10-Q/A 1 d10qa.htm FORM 10-Q/A Form 10-Q/A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q/A

 

 

 

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

For the quarterly period ended June 30, 2007

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)

133 Sevilla Avenue

Coral Gables, FL 33134

(Address of principal executive offices, including zip code)

(305) 415-8830

(Registrant’s telephone number, including area code)

Elandia, Inc.

(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 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 July 31, 2007, the registrant had 13,516,315 shares of common stock, $0.00001 par value per share, outstanding.

 

 

 


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EXPLANATORY NOTE

Items Amended by this Form 10-Q/A

This Amendment No. 1 (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 as originally filed with the U. S. Securities and Exchange Commission (“SEC”) on August 20, 2007 (the “Original Form 10-Q”) amends certain sections of the Original Form 10-Q to reflect the restatement of our unaudited interim consolidated condensed financial statements (and related disclosures) as of June 30, 2007 and for the three and six months ended June 30, 2007 as described below. With this Form 10-Q/A, we are amending:

 

   

Part I, Item 1 “Unaudited Financial Statements;”

 

   

Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”

This Form 10-Q/A also amends Part II, Item 6 “Exhibits,” and includes updated certifications from our Chief Executive Officer and Chief Financial Officer required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

This Form 10-Q/A makes only the changes described above and does not modify or update such items in any other respect, or any other items or disclosures presented in the Original Form 10-Q. Further, this Form 10-Q/A does not reflect any other events occurring after August 20, 2007, the date we filed the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC since the filing date of the Original Form 10-Q, including our Current Reports on Form 8-K and the Annual Report on Form 10-K for the year ended December 31, 2007.

Restatement of Prior Period Financial Statements

With the filing of this Form 10-Q/A, we are filing amendments to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, as originally filed with the SEC, to restate our unaudited interim consolidated condensed financial statements. In addition, we intend to file an amended Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2007. For this reason, the unaudited interim consolidated condensed financial statements and related financial information contained in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 should no longer be relied upon.

Background of the Restatement

Subsequent to the filing of our unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 filed with the SEC on August 20, 2007, information was discovered that suggested possible misstatements in connection with the recording of the acquisition of Latin Node, Inc. and Subsidiaries (“Latin Node”) on June 28, 2007.

As disclosed in our Current Report on Form 8-K/A filed with the SEC on September 14, 2007, we engaged in a review of Latin Node’s internal controls and legal compliance procedures within its finance and accounting department as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments in Central America were identified as having been made in the absence of adequate records and controls for a U.S. public company. We have initiated an internal investigation to determine whether any direct or indirect payments by Latin Node prior and subsequent to its acquisition by us were made in violation of the Foreign Corrupt Practices Act (“FCPA”). The internal investigation of the FCPA matter is being conducted by a Special Committee of the Board of Directors. The Special Committee has retained independent legal counsel to assist in the investigation of the FCPA matter.

The internal investigation has preliminarily revealed that certain payments from Latin Node may have been made in violation of the FCPA. Based on these preliminary results, Latin Node and/or eLandia may be subject to fines and penalties assessed by governmental authorities, and will incur substantial expenses associated with investigating the FCPA matter, responding to government inquiries and other matters arising from the acquisition of Latin Node. The adjustment to effect the restatement, which has been recorded effectively as of June 30, 2007, relates to the reallocation of the $26,818,835 purchase price along with the revaluation of certain warrants issued in connection with obtaining debt as part of the acquisition. We conducted a valuation of the acquired business of Latin Node, including the assets acquired and the liabilities assumed in order to evaluate whether the purchase price paid for Latin Node represented fair value. This valuation considered the alleged misrepresentations by the sellers about the FCPA matter, as well as the financial impact of the Latin Node management restructuring undertaken as a result of the investigation. We determined that the $26.8 million purchase price was approximately $20.6 million in excess of the fair value of the net assets acquired from Latin Node mostly due to the cost of the FCPA investigation, the resulting fines and penalties to which it may be subject, the termination of Latin Node’s senior management, and the resultant loss of business. Therefore, we allocated approximately $20.6 million of the purchase price as a direct charge to operations during the quarter ended June 30, 2007.

 

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Effective November 19, 2007, the Board of Directors of Latin Node terminated the employment of the Chief Executive Officer of Latin Node and certain other members of senior management. These terminations are part of a restructuring of the senior management of Latin Node.

The internal investigation of the FCPA matter has not been completed, and accordingly, there is no assurance that additional adjustments will not be necessary and that such adjustments, which could include further reductions in the carrying values of Latin Node’s assets, will not be material.

