
Total Expenses |
14,884,811 | 12,452,751 | 2,432,060 | 19.5 | % | ||||||||||
Operating Income (Loss) |
(5,812,255 | ) | (2,310,905 | ) | (3,501,351 | ) | 151.5 | % | |||||||
Interest Expense, Net |
(921,432 | ) | (1,003,396 | ) | 81,964 | (8.2 | )% | ||||||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
814,127 | | 814,127 | 100.0 | % | ||||||||||
Other Income (Expense) |
(3,624,971 | ) | (805,324 | ) | (2,819,647 | ) | 350.1 | % | |||||||
Net Income (Loss) |
$ | (9,544,531 | ) | $ | (4,119,625 | ) | $ | (5,424,906 | ) | 131.7 | % | ||||
Product Sales
Revenue from product sales decreased for the three months ended September 30, 2009, as compared to the same period in 2008, primarily due to a slowing economy in several Latin American markets resulting from the global financial crises, combined with significant inflation in countries such as Venezuela, Colombia and Argentina. The slower economy and the rise in inflation have made it more challenging for our customers to maintain their capital spending and, if necessary, obtain credit to fund their purchases. In addition, our association with SIBL has made it more difficult to obtain new customers. Revenue in Colombia in particular was considerably lower in the third quarter of 2009 as compared with the same period in 2008 as several large customers in 2008 made fewer purchases in 2009. Compounding the problem in Colombia, the difficulties that our customers are encountering in terms of obtaining financing resulted in the termination or postponement of several contracts. Also contributing to the lower 2009 revenue is a decline in our Argentinean operations, which we acquired during the third quarter of 2008, as a result of our conversion of the operations from sales and service of Sun Microsystems equipment to Cisco equipment.
Product gross margin for the three months ended September 30, 2009 remained constant as compared to the same period in 2008. Our product margins may be impacted by economic downturns or uncertain economic conditions and could decline if any of the factors that impact our gross margins are adversely affected in future periods.
We have sustained significant operating losses from our operations in Argentina. Our management continues to evaluate whether it is necessary to record an impairment charge with respect to the assets associated with those operations. We acquired the Argentina assets in the third quarter of 2008, and we continue to closely monitor the results of operations and financial condition of these assets, as well as the economic situation in Argentina.
Services
Revenue from the provision of professional IT services increased for the three months ended September 30, 2009, as compared with the same period in 2008, primarily as a result of several new maintenance service agreements entered into during the first and second quarter of 2009 associated with recent product sales, which has resulted in a larger installed base of our equipment being serviced. In addition, renewals of existing maintenance service agreements have also contributed to the increase in service revenues. In Venezuela, multiple maintenance service contracts were executed, some of which are expected to generate as much as $0.5 million per quarter in revenue.
38
Table of Contents
Service gross margin for the nine months ended September 30, 2009 decreased compared to the same period in 2008, primarily as a result of lower margins for both maintenance and installation and professional services, and also due to the mix of service revenue. Gross margin was impacted by the costs incurred in reorganizing and rebuilding our professional IT support team over the last several quarters as we have made investments in our personnel and market exposure to develop our services portfolio. Offsetting the decrease in gross margin is the synergies achieved from the redistribution of costs between countries which has enabled us to control our costs, while increasing revenues. Our service margins may be impacted by economic downturns or uncertain economic conditions and could decline if any of the factors that impact our gross margins are adversely affected in future periods.
Our service gross margin normally experiences some fluctuations due to various factors such as timing of maintenance service contract initiations and renewals, our strategic investments in headcount, and resources to support this business. Other factors include the mix of service offerings, as the gross margin from our installation and professional services is typically lower than the gross margin from maintenance service agreements. Our continued focus on providing comprehensive support to our customers networking devices, applications, and infrastructures, may cause installation and professional services to increase to a higher proportion of total service revenue.
Expenses
Sales, marketing and customer support costs include costs associated with advertising and promoting our products and services as well as supporting the customer after the sale is complete. Sales, marketing and customer support expenses for the three months ended September 30, 2009 reflect the significant investments made beginning in the second quarter of 2008, to expand our sales teams in multiple markets and roll out marketing campaigns supporting our entry into new markets such as Brazil, Peru, El Salvador, Guatemala and Nicaragua. Beginning in 2009, we began reallocating resources by cutting 2008 plans and projects in order to reinvest in newer, more effective ones.
General and administrative expenses include back office expenses such as executive and support staff costs as well as professional fees for accounting, legal and other services associated with our Latin America operations. General and administrative expenses were higher for the three months ended September 30, 2009, than for the same period in 2008, primarily as a result of certain non-recurring costs such as market research, legal fees and other professional fees required to establish a local presence and obtain licenses and permits in connection with our entry into new markets such as Brazil, Peru, El Salvador, Guatemala and Nicaragua. The 2009 period also includes additional professional fees incurred in connection with the processing of CADIVI dollars in Venezuela. Such costs were offset by efficiencies resulting from the optimization of our back-office infrastructure, such as the combination of support functions, and the realization of savings from cost control programs, such as the limitation of travel expenses, implemented over the last several quarters. General and administrative expenses were cut by approximately $6 million on an annual basis, mostly through reductions in salaries, office expenses and office-related expenses, in addition to the reduction in headcount by approximately 300 people. We expect to begin realizing the benefits of our cost-cutting measures during the fourth quarter of 2009 and into 2010.
Depreciation and amortization expense represents the straight line expense recognition of the costs of our property and equipment over their individual estimated useful lives. The expense increased for the three months ended September 30, 2009, as compared to the same period in 2008, primarily as a result of our investments in the capital infrastructure required to support our business in current markets as well as our expansion into new markets.
Amortization of intangible assets represents the straight line expense recognition of the intangible assets acquired in connection with our purchase of companies in Latin America. Amortization expense in the table above has been presented on a pro forma basis as if the acquisitions had occurred on January 1, 2008: therefore the expense is the same for both periods.
Interest expense is the cost associated with our outstanding debt obligations in Latin America including lines of credit, loans from financial institutions and capital leases. Interest expense, net of interest income, decreased for the three months ended September 30, 2009, as compared to 2008, as a result of lower average outstanding debt obligations during the three months ended September 30, 2009 relative to the same period in 2008.
On July 17, 2009, we consummated a purchase and sale transaction under a Securities Purchase Agreement effective as of July 1, 2009 (the 30% Purchase Agreement) with Alvarado. Pursuant to the 30% Purchase Agreement, we purchased 3,000,000 Common Units (30% Units) of Desca for an aggregate purchase price of $1.9 million. As a result of our purchase of the 30% Units under the 30% Purchase Agreement, effective July 1, 2009, we settled the noncontrolling interest purchase price obligation with Alvarado and Desca became our wholly-owned subsidiary. For the nine months ended September 30, 2009, the change in fair value of the noncontrolling interest purchase price obligation of $814,127 was recorded in the statement of operations. The settlement of the noncontrolling interest purchase price obligation in the amount of $6,134,711 was recorded as a credit to additional paid in capital as of September 30, 2009.
Other income and expense is comprised of non-operating items. The expense for the three months ended September 30, 2009, as compared with the expense in 2008, is predominantly a result of losses on the foreign currency swap and changes in foreign currency valuation.
39
Table of Contents
Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008
The following table sets forth, for the periods indicated, pro forma unaudited interim condensed consolidated statements of operations information for our continuing operations in Latin America.
For the Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Revenue |
|||||||||||||||
Product Sales |
$ | 54,054,423 | $ | 72,479,725 | $ | (18,425,302 | ) | (25.4 | )% | ||||||
Services |
32,686,783 | 30,577,627 | 2,109,156 | 6.9 | % | ||||||||||
Total Revenue |
86,741,206 | 103,057,352 | (16,316,147 | ) | (15.8 | )% | |||||||||
Cost of Revenue |
|||||||||||||||
Product Sales |
41,432,550 | 58,858,593 | (17,426,044 | ) | (29.6 | )% | |||||||||
Services |
20,850,720 | 18,003,557 | 2,847,163 | 15.8 | % | ||||||||||
Total Cost of Revenue |
62,283,270 | 76,862,150 | (14,578,880 | ) | (19.0 | )% | |||||||||
Gross Profit |
24,457,936 | 26,195,202 | (1,737,267 | ) | (6.6 | )% | |||||||||
28.2 | % | 25.4 | % | 2.8 | % | ||||||||||
Expenses |
|||||||||||||||
Sales, Marketing and Customer Support |
18,801,816 | 16,748,398 | 2,053,418 | 12.3 | % | ||||||||||
General and Administrative |
19,791,346 | 19,796,789 | (5,443 | ) | (0.0 | )% | |||||||||
Depreciation and Amortization |
1,987,719 | 1,180,460 | 807,259 | 68.4 | % | ||||||||||
Amortization Intangible Assets |
2,611,158 | 2,611,158 | | (0.0 | )% | ||||||||||
Total Expenses |
43,192,039 | 40,336,805 | 2,855,234 | 7.1 | % | ||||||||||
Operating Income (Loss) |
(18,734,103 | ) | (14,141,603 | ) | (4,592,501 | ) | 32.5 | % | |||||||
Interest Expense, Net |
(2,741,291 | ) | (2,022,825 | ) | (718,466 | ) | 35.5 | % | |||||||
Change in Value of Noncontrolling Interest Purchase Price Obligation |
814,127 | | 814,127 | 100.0 | % | ||||||||||
Other Income (Expense) |
(5,974,192 | ) | (962,725 | ) | (5,011,467 | ) | 520.6 | % | |||||||
Net Income (Loss) |
$ | (26,635,459 | ) | $ | (17,127,152 | ) | $ | (9,508,307 | ) | 55.5 | % | ||||
Product Sales
Revenue from product sales decreased for the nine months ended September 30, 2009, as compared to the same period in 2008, primarily due to a slowing economy in several Latin American markets resulting from the global financial crises, combined with significant inflation in countries such as Venezuela, Colombia and Argentina. The slower economy and the rise in inflation have made it more challenging for our customers to maintain their capital spending and, if necessary, obtain credit to fund their purchases. In addition, our association with SIBL has made it more difficult to obtain new customers. Revenue in Colombia in particular was considerably lower in the second quarter of 2009 as compared with the same period in 2008 as several large customers in 2008 made fewer purchases in 2009. Compounding the problem in Colombia, the difficulties that our customers are encountering in terms of obtaining financing resulted in the termination or postponement of several contracts, including one that resulted in a charge to revenue of approximately $1 million. Also contributing to the lower 2009 revenue is a decline in our Argentinean operations, which we acquired during the third quarter of 2008, as a result of our conversion of the operations from sales and service of Sun Microsystems equipment to Cisco equipment.
Product gross margin for the nine months ended September 30, 2009 increased compared to the same period in 2008, primarily due to higher margins achieved in Argentina after the conversion to Cisco equipment referred to above, as our consolidated purchasing power helps to secure volume pricing through Ciscos rebate program. In addition, a significant sale in Venezuela, with higher than normal profitability, was delivered during the three months ended March 31, 2009. The resulting effective increase in gross margin was partially offset by lower margins realized on several specially priced contracts in Colombia and the $1 million reduction in revenue in Colombia during the second quarter of 2009, as discussed above. Our product margins may be impacted by economic downturns or uncertain economic conditions and could decline if any of the factors that impact our gross margins are adversely affected in future periods.
We have sustained significant operating losses from our operations in Argentina. Our management continues to evaluate whether it is necessary to record an impairment charge with respect to the assets associated with those operations. We acquired the Argentina assets in the third quarter of 2008, and we continue to closely monitor the results of operations and financial condition of these assets, as well as the economic situation in Argentina.
Services
Revenue from the provision of professional IT services increased for the first nine months ended September 30, 2009, as compared with the same period in 2008. Increases resulting from several new maintenance agreements entered into during the first and second quarter of 2009, such as multiple service contracts in Venezuela, some of which are expected to generate as much as $0.5 million per quarter in revenue offset declines experienced in product sales in the first three quarters of 2009 as compared to 2008.
40
Table of Contents
Service gross margin for the nine months ended September 30, 2009 decreased compared to the same period in 2008, primarily as a result of lower margins for both maintenance and installation and professional services, and also due to the mix of service revenue. Gross margin was impacted by the costs incurred in reorganizing and rebuilding our professional IT support team over the last several quarters as we have made investments in our personnel and market exposure to develop our services portfolio. Offsetting the decrease in gross margin is the synergies achieved from the reallocation of costs between countries which has enabled us to control our costs, while increasing revenues. Our service margins may be impacted by economic downturns or uncertain economic conditions and could decline if any of the factors that impact our gross margins are adversely affected in future periods.
Our service gross margin normally experiences some fluctuations due to various factors such as timing of maintenance service contract initiations and renewals, our strategic investments in headcount, and resources to support this business. Other factors include the mix of service offerings, as the gross margin from our installation and professional services is typically lower than the gross margin from maintenance service agreements. Our continued focus on providing comprehensive support to our customers networking devices, applications, and infrastructures, may cause installation and professional services to increase to a higher proportion of total service revenue.
Expenses
Sales, marketing and customer support costs include costs associated with advertising and promoting our products and services as well as supporting the customer after the sale is complete. Sales, marketing and customer support expenses were higher for the nine months ended September 30, 2009 than for the same period in 2008 primarily as a result of significant investments made, beginning in the second quarter of 2008, to expand our sales teams in multiple markets and roll out several marketing campaigns supporting our entry into new markets such as Brazil, Peru, El Salvador, Guatemala and Nicaragua, primarily in 2008.
General and administrative expenses include back office expenses such as executive and support staff costs as well as professional fees for accounting, legal and other services associated with our Latin America operations. General and administrative expenses for the nine months ended September 30, 2009 were consistent with the same period in 2008. Higher costs during the first quarter of 2009, including certain non-recurring costs such as market research, legal fees and other professional fees required to establish a local presence and obtain licenses and permits in connection with our entrance into new markets such as Brazil, Peru, El Salvador, Guatemala and Nicaragua, were offset by efficiencies from the optimization of our back-office infrastructure, such as the combination of support functions, and the realization of savings from cost control programs, such as the limitation of travel expenses, implemented over the last several quarters. General and administrative expenses were cut by approximately $6 million on an annual basis, mostly through the reduction in salaries, office expenses and office-related expenses, in addition to the reduction in headcount by approximately 300 people. We expect to begin realizing the benefits of our cost-cutting measures during the fourth quarter of 2009 and into 2010.
Depreciation and amortization expense represents the straight line expense recognition of the costs of our property and equipment over their individual estimated useful lives. The expense increased for the nine months ended September 30, 2009, as compared to the same period in 2008, primarily as a result of our investments in the capital infrastructure required to support our business in current markets as well as our expansion into new markets.
Amortization of intangible assets represents the straight line expense recognition of the intangible assets acquired in connection with our purchase of companies in Latin America. As the amortization expense in the table above has been presented on a pro forma basis as if the acquisitions had occurred on January 1, 2008, the expense is the same for both periods.