Summary of the Effects of the Restatement

The effect of the restatement on our previously issued unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 is as follows:

 

     Restated Balance Sheet as of June 30, 2007  
     As Reported     Adjustments     Restated  

ASSETS

      

Total Current Assets

   $ 29,306,238       2,095,600     $ 31,401,838  

Telecommunications Licenses and Agreements

     2,344,000       1,286,000       3,630,000  

Deferred Financing Costs

     3,656,255       149,052       3,805,307  

Goodwill

     35,431,661       (22,576,961 )     12,854,700  

Other Long-Term Assets

     20,075,936         20,075,936  
                        

TOTAL ASSETS

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Total Current Liabilities

   $ 32,633,880       $ 32,633,880  
                  

Warrant Liability

     1,072,887       (832,441 )     240,446  

Minority Interest Purchase Price Obligation—Latin Node

     4,003,824       (3,106,967 )     896,857  

Notes Payable, Net of Discount

     4,429,100       981,493       5,410,593  

Other Long-Term Liabilities

     28,609,269         28,609,269  
                        

Total Long-Term Liabilities

     38,115,080       (2,957,915 )     35,157,165  
                        

Total Liabilities

     70,748,960       (2,957,915 )     67,791,045  
                        

Minority Interest

     1,127,216         1,127,216  
                  

Accumulated Deficit

     (25,378,936 )     (20,626,802 )     (46,005,738 )

Other Stockholders’ Equity

     44,316,850       4,538,408       48,855,258  
                        

Total Stockholders’ Equity

     18,937,914       (16,088,394 )     2,849,520  
                        

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

 

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     Restated Statements of Operations  
     Three Months Ended June 30, 2007     Six Months Ended June 30, 2007  
     As Reported     Adjustments     Restated     As Reported     Adjustments     Restated  

Revenue

   $ 15,240,632       —       $ 15,240,632     $ 28,842,297       —       $ 28,842,297  
                                                
       —             —      

Cost of Revenue

     8,314,323       —         8,314,323       15,272,073       —         15,272,073  

Operating Expenses

     2,472,379       —         2,472,379       4,976,115       —         4,976,115  

General and Administrative Expenses

     4,083,681       —         4,083,681       7,782,841       —         7,782,841  

Portion of Purchase Price Charged upon Acquisition of Latin Node

     —         20,626,802       20,626,802       —         20,626,802       20,626,802  

Depreciation and Amortization

     707,058       —         707,058       1,360,307       —         1,360,307  

Amortization of Intangible Assets

     444,767       —         444,767       889,534       —         889,534  
                                                

Total Costs and Expenses

     16,022,208       20,626,802       36,649,010       30,280,870       20,626,802       50,907,672  
                                                

Operating Loss

     (781,576 )     (20,626,802 )     (21,408,378 )     (1,438,573 )     (20,626,802 )     (22,065,375 )

Other (Expense) Income

     (1,174,596 )     —         (1,174,596 )     (264,380 )       (264,380 )
                                                

Net Loss from Continuing Operations

     (1,956,172 )     (20,626,802 )     (22,582,974 )     (1,702,953 )     (20,626,802 )     (22,329,755 )

Income from Discontinued Operations

     12,116       —         12,116       22,792       —         22,792  
                                                

Net Loss

   $ (1,944,056 )   $ (20,626,802 )   $ (22,570,858 )   $ (1,680,161 )   $ (20,626,802 )   $ (22,306,963 )
                                                

Net Loss per Share

   $ (0.15 )     $ (1.72 )   $ (0.13 )     $ (1.70 )

Weighted Average Basic and Diluted Shares Outstanding

     13,093,149         13,093,149       13,090,248         13,090,248  
                                    

Vendor Dispute

As a result of the investigation, we also discovered that one of Latin Node’s primary vendors has disputed the amounts owed to it by Latin Node, claiming that it was underpaid by approximately $4.4 million. This vendor accounted for approximately 16.1% of Latin Node’s 2007 cost of sales and has terminated its contract with Latin Node effective as of November 2, 2007. Latin Node has identified and is currently obtaining services from other vendors that are providing it with substantially similar services. We are currently reviewing the basis for this claim and we intend to vigorously defend any legal claim that may arise from these disputed amounts.

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q/A

 

     Page

PART I—FINANCIAL INFORMATION

   1

ITEM 1. FINANCIAL STATEMENTS

   1

CONSOLIDATED CONDENSED BALANCE SHEETS AT JUNE 30, 2007 (UNAUDITED) (RESTATED) AND DECEMBER 31, 2006

   1

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND  2006 (UNAUDITED) (RESTATED)

   3

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30,  2007 (UNAUDITED) (RESTATED)

   4

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND  2006 (UNAUDITED) (RESTATED)

   5

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (RESTATED)

   7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   54

ITEM 4. CONTROLS AND PROCEDURES

   54

PART II—OTHER INFORMATION

   56

ITEM 1. LEGAL PROCEEDINGS

   56

ITEM 1A. RISK FACTORS

   56

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   62

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   62

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   62

ITEM 5. OTHER INFORMATION

   62

ITEM 6. EXHIBITS

   62

SIGNATURES

   63


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PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

     June 30, 2007    December 31, 2006
    

(Unaudited)

(Restated)

    

ASSETS

     

Current Assets

     

Cash and Cash Equivalents

   $ 5,901,310    $ 1,211,124

Accounts Receivable (net of $2,552,365 and $1,174,754 allowance for doubtful accounts at June 30, 2007 and December 31, 2006, respectively)