Interest expense is the cost associated with our outstanding debt obligations in Latin America including lines of credit, loans from financial institutions and capital leases. Interest expense increased for the nine months ended September 30, 2009, as compared to 2008, primarily a result of higher average outstanding debt obligations during the nine months ended September 30, 2009.
On July 17, 2009, we consummated a purchase and sale transaction under a 30% Purchase Agreement effective as of July 1, 2009 with Alvarado. Pursuant to the 30% Purchase Agreement, we purchased the 30% Units of Desca for an aggregate purchase price of $1.9 million. As a result of our purchase of the 30% Units under the 30% Purchase Agreement, effective July 1, 2009, we settled the noncontrolling interest purchase price obligation with Alvarado and Desca became our wholly-owned subsidiary. For the nine months ended September 30, 2009, the change in fair value of the noncontrolling interest purchase price obligation of $814,127 was recorded in the statement of operations. The settlement of the noncontrolling interest purchase price obligation in the amount of $6,134,711 was recorded as a credit to additional paid in capital as of September 30, 2009.
Other income and expense is comprised of non-operating items. The expense for the nine months ended September 30, 2009, as compared with the expense in 2008, is predominantly a result of losses on the foreign currency swap and changes in foreign currency valuation.
Results of Operations South Pacific
We offer a broad range of IT network and systems integration services along with telecommunications services in the South Pacific, with the majority of our presence located in American Samoa and Fiji. The products and services we offer in each of these markets vary depending on the infrastructure, existing telecommunication and data communications systems and the needs of the local economy. Our services revenue includes support provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems, or applications as well as ISP and data network
41
Table of Contents
infrastructure and telecommunications services. Sales of related products include computer hardware, communications hardware and commercial off-the-shelf software sold through retail locations or by our direct sales force. In addition, we have invested in an underwater fiber optic cable service terminating in American Samoa which began generating revenue during May 2009 and we recently acquired the assets of Pacific Island Cable, a cable TV provider on American Samoa.
During the third quarter of 2008, we began restructuring our South Pacific operations by consolidating our presence in American Samoa, Fiji and Papua New Guinea. Further, in April 2009, we sold our operations in Papua New Guinea and, as a result, have classified the results of operations for our Papua New Guinea operations as discontinued operations for all periods presented in our unaudited interim condensed consolidated financial statements. Following the restructuring, American Samoa now serves as our regional headquarters while Fiji supports neighboring Pacific island nations by managing key customer agreements on a regional basis. The reorganization of our South Pacific operations is expected to save us approximately $1 million in operating costs on an annual basis.
Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008
The following table sets forth, for the periods indicated, unaudited interim condensed consolidated statements of operations information for our continuing operations in the South Pacific.
For the Three Months Ended September 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Revenue |
|||||||||||||||
Product Sales |
$ | 979,119 | 2,194,486 | (1,215,367 | ) | (55.4 | )% | ||||||||
Services |
3,778,575 | 3,256,799 | 521,777 | 16.0 | % | ||||||||||
Total Revenue |
4,757,694 | 5,451,285 | (693,590 | ) | (12.7 | )% | |||||||||
Cost of Revenue |
|||||||||||||||
Product Sales |
941,168 | 1,944,973 | (1,003,804 | ) | (51.6 | )% | |||||||||
Services |
1,307,488 | 1,051,897 | 255,592 | 24.3 | % | ||||||||||
Total Cost of Revenue |
2,248,656 | 2,996,870 | (748,213 | ) | (25.0 | )% | |||||||||
Gross Profit |
2,509,038 | 2,454,415 | 54,623 | 2.2 | % | ||||||||||
52.7 | % | 45.0 | % | 7.7 | % | ||||||||||
Expenses |
|||||||||||||||
Sales, Marketing and Customer Support |
1,065,781 | 756,899 | 308,882 | 40.8 | % | ||||||||||
General and Administrative |
929,115 | 1,274,527 | (345,412 | ) | (27.1 | )% | |||||||||
Depreciation and Amortization |
1,083,880 | 323,422 | 760,458 | 235.1 | % | ||||||||||
Amortization Intangible Assets |
138,275 | 186,347 | (48,072 | ) | (25.8 | )% | |||||||||
Total Expenses |
3,217,051 | 2,541,195 | 675,856 | 26.6 | % | ||||||||||
Operating Income (Loss) |
(708,013 | ) | (86,780 | ) | (621,234 | ) | 715.9 | % | |||||||
Interest Expense, Net |
(409,772 | ) | (131,741 | ) | (278,030 | ) | 211.0 | % | |||||||
Other Income (Expense) |
333,670 | 589,813 | (256,143 | ) | (43.4 | )% | |||||||||
Net Income (Loss) |
$ | (784,115 | ) | $ | 371,292 | $ | (1,155,407 | ) | (311.2 | )% | |||||
Product Sales
Revenue from product sales decreased for the three months ended September 30, 2009, as compared to the same period in 2008, primarily as a result of extremely aggressive pricing programs pursued by some of our competitors on sales of servers, PCs and peripherals and slower sales of telecommunications products such as handsets and accessories. Additionally, in April 2009, the Reserve Bank of Fiji announced that Fijis currency had been devalued by 20% effective immediately and the President of Fiji annulled the countrys constitution, terminated all the judges in the country and declared himself the head of state. As a result of these actions, there has been concern over the future business environment in Fiji which has resulted in slower sales of expensive technology equipment. In connection with the restructuring and sales of operations in certain markets mentioned above, we have intentionally decreased our sales volume of low margin PC and peripheral products and have continued to focus our future business on the provision of professional IT and other services such as communication services via our undersea cable operations and the delivery of cable television services through our acquisition of Pacific Island Cable on American Samoa.
As a result of the factors discussed above and the uncertainty caused by such factors, our management is reviewing all options with respect to our operations in Fiji. At September 30, 2009, assets in Fiji amounted to approximately $1.8 million and liabilities amounted to approximately $1.1 million. Any decision with respect to these operations is not expected to have a material adverse impact on our operations as a whole.
The cost of revenue from product sales decreased at a slower rate than the corresponding revenue due to changes in the sales mix in 2009 as compared with 2008, which reflects our shift away from lower margin servers, PCs and peripherals.
42
Table of Contents
Services
Revenue from the provision of professional services for the three months ended September 30, 2009 increased as compared with the same period in 2008 primarily as a result of the provision of communication services through our undersea cable operations, as well as revenues generated from our cable television operations, both of which began generating revenues during the second quarter of 2009.
The cost of revenue from the provision of professional services for the three months ended September 30, 2009 increased over the same period in 2008 mainly as a result of short-term cost overlaps required to transition the provision of certain of our communication services from satellite based networks to the new undersea fiber optic cable. In addition, our new cable television service offerings carry a lower overall margin than some of our other services.
Expenses
Sales, marketing and customer support expenses were higher for the three months ended September 30, 2009 than for the same period in 2008. This increase resulted primarily from the costs associated with several marketing promotions and campaigns as well as community service programs launched to commemorate AST Telecoms 10-year presence in American Samoa.
General and administrative expenses were lower for the three months ended September 30, 2009 than for the same period in 2008. This reduction resulted primarily from the benefits of the regional reorganization, including lower back office support costs such as personnel, travel, rent, and insurance as well as lower professional fees.
Expenses related to the depreciation of property, plant and equipment for the three months ended September 30, 2009 were higher than for the same period in 2008 mainly due to the installation of new network equipment to support the undersea cable operations.
Expenses related to the amortization of intangible assets for the three months ended September 30, 2009 decreased from the same period in 2008 primarily due to the ending of the estimated useful life, and hence the amortization period, of certain intangible assets acquired in connection with acquisitions made during the three months ended March 31, 2006 offset by the amortization of certain intangible assets acquired in connection with our acquisition of Pacific Island Cable.
Interest expense, net of interest income, for the three months ended September 30, 2009 increased as compared to the same period in 2008 as a result of higher average outstanding debt balances in 2009 as compared with 2008. Although certain debt was paid down over the last several quarters, new debt associated with the undersea cable operations, including the $16.7 million Term Loan Agreement described above under Recent Developments resulted in higher interest expense for the three months ended September 30, 2009, as compared with the same period in 2008.
Other expense, net of other income was lower for the three months ended September 30, 2009 than for the same period in 2008 mainly as a result of gains from changes in foreign currency rates experienced in 2009.
43
Table of Contents
Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008
The following table sets forth, for the periods indicated, unaudited interim condensed consolidated statements of operations information for our continuing operations in the South Pacific.
For the Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Revenue |
|||||||||||||||
Product Sales |
$ | 2,891,755 | 5,290,112 | (2,398,357 | ) | (45.3 | )% | ||||||||
Services |
10,678,494 | 10,721,074 | (42,580 | ) | (0.4 | )% | |||||||||
Total Revenue |
13,570,249 | 16,011,186 | (2,440,936 | ) | (15.2 | )% | |||||||||
Cost of Revenue |
|||||||||||||||
Product Sales |
2,614,924 | 4,465,463 | (1,850,543 | ) | (41.4 | )% | |||||||||
Services |
3,853,354 | 3,227,766 | 625,588 | 19.4 | % | ||||||||||
Total Cost of Revenue |
6,468,274 | 7,693,229 | (1,224,954 | ) | (15.9 | )% | |||||||||
Gross Profit |
7,101,975 | 8,317,957 | (1,215,982 | ) | (14.6 | )% | |||||||||
52.3 | % | 52.0 | % | 0.4 | % | ||||||||||
Expenses |
|||||||||||||||
Sales, Marketing and Customer Support |
2,250,678 | 2,557,643 | (306,966 | ) | (12.0 | )% | |||||||||
General and Administrative |
2,580,442 | 3,854,860 | (1,274,418 | ) | (33.1 | )% | |||||||||
Impairment of Goodwill |
1,025,717 | 630,802 | 394,915 | 62.6 | % | ||||||||||
Depreciation and Amortization |
1,948,136 | 1,044,834 | 903,302 | 86.5 | % | ||||||||||
Amortization Intangible Assets |
841,108 | 559,042 | 282,066 | 50.5 | % | ||||||||||
Total Expenses |
8,646,081 | 8,647,181 | (1,101 | ) | (0.0 | )% | |||||||||
Operating Income (Loss) |
(1,544,106 | ) | (329,224 | ) | (1,214,881 | ) | 369.0 | % | |||||||
Interest Expense, Net |
(641,605 | ) | (418,734 | ) | (222,870 | ) | 53.2 | % | |||||||
Other Income (Expense) |
259,576 | 491,753 | (232,177 | ) | (47.2 | )% | |||||||||
Net Income (Loss) |
$ | (1,926,135 | ) | $ | (256,205 | ) | $ | (1,669,928 | ) | 651.8 | % | ||||
Product Sales
Revenue from product sales decreased for the nine months ended September 30, 2009, as compared to the same period in 2008, primarily as a result of extremely aggressive pricing programs pursued by some of our competitors on sales of servers, PCs and peripherals, slower sales of telecommunications products such as handsets and accessories and a large corporate communication system sale in Fiji that occurred during the first quarter of 2008 was not repeated in 2009. Additionally, in April 2009, the Reserve Bank of Fiji announced that Fijis currency had been devalued by 20% effective immediately and the President of Fiji annulled the countrys constitution, terminated all the judges in the country and declared himself the head of state. As a result of these actions, there has been concern over the future business environment in Fiji which has resulted in slower sales of expensive technology equipment. In connection with the restructuring and sales of operations in certain markets mentioned above, we have intentionally decreased our sales volume of low margin PC and peripheral products and have continued to seek out ways to focus our future business on the provision of professional IT and other services such as communication services via our undersea cable operations and the delivery of cable television services through our acquisition of Pacific Island Cable on American Samoa.
As a result of the factors discussed above and the uncertainty caused by such factors, our management is reviewing all options with respect to our operations in Fiji. At September 30, 2009, assets at Fiji amounted to approximately $1.8 million and liabilities amounted to approximately $1.1 million. Any decision with respect to these operations is not expected to have a material adverse impact on our operations as a whole.
The cost of revenue from product sales decreased at a slower rate than the corresponding revenue due to changes in the sales mix in 2009 as compared with 2008, which reflects our shift away from lower margin servers, PCs and peripherals.
Services
Overall, revenue from the provision of professional services for the nine months ended September 30, 2009 decreased as compared with the same period in 2008. Decreases resulting from the Pacific island markets that were closed or sold during 2008, lower revenue in Fiji due to the devaluation and political changes mentioned above, as well as declines in telecommunications services stemming from aggressive pricing programs were partially offset by growth in our continuing markets and our new service offerings. During the second quarter of 2009, we began generating revenue via the provision of communication services through our undersea cable operations and had our first full quarter of revenue from our cable television operations.
The cost of revenue from the provision of professional services for the nine months ended September 30, 2009 increased over the same period in 2008 mainly as a result of short-term cost overlaps required to transition the provision of certain of our communication services from satellite based networks to the new undersea fiber optic cable. In addition, our new cable television service offerings carry a lower overall margin than some of our other services.
44
Table of Contents
Expenses
Sales, marketing and customer support expenses were lower for the nine months ended September 30, 2009 than for the same period in 2008. This reduction resulted primarily from the benefits of the regional reorganization, such as operating in fewer markets and scaled back advertising and marketing in certain other markets. In addition, we have evaluated staffing levels along our various geographic locations and lines of business and have made adjustments, where possible, to reduce our costs.
General and administrative expenses were lower for the nine months ended September 30, 2009 than for the same period in 2008. This reduction resulted primarily from the benefits of the regional reorganization, including lower back office support costs such as personnel, travel, rent, and insurance as well as lower professional fees.
The 2009 impairment of goodwill represents non-cash charges incurred during the first quarter of 2009. As mentioned above, in April 2009, the Reserve Bank of Fiji announced that Fijis currency had been devalued by 20% effective immediately. Also, in April 2009, the President of Fiji annulled the countrys constitution, terminated all the judges in the country and declared himself the head of state. As a result of these actions, the Ah Koy litigation discussed in the Legal Proceedings section below and Fijis current economic instability and uncertain business climate, we undertook a review of the carrying value of our goodwill related to our operations in Fiji during the first quarter of 2009. Based on this review, we determined that the value of our goodwill related to our operations in Fiji had been impaired and, accordingly, during the first quarter of 2009 we recorded an impairment charge of $1,025,717. During the nine months ended September 30, 2008, we made the decision to restructure the operations in certain specific South Pacific Island nations (other than Fiji, Papua New Guinea and America Samoa). As a result of this decision, we undertook a review of the carrying amount of our goodwill as of September 30, 2008 and determined that the value of our goodwill related to certain specific South Pacific Island nations had been impaired. Accordingly, during the nine months ended September 30, 2008 we recorded an impairment charge of $630,802.
Expenses related to the depreciation of property, plant and equipment for the nine months ended September 30, 2009 were higher than for the same period in 2008 mainly due to the installation of new network equipment to support the undersea cable operations.
Expenses related to the amortization of intangible assets for the nine months ended September 30, 2009 increased from the same period in 2008 primarily due to the write off of contract rights associated with the activation of the undersea cable operations, partially offset by the ending of the estimated useful life, and hence the amortization period, of certain intangible assets acquired in connection with acquisitions made during the three months ended March 31, 2006.