     15,256,487      5,794,073

Inventories

     3,764,507      3,969,981

Prepaid Expenses

     3,722,580      1,164,691

Other Current Assets

     1,675,523      253,915

Deferred Tax Asset — Current Portion

     1,081,431      649,210
             
Total Current Assets      31,401,838      13,042,994

Restricted Cash

     397,574      —  

Property and Equipment, Net

     12,917,602      8,966,083

Deferred Tax Asset

     —        159,699

Due From Affiliates

     139,052      —  

Security Deposits

     605,299      —  

Telecommunications Licenses and Agreements

     3,630,000      344,000

Telecommunications Licenses and Agreements— Held for Sale

     445,743      1,102,740

Customer Lists (net of $610,992 and $395,349 accumulated amortization at June 30, 2007 and December 31, 2006, respectively)

     2,408,008      2,623,651

Contract Rights (net of $1,909,356 and $1,235,464 accumulated amortization at June 30, 2007 and December 31, 2006, respectively)

     2,814,644      3,488,536

Deferred Financing Costs (net of $197,520 and $0 of accumulated amortization at June 30, 2007 and December 31, 2006, respectively)

     3,805,307      —  

Goodwill

     12,854,700      12,929,851

Investment in Unconsolidated Subsidiaries

     348,014      —  
             
Total Assets    $ 71,767,781    $ 42,657,554
             

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

     June 30, 2007     December 31, 2006  
    

(Unaudited)

(Restated)

       

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts Payable (including bank overdraft facility of $1,874,830 and $657,281 at June 30, 2007 and December 31, 2006, respectively)

   $ 12,201,896     $ 6,195,229  

Accrued Expenses

     8,824,989       4,748,928  

Current Portion of Long-Term Debt and Capital Lease Obligations

     6,495,072       4,246,019  

Income Taxes Payable

     465,514       839,653  

Customer Advances

     1,755,211       —    

Deferred Revenue

     1,287,215       712,164  

Deferred Gain on Sale Leaseback — Related Party

     316,886       336,716  

Liabilities from Discontinued Operations

     1,287,097       1,312,740  
                
Total Current Liabilities      32,633,880       18,391,449  
                

Long-Term Liabilities

    

Long-Term Debt and Capital Lease Obligations

     819,050       767,547  

Long-Term Debt — Convertible — Related Party (net of discount of $3,994,291 and $0 at June 30, 2007 and December 31, 2006, respectively)

     26,305,709       3,300,000  

Accrued Interest — Related Party

     997,742       —    

Notes Payable (net of discount of $89,407 and $0 at June 30, 2007 and December 31, 2006, respectively)

     5,410,593       —    

Deferred Tax Liability

     36,323       45,321  

Deferred Gain on Sale Leaseback, Net of Current Portion — Related Party

     450,445       598,973  

Warrant Liability

     240,446       —    

Minority Interest Purchase Price Obligation — Latin Node

     896,857       —    
                
Total Long-Term Liabilities      35,157,165       4,711,841  
                
Total Liabilities      67,791,045       23,103,290  
                
Commitments and Contingencies     
Minority Interest      1,127,216       1,335,920  
                
Stockholders’ Equity     

Common Stock, $0.00001 par value; 50,000,000 shares authorized; 13,516,315 and 13,060,314 shares issued at June 30, 2007 and December 31, 2006, respectively, and 13,516,315 and 13,114,315 shares outstanding at June 30, 2007 and December 31, 2006, respectively

     135       130  

Additional Paid-In Capital

     48,595,521       41,562,041  

Accumulated Deficit

     (46,005,738 )     (23,698,775 )

Accumulated Other Comprehensive Income

     259,602       354,948  
                
Total Stockholders’ Equity      2,849,520       18,218,344  
                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY    $ 71,767,781     $ 42,657,554  
                

The accompanying notes are an integral part of these consolidated condensed financial statements (unaudited).

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007 (Restated)     2006     2007 (Restated)     2006  

REVENUE (includes $9,230,490 and $7,840,331 for the three months ended June 30, 2007 and 2006, respectively, and $17,211,383 and $12,364,088 for the six months ended June 30, 2007 and 2006, respectively, from a consolidated subsidiary in which the Company owns a 50% interest) (Note 5)

   $ 15,240,632     $ 12,230,620     $ 28,842,297     $ 20,334,828  

COSTS AND EXPENSES

        

Cost of Revenue

     8,314,323       6,477,551       15,272,073       10,545,084  

Operating Expenses

     2,472,379       2,323,179       4,976,115       3,882,235  

General and Administrative Expenses (including stock-based compensation expense of $225,185 for the three months ended June 30, 2007 and $337,774 for the six months ended June 30, 2007)

     4,083,681       3,243,327       7,782,841       5,676,953  

Portion of Purchase Price Charged upon Acquisition of Latin Node (Note 3 and 6)

     20,626,802       —         20,626,802       —    

Depreciation and Amortization

     707,058       607,674       1,360,307       1,080,557  

Amortization of Intangible Assets

     444,767       619,743       889,534       1,032,904  
                                

Total Costs and Expenses

     36,649,010       13,271,474       50,907,672       22,217,733  
                                
OPERATING LOSS      (21,408,378 )     (1,040,854 )     (22,065,375 )     (1,882,905 )

OTHER (EXPENSE) INCOME

        

Interest Expense and Other Financing Costs

     (1,140,845 )     (150,442 )     (1,890,395 )     (371,327 )

Interest Income

     483,248       —         606,211       —    

Other

     (43,222 )     (4,015 )     (45,444 )     2,580  

Gain on Sales Leaseback — Related Party

     84,181       84,178       168,359       140,297  

Gain on Sale of Telecommunications License

     —         —         1,842,875       —    

Foreign Exchange Gain

     86,729       172,828       140,301       331,194  
                                

Total Other (Expense) Income

     (529,909 )     102,549       821,907       102,744  
                                
NET LOSS BEFORE INCOME TAX      (21,938,287 )     (938,305 )     (21,243,468 )     (1,780,161 )

Income Tax Expense

     (343,981 )     (400,614 )     (571,392 )     (570,857 )

Minority Interest in Net Profit After Tax

     (300,706 )     (328,407 )     (514,895 )     (552,208 )
                                
LOSS FROM CONTINUING OPERATIONS      (22,582,974 )     (1,667,326 )     (22,329,755 )     (2,903,226 )

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

     12,116       15,550       22,792       (6,846 )
                                

NET LOSS

   $ (22,570,858 )   $ (1,651,776 )   $ (22,306,963 )   $ (2,910,072 )
                                

Basic and Diluted Net Loss per Share

        

Loss from Continuing Operations

   $ (1.72 )   $ (0.13 )   $ (1.70 )   $ (0.24 )

Loss from Discontinued Operations

     —         0.00       —         —    
                                

Net Loss

   $ (1.72 )   $ (0.13 )   $ (1.70 )   $ (0.24 )
                                

Weighted Average Basic and Diluted Shares Outstanding

     13,093,149       13,052,401       13,090,248       12,090,108  

OTHER COMPREHENSIVE LOSS, NET OF TAX

        

Net Loss

   $ (22,570,858 )   $ (1,651,776 )   $ (22,306,963 )   $ (2,910,072 )

Foreign Currency Translation Adjustment

     (117,795 )     (54,007 )     (95,346 )     150,213  
                                

Comprehensive Loss

   $ (22,688,653 )   $ (1,705,783 )   $ (22,402,309 )   $ (2,759,859 )
                                

The accompanying notes are an integral part of these consolidated condensed financial statements (unaudited).

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2007

(UNAUDITED)

 

     Common Stock               Accumulated        
     Shares    Amount    Additional
Paid-In
Capital
   Accumulated
Deficit
    Other
Comprehensive
Income
    Total
Stockholders’
Equity
 

Balances — January 1, 2007

   13,060,314    $ 130    $ 41,562,041    $ (23,698,775 )   $ 354,948     $ 18,218,344  

Issuance of common stock to directors for services

   27,000      —        112,590      —         —         112,590  

Issuance of common stock to officer for services

   54,001      1      225,184      —         —         225,185  

Fair value of warrants granted to majority stockholder in connection with $25.3 million convertible promissory note

   —        —        4,190,690      —         —         4,190,690  

Fair value of warrants granted to majority stockholder in connection with $5.0 million convertible promissory note

   —        —        857,461      —         —         857,461  

Issuance of common stock in connection with acquisition of Latin Node

   375,000      4      1,563,746      —         —         1,563,750  

Fair value of warrants granted to majority stockholder in connection with $13.0 million debt financing

   —        —        83,809      —         —         83,809  

Foreign currency translation adjustment

   —        —        —        —         (95,346 )     (95,346 )

Net loss for the six months ended June 30, 2007 (Restated)

   —        —        —        (22,306,963 )     —         (22,306,963 )
                                           

Balances — June 30, 2007 (Restated)

   13,516,315    $ 135    $ 48,595,521    $ (46,005,738 )   $ 259,602     $ 2,849,520  
                                           

The accompanying notes are an integral part of these consolidated condensed financial statements (unaudited).

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended June 30,  
     2007 (Restated)     2006  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Loss

   $ (22,306,963 )   $ (2,910,072 )

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

    

Depreciation and Amortization

     1,360,307       1,080,557  

Amortization — Intangible Assets

     889,534       1,032,904  

Amortization of Deferred Financing Costs and Interest Expense

     557,678       —    

Non-cash Stock Compensation

     337,775       100,000  

Minority Interest in Net Income

     514,895       552,208  

Gain on Sale of Telecommunications License

     (1,842,875 )     —    

Portion of Purchase Price Charged upon Acquisition of Latin Node

     20,626,802    

Bad Debt Expense (Recovery)

     146,104       (113,000 )

Foreign Currency Exchange Gain

     (140,301 )     (331,194 )

Gain on Sale Leaseback — Related Party

     (168,359 )     (140,297 )

Changes in Operating Assets and Liabilities:

    

Accounts Receivable

     571,976       2,017,128  

Assets from Discontinued Operations

     —         452,131  

Liabilities from Discontinued Operations

     (25,643 )     (47,305 )

Accounts Payable

     (1,150,664 )     (7,846,892 )

Accrued Interest on Long-term Debt — Related Party

     997,742       4,471,735  

Accrued Expenses

     (5,925 )     —    

Income Taxes Payable

     (376,325 )     410,285  

Inventories

     232,916       (950,211 )