Interest expense, net of interest income, for the nine months ended September 30, 2009 increased as compared to the same period in 2008 as a result of new debt associated with the undersea cable operations that was obtained in the late first quarter of 2009 and into the second quarter of 2009, including the $16.7 million Term Loan Agreement described above under Recent Developments.
Other expense, net of other income was lower for the nine months ended September 30, 2009 than for the same period in 2008 mainly as a result of gains from changes in foreign currency rates experienced in 2009, partially offset by higher charges associated with the noncontrolling interest and the termination of the amortization period for the sale leaseback gain in Fiji in the first quarter of 2008.
Results of Operations Corporate and Discontinued Operations
Comparison of the Three and Nine Months Ended September 30, 2009 to the Three and Nine Months Ended September 30, 2008
Our corporate headquarters primarily performs administrative services, and as such, does not generate revenue. The discontinued operations pertain predominantly to our investments in Latin Node and our Papua New Guinea Operations, as discussed below.
45
Table of Contents
The following tables set forth, for the periods indicated, unaudited interim condensed consolidated statements of operations information for our corporate office and our discontinued operations.
For the Three Months Ended September 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Expenses |
|||||||||||||||
General and Administrative |
$ | 1,375,329 | $ | 2,210,430 | $ | (835,102 | ) | (37.8 | )% | ||||||
Depreciation and Amortization |
24,536 | 8,581 | 15,955 | 185.9 | % | ||||||||||
Total Expenses |
1,399,865 | 2,219,011 | (819,147 | ) | (36.9 | )% | |||||||||
Operating Income (Loss) |
(1,399,865 | ) | (2,219,011 | ) | 819,147 | (36.9 | )% | ||||||||
Interest Expense, Net |
61,243 | 169,830 | (108,588 | ) | (63.9 | )% | |||||||||
Other Income (Expense) |
(72,166 | ) | (99,735 | ) | 27,568 | (27.6 | )% | ||||||||
Income (Loss) from Discontinued Operations |
(2,034 | ) | 144,444 | (146,478 | ) | (101.4 | )% | ||||||||
Net Income (Loss) |
$ | (1,412,822 | ) | $ | (2,004,472 | ) | $ | 591,649 | (29.5 | )% | |||||
For the Nine Months Ended Setptember 30, | |||||||||||||||
2009 | 2008 | Change $ | Change % | ||||||||||||
Expenses |
|||||||||||||||
General and Administrative |
$ | 10,280,500 | $ | 10,018,922 | $ | 261,577 | 2.6 | % | |||||||
Depreciation and Amortization |
50,566 | 16,012 | 34,554 | 215.8 | % | ||||||||||
Total Expenses |
10,331,066 | 10,034,934 | 296,131 | 3.0 | % | ||||||||||
Operating Income (Loss) |
(10,331,066 | ) | (10,034,934 | ) | (296,131 | ) | 3.0 | % | |||||||
Interest Expense, Net |
55,179 | (1,842,756 | ) | 1,897,935 | (103.0 | )% | |||||||||
Other Income (Expense) |
167,307 | (90,974 | ) | 258,281 | (283.9 | )% | |||||||||
Income (Loss) from Discontinued Operations |
(9,507,171 | ) | (12,073,312 | ) | 2,566,141 | (21.3 | )% | ||||||||
Net Income (Loss) |
$ | (19,615,751 | ) | $ | (24,041,976 | ) | $ | 4,426,226 | (18.4 | )% | |||||
General and administrative expenses are predominantly corporate overhead expenses including executive costs and fees for professional services. The decrease for the three months ended September 30, 2009 as compared to the same period from 2008 was primarily the result of lower accounting and other professional fees, partially offset by higher compensation costs pertaining to the new and expanded management team that was assembled during the second and third quarter of 2008. The increase for the nine months ended September 30, 2009 as compared to the same period from 2008 was predominantly a result of higher compensation costs pertaining to the new and expanded management team that was assembled during the second and third quarter of 2008 and higher professional fees for legal fees related to the sale of Datec PNG and an unsuccessful potential acquisition. The increase was offset by lower accounting fees and the recognition of income due to the settlement of previously recorded obligations.
On an overall basis, we have been able to cut general and administrative expenses by approximately $3 million on an annual basis, mostly through the reduction in legal, accounting and professional fees, as well as through the reduction in headcount. We expect to begin realizing the benefits of our cost-cutting measures during the fourth quarter of 2009 and into 2010.
The capital investments made at our corporate office to accommodate the growth in headcount resulted in higher depreciation costs in both the three and nine months ended September 30, 2009 as compared with the same periods in 2008.
Interest expense, net is a factor of our average outstanding debt and/or excess cash position during the period. At January 1, 2009, we had $12.0 million outstanding under a bridge loan agreement with SIBL which incurred interest at 6%. This obligation was converted to shares of our Series B Preferred Stock on February 6, 2009. The expense incurred on this obligation was offset by interest earned on short term investments of excess cash on hand with financial institutions ranging from overnight agreements to nine month certificates of deposit. During the nine months ended September 30, 2008, we had a $30.3 million convertible long-term debt obligation outstanding with SIBL, which incurred interest at 10%. In addition, the associated deferred financing costs and note discount were being amortized into interest expense over the term of the note. This obligation was converted to Series A Preferred Stock and, ultimately common stock on June 30, 2008.
Other Income is generally comprised of one-time, non-operating income and expense items. The increase for both the three and nine months ended September 30, 2009 as compared with the same periods in 2008 is predominantly a result of a decrease in the value of our liability regarding certain warrants to purchase our common stock, resulting in income for the current period.
The income (loss) from discontinued operations pertains primarily to our investment in Latin Node and the sale of our operations in Papua New Guinea. Latin Node was classified as a discontinued operation on January 28, 2008 and, on June 12, 2008 filed for an assignment for benefit of creditors, whereby all of the assets of Latin Node were transferred to an assignee. We continued to reflect the assets, liabilities and results of operations of Latin Node under the consolidation method of accounting because we were deemed to be the principal secured creditor under the assignment for benefit of creditors and, as such, were entitled to receive all of the proceeds from any asset sales after the payment of the costs of administration. On November 18, 2008, we reached a settlement agreement regarding Latin Nodes final assets. Once our control over Latin Node was effectively lost on November 18, 2008, we deconsolidated Latin Node and began using the equity method of accounting for the investment. The results during the three and nine months ended September 30, 2008 reflect the losses sustained during the final months of Latin Nodes operations as well as
46
Table of Contents
expenses incurred in connection with legal and other costs pertaining to the FCPA investigation and subsequent discontinuance of Latin Node. During the first quarter of 2009, we received and subsequently cancelled, 375,000 shares of our common stock as a result of a litigation settlement stemming from the purchase of Latin Node, resulting in a gain of approximately $0.5 million. In April 2009, we sold our operations in Papua New Guinea and, as a result, have classified the results of operations for our Papua New Guinea operations as discontinued operations for all periods presented in our unaudited interim condensed consolidated financial statements.
Liquidity and Capital Resources
Modification of Financing Arrangements with Stanford International Bank Ltd. and Recent Financial Collapse
Prior to 2009, our principal source of liquidity has been the issuances of equity and debt securities, including preferred stock and convertible promissory notes, to SIBL.
As noted above in Recent Developments on July 21, 2008, we entered into a Credit Agreement with SIBL, pursuant to which SIBL agreed to provide a loan to us in the principal amount of up to $40 million. On February 6, 2009, as part of a modification to our capital structure, we entered into a Modification Agreement and a Fourth Amendment with SIBL, the terms and provisions of which are more fully described above in Recent Developments.