Other Current Assets

     (1,808,647 )     28,032  

Other Liabilities

     —         450,730  

Prepaid Expenses

     529,130       292,955  

Deferred Revenue

     575,051       195,293  
                

TOTAL ADJUSTMENTS

     21,821,171       1,655,059  
                

CASH USED IN OPERATING ACTIVITIES

     (485,792 )     (1,255,013 )
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Other Long-Term Assets

     (20,610 )     —    

Cash Acquired in Latin Node Acquisition

     391,964       252,153  

Acquisition Cost Incurred — Latin Node

     (716,677 )     (504,544 )

Cash Advanced to Latin Node — Pre-Acquisition

     (5,175,000 )     —    

Notes Receivable — Latin Node

     (20,000,000 )     —    

Acquisition of Telecommunications License

     —         (165,000 )

Proceeds from Sale of Telecommunications License, Net of Selling Expenses

     2,630,272       —    

Purchases of Property and Equipment

     (1,248,210 )     (839,762 )
                

CASH USED IN INVESTING ACTIVITIES

     (24,138,261 )     (1,257,153 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Advances from Related Parties

     —         255,039  

Proceeds from Convertible Promissory Note — Related Party

     27,000,000       2,200,000  

Financing Costs Paid — Convertible Promissory Note

     (3,071,556 )     —    

Proceeds from Line of Credit

     950,000       484,333  

Proceeds from Long-Term Debt

     5,500,000       397,210  

Principal Payments of Long-Term Debt and Capital Lease Obligations

     (75,831 )     (89,055 )

Dividends Paid to Minority Interest Holders

     (761,839 )     (681,920 )
                

CASH PROVIDED BY FINANCING ACTIVITIES

     29,540,774       2,565,607  
                

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (226,535 )     743  
                

NET INCREASE IN CASH

     4,690,186       54,184  

CASH — Beginning

     1,211,124       322,024  
                

CASH — Ending

   $ 5,901,310     $ 376,208  
                

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended June 30,  
     2007 (Restated)     2006  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash Paid During the Periods For:

    

Interest

   $ 306,956     $ 186,686  

Taxes

   $ 190,423     $ 4,448  

Acquisition of Operating Subsidiaries: Datec Group, Ltd.:

    

Cash Acquired in Acquisition

   $ —       $ 252,153  

Accounts Receivable

     —         7,416,900  

Prepaid Expenses and Other Current Assets

     —         1,164,786  

Inventory

     —         3,324,940  

Current Liabilities

     —         (12,628,687 )

Taxes Payable

     —         (1,752,278 )

Long-Term Liabilities

     —         (1,645,411 )

Minority Interest

     —         (805,937 )

Goodwill Recognized in Business Acquisition

     —         7,357,814  

Intangible Assets Recognized with Business Acquisition

     —         8,187,344  

Other Assets

     —         823,628  

Property, Plant and Equipment

     —         3,624,999  
                

Total Non-Cash Consideration

   $ —       $ 15,320,251  
                

Acquisition of Minority Interest in AST Telecom, LLC:

    

Wireless licenses

   $ —       $ 600,000  

Customer lists

     —         1,176,875  

Contract rights

     —         1,081,850  

Goodwill

     —         1,641,227  

Other assets

     —         1,041,656  
                

Total non-cash consideration

   $ —       $ 5,541,608  
                

Acquisition of Latin Node, Inc.:

    

Total Current Assets

   $ 14,358,218     $ —    

Property and Equipment

     4,161,935       —    

Other Assets

     1,469,329       —    

Current Liabilities

     (15,412,734 )     —    

Long-Term Liabilities

     (773,858 )     —    

Portion of Purchase Price Charged upon Acquisition of Latin Node

     20,626,802       —    

Telecommunications Licenses and Agreements

     3,286,000       —    

Minority Interest Purchase Price Obligation

     (896,857 )     —    

Non-Cash Consideration — Common Stock

     (1,563,750 )     —    
                

Purchase Price of Acquisition, Including Transaction Expenses

     25,255,085       —    

Conversion of Notes Receivable

     (24,538,408 )     —    
                

Cash Paid for Acquisition

   $ 716,677     $ —    
                

NON-CASH INVESTING AND FINANCING ACTIVITIES:

    

Acquisition of Equipment with Issuance of Note Payable

   $ 28,401     $ —    

Fair Market Value of Warrants Granted in Connection with Convertible Promissory Notes and Long-Term Debt

   $ 5,131,960     $ —    

Accrued Interest Income on Note Receivable — Latin Node

   $ 607,462     $ —    

Accrued Interest Expense on Convertible Promissory Note — Related Party

   $ 1,031,737     $ —    

Conversion of Note Receivable to Investment in Latin Node

   $ 20,000,000     $ —    

The accompanying notes are an integral part of these consolidated condensed financial statements (unaudited).

 

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ELANDIA INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2007

(UNAUDITED)

(RESTATED)

NOTE 1—Nature of Business

eLandia International Inc., formerly known as Elandia, Inc., (“eLandia,” “Company,” “we,” “us,” and/or “our”), through its subsidiaries, is a telecommunications service provider and an information solutions and services provider, offering a wide range of technology products, Internet access service, professional services and other solutions to American Samoa, Papua New Guinea, Fiji and other Pacific Island Nations, and Central and South America regions. The products and services we offer in each of the geographic areas we serve vary depending on the infrastructure, existing telecommunication systems and the needs of the region. Generally, however, our telecommunications operations include wholesale and retail long-distance service (including the use of Voice over Internet Protocol (“VoIP”) technology), wireless coverage and Internet access. Our software solutions include Microsoft products, database applications, accounting applications and other system applications. We also offer peripheral products including fax machines, copiers, telephones and general office equipment. Our hardware offerings include PBX hardware, servers, routers and switching systems. In addition, we offer professional services to assist our customers in implementing customized solutions to meet their business needs. These services include application development, systems integration, training and maintenance and support.

NOTE 2—Basis of Presentation

Our unaudited interim consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and reflect all adjustments that are necessary for a fair presentation of the results for interim periods. All adjustments made were of a normal recurring nature. Certain information and footnote disclosures normally included in interim financial statements prepared according to accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. As a result, you should read these unaudited interim consolidated condensed financial statements along with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on April 18, 2007. Operating results for the interim period should not be viewed as representative of results that may be expected for the year ending December 31, 2007.

Certain reclassifications have been made to the December 31, 2006 balance sheet to conform to the June 30, 2007 presentation.

NOTE 3—Acquisition Contingency, Restatement of Previously Filed Financial Statements and Latin Node Management Restructuring

Subsequent to the filing of our unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 filed with the SEC on August 20, 2007, information was discovered that suggested possible misstatements in connection with the recording of the acquisition of Latin Node, Inc. and subsidiaries (“Latin Node”) on June 28, 2007.

As disclosed in our Current Report on Form 8-K/A filed with the SEC on September 14, 2007, we engaged in a review of Latin Node’s internal controls and legal compliance procedures within its finance and accounting department as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments in Central America were identified as having been made in the absence of adequate records and controls for a U.S. public company. We have initiated an internal investigation to determine whether any direct or indirect payments by Latin Node prior and subsequent to its acquisition by us were made in violation of the Foreign Corrupt Practices Act (“FCPA”). The internal investigation of the FCPA matter is being conducted by a Special Committee of the Board of Directors. The Special Committee has retained independent legal counsel to assist in the investigation of the FCPA matter.

The internal investigation has preliminarily revealed that certain payments from Latin Node may have been made in violation of the FCPA. Based on these preliminary results, Latin Node and/or eLandia may be subject to fines and penalties assessed by governmental authorities, and will incur substantial expenses associated with investigating the FCPA matter, responding to government inquiries and other matters arising from the acquisition of Latin Node. The adjustment to effect the restatement, which has been recorded effectively as of June 30, 2007, relates to the reallocation of the $26,818,835 purchase price along

 

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with the revaluation of certain warrants issued in connection with obtaining debt as part of the acquisition. We conducted a valuation of the acquired business of Latin Node, including the assets acquired and the liabilities assumed in order to evaluate whether the purchase price paid for Latin Node represented fair value. This valuation considered the alleged misrepresentations by the sellers about the FCPA matter, as well as the financial impact of the Latin Node management restructuring undertaken as a result of the investigation. We determined that the $26.8 million purchase price was approximately $20.6 million in excess of the fair value of the net assets acquired from Latin Node mostly due to the cost of the FCPA investigation, the resulting fines and penalties to which it may be subject, the termination of Latin Node’s senior management, and the resultant loss of business. Therefore, we allocated approximately $20.6 million of the purchase price as a direct charge to operations during the quarter ended June 30, 2007.

Effective November 19, 2007, the Board of Directors of Latin Node terminated the employment of the Chief Executive Officer of Latin Node and certain other members of senior management. These terminations are part of a restructuring of the senior management of Latin Node.

The internal investigation of the FCPA matter has not been completed, and accordingly, there is no assurance that additional adjustments will not be necessary and that such adjustments, which could include further reductions in the carrying values of Latin Node’s assets, will not be material.

The effect of the restatement on our previously issued unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 is as follows:

 

     Restated Balance Sheet as of June 30, 2007  
     As Reported     Adjustments     Restated  

ASSETS

      

Total Current Assets

   $ 29,306,238       2,095,600     $ 31,401,838  

Telecommunications Licenses and Agreements

     2,344,000       1,286,000       3,630,000  

Deferred Financing Costs

     3,656,255       149,052       3,805,307  

Goodwill

     35,431,661       (22,576,961 )     12,854,700  

Other Long-Term Assets

     20,075,936         20,075,936  
                  

TOTAL ASSETS

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Total Current Liabilities

   $ 32,633,880       $ 32,633,880  
                  

Warrant Liability

     1,072,887       (832,441 )     240,446  

Minority Interest Purchase Price Obligation—Latin Node

     4,003,824       (3,106,967 )     896,857  

Notes Payable, Net of Discount

     4,429,100       981,493       5,410,593  

Other Long-Term Liabilities

     28,609,269         28,609,269  
                        

Total Long-Term Liabilities

     38,115,080       (2,957,915 )     35,157,165  
                        

Total Liabilities

     70,748,960       (2,957,915 )     67,791,045  
                        

Minority Interest

     1,127,216         1,127,216  
                  

Accumulated Deficit

     (25,378,936 )     (20,626,802 )     (46,005,738 )