As a result of the SIBL receiverships, and the uncertainty caused by them, we have lost access to one of our primary sources of financing which will negatively impact our ability to obtain additional capital which we may need to fund our expansion plans and service our debt obligations. Also, due to the recent circumstances surrounding SIBL, our association with SIBL has become a significant detriment to our operations and prospects. Several banks in Latin America have restricted our access to revolving credit lines or have prevented additional draws on open credit lines requiring us to use cash reserves to remain current with our vendors. Our lines of credit with certain vendors have also been tightened with additional deposit or security requirements being added. The uncertainty caused by the possible impact of our association with SIBL has also inhibited our ability to obtain third party financing and has caused us to expend significant amounts of working capital that were not budgeted or anticipated. However, we do not believe that these factors will have a material adverse effect on our business, financial condition or results of operations.
In addition, our association with SIBL along with any legal proceedings that may arise from such association could adversely impact our liquidity, capital resources and operations. Any such legal actions may result in substantial costs and are expected to divert our managements attention and resources. An unfavorable judgment against us in any legal proceeding or claim could require us to pay monetary damages. Also, an unfavorable judgment in which the counterparty is awarded equitable relief, such as an injunction, could harm our business, consolidated results of operations and consolidated financial condition.
In addition, local credit markets in Latin America have recently tightened and local bank lending policies have become more stringent than in the past. Desca has had local lines of credit expire unrenewed as a result and we have had to supply cash to Desca to replace that liquidity.
Overall Cash Inflows and Outflows
We incurred a $30.6 million loss from continuing operations and used $28.8 million of cash in continuing operations for the nine months ended September 30, 2009. As of September 30, 2009, we have a $149.7 million accumulated deficit and working capital of $6.3 million.
Operating Activities. We used $28.8 million to fund operations during the nine months ended September 30, 2009. For the nine months ended September 30, 2009, our loss from continuing operations, net of income tax expense amounted to $38.8 million, which included net non-cash expense of $10.5 million. Changes in operating assets and liabilities utilized $0.5 million in cash.
Investing Activities. We used $2.9 million to fund investing activities during the nine months ended September 30, 2009. We received approximately $8.2 million from the redemption of certificates of deposit and $5.6 million from the sale of one of our subsidiaries. We paid approximately $3.6 million for the acquisitions of entities and approximately $15.6 million for investments in capital assets.
Financing Activities. We received approximately $8.1 million in cash from financing activities during the nine months ended September 30, 2009. During the nine months ended September 30, 2009, we received $4.1 million in net proceeds from lines of credit, notes payable and long-term debt and $6.0 million of proceeds from subscriptions receivable from the noncontrolling interest of one of our subsidiaries. We paid an aggregate of $0.7 million in cash for our capital leases during the nine months ended September 30, 2009.
On June 8, 2009, we entered into a Term Loan Agreement in the amount of $16,672,000 with ANZ, whereby the proceeds of the term loan were used to fund the construction, installation and delivery to customers of a fully operational underwater fiber optic cable linking America Samoa and Samoa to Hawaii and providing improved long distance telecommunication and data services.
47
Table of Contents
The successful management of our working capital needs is a key driver of our growth and cash flow generation of our operations in Latin America. One measurement we use to monitor working capital is days sales outstanding (DSO), which measures the number of days we take to collect revenue after a sale is made. Our consolidated annualized DSO has remained consistent at 111 days as of September 30, 2009 and December 31, 2008. Our DSO as of December 31, 2008 is on a pro forma basis to give effect to our 2008 acquisitions, as if these transactions occurred on January 1, 2008, and the classification of Datec PNG as discontinued operations.
Since 2003, Venezuela has imposed currency controls and created the CADIVI with the task of establishing detailed rules and regulations and generally administering the exchange control regime. These controls fix the exchange rate between the Bolivar and the U.S. Dollar, and restrict the ability to exchange Bolivars for dollars and vice versa. The near-term effect has been to restrict our ability to repatriate funds from Venezuela in order to meet our cash requirements. To the extent that we move money in or out of Venezuela, either for cash flow purposes or working capital needs, we are subject to exchange gains or losses because Venezuela is operating on a fixed exchange rate, whereas the actual market is operating on a variable exchange rate.
In particular, the currency controls in Venezuela have restricted our ability to make payments to vendors in U.S. Dollars, causing us to borrow money to meet these obligations and to be subject to credit holds, and therefore delaying the delivery of customer orders which, in turn, has delayed or caused the loss of sales.
In order to address and mitigate these issues, we either (i) enter into short-term financing arrangements with our vendors which extends the date when payment is due, (ii) obtain short-term financing from local banks in country, or (iii) we may deploy working capital from eLandia. Additionally, we continue to successfully decrease our working capital debt and related interest expense in Latin America and have been able to refinance our long-term needs with long-term debt, which historically was not possible.
We continue to make appropriate applications through the Venezuelan government and CADIVI for approval to obtain U.S. Dollars at the official exchange rate. However, in recent periods, we have experienced difficulties in obtaining such approvals on a timely basis and we have not been given any assurances as to when the approval process would be completed. Due to these delays, we have used available local currency paid by customers to reduce our debt obligations denominated in that local currency. As a result, when approvals from CADIVI have been obtained we have had to promptly acquire Bolivars using a legal parallel exchange process in order to obtain U.S. Dollars at the official exchange rate which can then be repatriated and used to meet our working capital needs. If previously obtained approvals do not ultimately result in currency conversions at the official exchange rate or if there is a delay in approvals being honored by CADIVI, we would be required to obtain U.S. Dollars at a substantially less favorable exchange rate which would negatively impact our financial results and financial position. From time to time, we may have to recognize charges to operating income in connection with the exchange of Bolivars to U.S. Dollars at rates which were unfavorable to the official exchange rate. During the first half of the fourth quarter of 2009, we have received a large amount of approvals from CADIVI which we expect to substantially reduce the risk on our payables and debt obligations.
We believe that we have sufficient working capital at the parent company level in order to satisfy any subsidiary needs to the extent that such fundings are in our best interest as a whole. However, to the extent that we must rely on short-term financing from vendors or local banks, these financing arrangements may involve high interest rates or payment terms which could be unfavorable to us.
While we have begun to see the beginnings of economic stability and recovery in the markets we currently serve, the recent global economic crisis has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. In addition, our association with SIBL, and the related ongoing uncertainties have made our efforts to raise additional capital more difficult. These conditions not only limit our access to capital, but also make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and could cause U.S. and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers may face issues including:
| the inability to obtain credit to finance purchases of our products; |
| customer insolvencies; |
| decreased customer confidence to make purchasing decisions; |
| decreased customer demand; and |
| decreased customer ability to pay their trade obligations. |
In addition, the recent economic crisis could adversely impact our suppliers ability to provide us with materials and components, either of which may negatively impact our business, financial condition and results of operations.
Our anticipated growth and expansion in Latin America has required significant use of our working capital, as well as the use of vendor financings and other forms of borrowings. Along with these investments, we have incurred significant expenses to fund our anticipated growth. Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors specific to our target customer base. As such, sales are generally higher in the fourth quarter and, accordingly, we believe we will experience revenue growth or expansion during the remainder of 2009 and into 2010. As a result of the anticipated growth, we will need access and availability to our existing vendor financings and credit facilities and/or will need to obtain additional
48
Table of Contents
financing and capital resources. We have also begun utilizing our cash resources to reduce our short-term debt and purchase additional inventory. While we expect to utilize additional cash resources during the fourth quarter of 2009, we believe that our cash position will steadily increase through the first half of 2010.