Other Stockholders’ Equity

     44,316,850       4,538,408       48,855,258  
                        

Total Stockholders’ Equity

     18,937,914       (16,088,394 )     2,849,520  
                        

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

 

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     Restated Statements of Operations  
     Three Months Ended June 30, 2007     Six Months Ended June 30, 2007  
     As Reported     Adjustments     Restated     As Reported     Adjustments     Restated  

Revenue

   $ 15,240,632       —       $ 15,240,632     $ 28,842,297       —       $ 28,842,297  
                                                
       —             —      

Cost of Revenue

     8,314,323       —         8,314,323       15,272,073       —         15,272,073  

Operating Expenses

     2,472,379       —         2,472,379       4,976,115       —         4,976,115  

General and Administrative Expenses

     4,083,681       —         4,083,681       7,782,841       —         7,782,841  

Portion of Purchase Price Charged upon Acquisition of Latin Node

     —         20,626,802       20,626,802       —         20,626,802       20,626,802  

Depreciation and Amortization

     707,058       —         707,058       1,360,307       —         1,360,307  

Amortization of Intangible Assets

     444,767       —         444,767       889,534       —         889,534  
                                                

Total Costs and Expenses

     16,022,208       20,626,802       36,649,010       30,280,870       20,626,802       50,907,672  
                                                

Operating Loss

     (781,576 )     (20,626,802 )     (21,408,378 )     (1,438,573 )     (20,626,802 )     (22,065,375 )

Other (Expense) Income

     (1,174,596 )     —         (1,174,596 )     (264,380 )       (264,380 )
                                                

Net Loss from Continuing Operations

     (1,956,172 )     (20,626,802 )     (22,582,974 )     (1,702,953 )     (20,626,802 )     (22,329,755 )

Income from Discontinued Operations

     12,116       —         12,116       22,792       —         22,792  
                                                

Net Loss

   $ (1,944,056 )   $ (20,626,802 )   $ (22,570,858 )   $ (1,680,161 )   $ (20,626,802 )   $ (22,306,963 )
                                                

Net Loss per Share

   $ (0.15 )     $ (1.72 )   $ (0.13 )     $ (1.70 )

Weighted Average Basic and Diluted Shares Outstanding

     13,093,149         13,093,149       13,090,248         13,090,248  
                                    

As a result of the investigation, we also discovered that one of Latin Node’s primary vendors has disputed the amounts owed to it by Latin Node, claiming that it was underpaid by approximately $4.4 million. This vendor accounted for approximately 16.1% of Latin Node’s 2007 cost of sales and has terminated its contract with Latin Node effective as of November 2, 2007. Latin Node has identified and is currently obtaining services from other vendors that are providing it with substantially similar services. We are currently reviewing the basis for this claim and we intend to vigorously defend any legal claim that may arise from these disputed amounts.

NOTE 4—Liquidity, Financial Condition and Management Plans

As of June 30, 2007, we had a working capital deficiency of $1,232,042 and for the six months ended June 30, 2007, we incurred a net loss of $22,306,963 which includes a portion of the purchase price charged upon acquisition of Latin Node totaling $20,626,802.

In February 2007, we obtained a $30.3 million financing commitment from our major stockholder. Of the $30.3 million committed, $20 million was used in conjunction with a loan to Latin Node (which was ultimately converted into preferred stock of Latin Node on June 28, 2007), $3.3 million was used to refinance an existing short term note we had outstanding to our major stockholder, $2 million was used to pay financing costs to our major stockholder, and the remaining $5 million was used as an additional loan to Latin Node during June of 2007.

Effective June 28, 2007, we acquired 8 million shares of Series A 10% Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”), of Latin Node. The Series A Preferred Stock is convertible, in whole or in part and at a conversion price of $2.50 per share, into shares of common stock of Latin Node representing 80% of the issued and then outstanding shares of common stock of Latin Node. The purchase price for the Series A Preferred Stock was $26,818,835 which was paid as follows:

 

  i) $24.5 million for the cancellation of a note receivable from Latin Node,

 

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  ii) $1,563,750 for the fair value of 375,000 shares of eLandia common stock (fair value of $4.17 per share), and

 

  iii) $716,677 of direct acquisition costs paid in cash.

On June 29, 2007, Latin Node, our 80% owned subsidiary, closed on a $13.0 million debt financing transaction with Laurus Master Fund, Ltd. (“Laurus”). Laurus extended financing to Latin Node in the form of a $7.5 million Secured Non-Convertible Revolving Note (the “Facility”) based on accounts receivable. The Facility has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 2.5% per annum, subject to a floor of 10.0%. As of June 30, 2007, the Wall Street Journal prime rate was 8.25%. As of June 30, 2007, we have not borrowed any of the $7.5 million available under the Facility. In addition, Laurus extended financing to Latin Node in the form of a $5.5 million Secured Convertible Term Note (the “Secured Note”) secured by a first lien on all assets of Latin Node. The Secured Note has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 3.5% per annum, subject to a floor of 11.0%. Interest payments are due monthly over the term of the loan, commencing immediately, while principal payments are due in 24 equal monthly installments beginning July 1, 2008. As of June 30, 2007, the amount outstanding under such Secured Note amounted to $5.5 million.