Our capital expenditures, together with ongoing operating expenses and obligations to service our debts, will likely decrease our available cash balances during the next fiscal year. We believe that our current level of working capital will be sufficient to sustain our current operations and service our debt obligations through at least October 1, 2010. However, there can be no assurance that the plans and actions proposed by management will be successful or that unforeseen circumstances will not require us to seek additional funding sources in the future or effectuate plans to conserve liquidity in the event additional sources of funds are needed or may not be available on acceptable terms, if at all. Although the overall economy is showing signs of recovery, in particular in the markets we serve, the current macro-economic conditions create risk and our ability to measure and react to these issues, as well as any issues that may arise as a result of the SIBL matter, will ultimately factor into our future success and ability to meet our business objectives and fulfill our business plan. In addition, if we are not able to sell our assets or our sources of revenue do not generate sufficient capital to fund operations, we will need to identify other sources of capital and/or we may be required to modify our business plan. Our inability to obtain needed debt and/or equity financing when needed or to generate sufficient cash from operations may require us to scale back our business plan and limit our planned growth and expansion activities, abandon projects and/or curtail capital expenditures. The current challenging economic conditions and the unusual events that have affected global financial markets may impair our ability to identify and secure other sources of capital. At this time, we cannot provide any assurance that other sources of capital will be available.
As discussed above, since January 1, 2009 our cash position has been declining. We must therefore collect outstanding receivables more rapidly and are materially dependent on the ability and willingness of our customers to pay the invoiced amounts more rapidly than in the recent past. If we cannot strengthen our overall financial position, we may experience restrictions on our vendor credit. Such events would have a material adverse impact on our results of operations and financial condition.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for smaller reporting companies.
ITEM 4T. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation we have concluded that our disclosure controls and procedures are not effective in ensuring that all material information required to be filed with the SEC is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC because of material weaknesses in our internal control over financial reporting as discussed below and in our Annual Report on Form 10-K for the year ended December 31, 2008.
In light of the material weaknesses described in our Annual Report on Form 10-K for the year ended December 31, 2008, our management continues to perform additional analyses and other post-closing procedures to ensure that our unaudited interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Accordingly, our management believes that the unaudited interim condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008, we are implementing enhancements and changes to our internal control over financial reporting to provide reasonable assurance that errors and control deficiencies will not occur. We recognize the importance of having staff with competencies required for the accurate interpretation of GAAP; for having effective internal controls over financial reporting; and for establishing the appropriate policies and procedures to assure timely, accurate, and reliable information. Consequently, to eliminate material weaknesses identified with respect to staffing and training, our management has continued efforts to increase the depth and upgrade the skill sets of our accounting group through continuing education and ongoing training while maintaining staffing with appropriate skills and experience in the application of GAAP commensurate with our financial reporting requirements. Chief among these efforts is the development of a Controllership Guide and coordinated on-line education program.
49
Table of Contents
We recognize the importance of maintaining controls over our general computer environment at our Corporate Headquarters and their use as an effective tool for managing and controlling processes that affect the financial reporting process. To this end we are implementing more robust processes to manage server hardware and developing companywide data retention policies.
We recognize the need for establishing entity level controls as defined by the COSO framework. We recognize the importance of having a Code of Business Conduct and FCPA training program; consistent finance and accounting policies and procedures; account reconciliation guidelines; whistle blower hotline; risk assessment process; and delegation of authority document. To this end, we are requiring 100% compliance by each of our operations worldwide, with respect to the Code of Business Conduct and FCPA training; development and circulation of an accounting and finance policies and procedures guide; development and compliance of an account reconciliation policy; establishment of a whistle blower hotline; formalization of the risk assessment process; development of a delegation of authority document and other process enhancements.
Additionally, we are enforcing spreadsheet control policies, especially those affecting spreadsheets that are critical to the preparation of financial statements and related disclosures in accordance with GAAP and SEC regulations.
No other changes to internal controls over financial reporting have come to managements attention during the nine months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
On September 14, 2007, we engaged in a review of Latin Nodes internal controls and legal compliance procedures within its finance and accounting departments as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments made to third parties in Central America prior to our acquisition of Latin Node on June 28, 2007 were identified as having been made in the absence of adequate records and controls for a U.S. public company. We conducted an internal investigation to determine whether any direct or indirect payments by employees of Latin Node or consultants used by Latin Node prior and subsequent to its acquisition by us were made in violation of the FCPA. The internal investigation of the FCPA matter was conducted by a Special Committee of our Board of Directors. The Special Committee retained independent legal counsel to assist in the investigation of the FCPA matter.
The internal investigation preliminarily revealed that certain payments from Latin Node prior to our acquisition of Latin Node may have been made in violation of the FCPA. We voluntarily and proactively reported these potential violations to the SEC, the United States Department of Justice, and the Federal Bureau of Investigation and cooperated fully with these agencies regarding this matter. Following settlement discussions with the Department of Justice, Latin Node agreed to enter into a plea agreement to resolve the matter by the payment of a monetary penalty of $2 million for the actions that occurred prior to Latin Nodes acquisition by us. On March 23, 2009, the Department of Justice filed charges in the United States District Court for the Southern District of Florida against Latin Node for actions taken by Latin Node prior to the time that we made our investment in Latin Node. On April 3, 2009, the matter was resolved and the court approved the plea agreement reached with the Department of Justice. In accordance with the terms of the settlement agreement, we agreed to pay $500,000 promptly following the settlement date, and the remaining $1,500,000 in three equal installments of $500,000 each by January 31, 2010, January 31, 2011 and January 31, 2012, respectively.
On January 22, 2008, Latin Node was named as a defendant in a third party complaint filed in the 11th Judicial Circuit of the State of Florida in and for Miami-Dade County, Florida, bearing case number 08-922-CA-01 (06) by Juan Pablo Vasquez, Olivia de la Salas and Gloria Vasquez, former employees of Latin Node, Inc. The Plaintiffs were terminated with cause by Latin Node and have brought an action for breach of contract. The Plaintiffs seek damages (including but not limited to severance pay and compensation for accrued but unused vacation pay), together with attorneys fees. On June 26, 2009, the court entered a notice of lack of prosecution in this case and directed the parties to appear on September 18, 2009 for a hearing on the courts motion of dismissal for lack of prosecution in the case. On September 21, 2009, the court issued an order dismissing the action for lack of prosecution.
On June 12, 2008, Latin Node filed for an assignment for benefit of creditors in the 11th Judicial Circuit in and for Miami-Dade County, Florida (case no. 08-33495 CA11). As part of this proceeding, all of the assets of Latin Node were transferred to Michael Phelan, assignee. On July 17, 2008, all of these assets were sold to the highest bidder, Business Telecommunications Services, Inc. (BTS). Since we were the principal creditor of Latin Node, we had the right to receive all of the proceeds from such sale after the payment of the costs of administration. The immediate proceeds from the sale of these assets were used to pay these administrative costs. A final court order approving the disposition of the proceeds from the sale of all other assets was scheduled for May 21, 2009. However, on May 20, 2009, Empresa Hondurena de Telecomunicaciones filed a Motion for Continuance or in the alternative Motion to Stay the Assignees Motion to Approve Final Report and Fees to Assignee, Assignees Counsel and Assignors Counsel, Disburse Remaining Funds to Priority and Unsecured Creditors, Discharge Assignee and Close Case. At a hearing held on August 28, 2009 on said motions, the court ordered the parties to select a forensic examiner to conduct an examination and determine whether the claims made by Hondutel are valid. On September 17, 2009, the court appointed a forensic examiner, whose report is expected to be completed by the end of 2009.
50
Table of Contents
On June 27, 2008, we filed an action against Jorge Granados, individually and Retail Americas VoIP, LLC, a Delaware limited liability company (RAV) in the 11th Judicial Circuit in and for Miami-Dade County, Florida (Case No. 08-37352 CA20). The action asserted claims for contractual indemnification, breach of contract, breach of the obligation of good faith and fair dealing, fraud, fraudulent inducement, unjust enrichment, and specific performance against the escrow agent. These claims arose from the transaction where we purchased 80% of the equity of Latin Node, Inc. for $20 million pursuant to a preferred stock purchase agreement. The gravamen of the action was that Jorge Granados and RAV failed to disclose as part of the preferred stock purchase agreement that Latin Node had made payments to various third parties in violation of the Foreign Corrupt Practices Act and one of Latin Nodes vendors claimed that it was owed $4.4 million. On February 12, 2009, we entered into a Settlement Agreement with Jorge Granados and RAV pursuant to which (i) the 375,000 shares of our common stock were returned to us by the escrow agent, (ii) we exchanged mutual general releases with Jorge Granados and RAV, (iii) Jorge Granados resigned as a director of Latin Node, Inc. and a manager of RAV, and (iv) Jorge Granados agreed to be subject to certain non-competition, non-solicitation and non-disclosure covenants. The action was dismissed on March 13, 2009.
On February 24, 2009, Kelton Investments Ltd. (Kelton) and Datec Group Ltd. (Datec), as plaintiffs, filed in the High Court of Fiji at Suva (the Fiji Court) an Ex Parte Notice of Motion for Interim Injunction (the Motion). The Motion named as defendants Generic Technology Limited (Generic), Datec Pacific Holdings Ltd., eLandia, the Receiver for Stanford, and the Registrar of Companies. The Motion sought an interim injunction preventing certain defendants from, among other things, appointing new directors or removing existing directors from the board of directors of Generic and other entities and also preventing certain defendants from disposing of shares in Generic or its subsidiaries. On February 27, 2009, the Fiji Court entered an order granting this relief on an ex parte basis.
On March 31, 2009, Kelton and Datec filed a Statement of Claim in the Fiji Action. In essence, the Statement of Claim alleges that the Amended and Restated Arrangement Agreement dated August 8, 2005 (Arrangement Agreement) pursuant to which eLandia acquired the subsidiaries of Datec was induced by untrue representations related to the capital to be devoted to those subsidiaries and alleged investigations of Stanford. It asserts claims for fraudulent misrepresentation, proper construction and enforceability of certain Stock Purchase Agreements in which claims against eLandia were released, breach of Stock Purchase Agreements, breach of the Arrangement Agreement, and equitable estoppel. As relief, it seeks, among other things, rescission of the Arrangement Agreement and Stock Purchase Agreements, a declaration as to the scope of the Stock Purchase Agreements, injunctive relief, and damages. We are currently requesting details and particulars of the claims made ahead of the next appearance in the Fiji Court.
A hearing to review the order granting the interim injunction was scheduled for April 20, 2009. That hearing was cancelled due to the closure of the Fiji courts by the military led Fiji government. The hearing has been rescheduled a number of times and is now set to be held on December 2, 2009.
On March 9, 2009, we filed an action in the United States District Court for the Southern District of Florida, Miami Division (the Court), against Sir James Ah Koy, Michael Ah Koy, Kelton, and Datec. On March 17, 2009 we filed an Amended Complaint in that suit. In essence, we have alleged that Sir James Ah Koy and his son, Michael Ah Koy, Kelton, and Datec have improperly acted to frustrate the sale of our interests in the South Pacific. Among other things, we assert that the defendants have improperly employed claims and complaints about the Arrangement Agreement that they have released to favor their own interests at our expense. We assert claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conspiracy to breach fiduciary duty, declaratory judgment under various agreements, breach of the implied covenant of good faith and fair dealing, breach of contract, and tortious interference with business relations. We seek a declaratory judgment, an injunction, compensatory damages (which we view as including all damage defendants have caused, including loss of sales proceeds and other costs), punitive damages, attorneys fees, and costs.
On April 15, 2009, we filed a motion seeking a preliminary injunction to preclude defendants from prosecuting the Fiji Action or causing that action to be prosecuted. On April 17, 2009, the defendants filed a motion to dismiss for lack of personal jurisdiction and a memorandum in opposition to our motion for a preliminary injunction on grounds of personal jurisdiction with the court and we, in turn, filed, among others, our opposition to said motion on May 4, 2009. A hearing was held on July 7, 2009, on the personal jurisdiction issue and preliminary injunction. On August 24, 2009, the Court entered a Report and Recommendation on Motion to Dismiss recommending that the defendants motion for lack of personal jurisdiction be dismissed and an Order stating that our preliminary injunction motion would not be adjudicated at this stage and denied the same without prejudice. On September 11, 2009, the defendants filed objections to the Courts Report and Recommendation and on October 5, 2009 we filed our response to said objections. On September 8, 2009, we filed a Second Amended Complaint to which the defendants filed an Answer and Affirmative Defenses on October 9, 2009. On October 9, 2009, the defendants also filed a Motion for Summary Judgment based on our alleged lack of standing. Orders on the pending objections and motions have not yet been entered by the Court. Additionally, on August 22, 2009, the Court issued a Scheduling Order setting forth a timeline for this case.
In addition to the above, from time to time, we are periodically a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business. Other than as described above, as of the date of this Quarterly Report, management does not believe that there is any proceeding threatened or pending against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.
51
Table of Contents
ITEM 1A. | RISK FACTORS |
Not required for smaller reporting companies.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Desca Acquisition
On July 17, 2009, under the terms of the 30% Purchase Agreement, we issued to Alvarado 2,500,000 shares of our common stock, valued at $0.9 million based on the closing stock price of $0.34 on July 17, 2009. These shares were issued in a transaction exempt from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
CTT Release of Escrow Amount
In connection with the release of amounts held in escrow to satisfy certain indemnification claims, on September 30, 2009, we issued 350,000 shares of our common stock to the CTT Sellers, valued at $105,000 based on the closing stock price of $0.30 on September 30, 2009. These shares were issued in a transaction exempt from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
Transistemas Settlement Agreement
On August 27, 2009, pursuant to the terms of the Settlement Agreement, we issued to the former owners of Transistemas 433,333 shares of our common stock valued of $156,000 based on a closing stock price of $0.36 on August 27, 2009. These shares were issued in a transaction exempt from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 5. | OTHER INFORMATION |
None.
52
Table of Contents
ITEM 6. | EXHIBITS |
Exhibit No. |
Description of Document |
Method of Filing | ||
10.1 |
Securities Purchase Agreement, effective as of July 1, 2009, by and between eLandia International Inc. and Jorge Enrique Alvarado Amado. | Filed herewith. | ||
31.1 |
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
31.2 |
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
32.1 |
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
32.2 |
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. |
53
Table of Contents
SIGNATURES
Pursuant to the requirements 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.
ELANDIA INTERNATIONAL INC. | ||||||||
Date: November 16, 2009 | By: | /s/ Pete R. Pizarro | ||||||
Pete R. Pizarro | ||||||||
Chief Executive Officer | ||||||||
Date: November 16, 2009 | By: | /s/ Harley L. Rollins, III | ||||||
Harley L. Rollins, III | ||||||||
Chief Financial Officer |
54
Table of Contents
Exhibit Index
Exhibit No. |
Description of Document |
Method of Filing | ||
10.1 |
Securities Purchase Agreement, effective as of July 1, 2009, by and between eLandia International Inc. and Jorge Enrique Alvarado Amado. | Filed herewith. | ||
31.1 |
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
31.2 |
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
32.1 |
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
32.2 |
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. |
55