Management believes that the plans and actions put in place during 2006 to reduce expenses in Fiji and the other Pacific Island Nations, the payments from the Universal Service Fund associated with our wireless telecommunications services in American Samoa, the anticipated cash flow from operations in Papua New Guinea, the additional funds available under the Facility and Secured Note to Latin Node and the proceeds from the sale of the U.S. Virgin Islands wireless license we held, will provide sufficient cash for our operations during the second half of 2007. There is no assurance, however, that we will generate positive cash flows during 2007 and beyond.

Our ability to meet our debt obligations, maintain our working capital and generate operating profits in the future will depend, in large part, upon the realization of the items listed above as well as the future performance of our operating subsidiaries, which will be affected by many factors, some of which are beyond management’s control; thus, there can be no assurance that we will maintain sufficient capital and become profitable.

NOTE 5 – Significant Accounting Policies

Principles of Consolidation

The unaudited interim consolidated condensed financial statements include the accounts of eLandia and our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Our unaudited interim consolidated condensed financial statements include the acquired operating subsidiaries from:

 

  a) Datec Group, Ltd. (“Datec”) from February 1, 2006 since Datec’s acquisition was accounted for under the purchase method of accounting.

 

  b) AST Telecom, LLC (“AST”), which conducts operations in American Samoa, effectively came under common control on September 14, 2004, at which time Stanford Venture Capital Holdings (“SVCH”) was a majority stockholder of eLandia and was a majority member of AST. The acquisition of the remaining minority interest in AST was acquired on February 1, 2006 and was accounted for as a common control merger (similar to a pooling of interest). Accordingly, AST’s operations are included in its entirety for the periods presented.

 

  c) Effective June 28, 2007, we acquired an 80% interest in Latin Node and accounted for the transaction using the purchase method of accounting. As such, the results of operations and cash flows of Latin Node are included in the unaudited interim consolidated condensed financial statements from June 29, 2007 through June 30, 2007. In addition, the assets and liabilities acquired are included in the unaudited interim consolidated condensed balance sheet at June 30, 2007.

In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” as revised (“FIN 46R”) the Company consolidates variable entities when it has voting interest less than 51% but is considered to be the beneficiary of the variable interest entity. Under FIN 46R, the primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, direct or implied.

 

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Based on the operating agreement that conveys the ability to appoint management, we include in our unaudited interim consolidated condensed financial statements, the results of operations and financial position of Datec PNG Pty Limited (“Datec PNG”), in which we hold a 50% interest. Datec PNG has an overdraft facility account with a maximum borrowing limit of approximately $2,390,000. This overdraft facility account is secured by the assets of Datec PNG.

The following is a summary of certain financial data for Datec PNG as of and for the three and six months ended June 30, 2007:

 

     For the Three Months
Ended June 30, 2007
   For the Six Months
Ended June 30, 2007

Revenue

   $ 9,230,490    $ 17,211,383

Net income after tax and minority interest

   $ 168,178    $ 123,946
     As of June 30, 2007     

Total assets

   $ 13,618,257   

Total liabilities

   $ 7,858,823   

Loss Per Share

We present both basic and diluted loss from continuing and discontinued operations per share and net loss per share on the face of the unaudited interim consolidated condensed statement of operations. As provided by the Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share,” basic loss from continuing and discontinued operations and net loss per share is calculated as the loss attributable to common stockholders divided by the weighted average number of shares outstanding during the periods. Diluted loss per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and convertible preferred stock. As of June 30, 2007, we had 2,098,000 warrants excluded from the diluted computation since their effect would be anti-dilutive. In addition, our majority stockholder and Laurus have the option to convert their notes payable totaling $35.8 million into 7,160,000 common shares ($5.00 per share). These common share equivalents are excluded from the diluted computation since their effect would be anti-dilutive.

Foreign Currency Translation

The financial statements of our foreign operations are stated in foreign currencies, referred to as the functional currency. Under SFAS No. 52, “Foreign Currency Translation” 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 statement of operations amounts expressed in functional currencies are translated using average exchange rates. Gains resulting from foreign currency transactions are recorded as foreign exchange gains in the unaudited interim consolidated condensed statement of operations.

The following exchange rates were used in the preparation of the unaudited interim consolidated condensed financial statements:

 

     For the Six
Months Ended
June 30, 2007
Average Rate
   For the Six
Months Ended
June 30, 2006
Average Rate
   For the Three
Months Ended
June 30, 2007
Average Rate
   For the Three
Months Ended
June 30, 2006
Average Rate
   As of
June 30,
2007
   As of
December 31,
2006

New Zealand Dollar

   0.7315    0.6581    0.7537    0.6512    0.7753    0.7143

Australian Dollar

   0.8135    0.7412    0.8346    0.7393    0.8477    0.7933

Fiji Dollar

   0.6170    0.5804    0.6284    0.5803    0.6349    0.6094

Papua New Guinea Kina

   0.3409    0.3352    0.3423    0.3358    0.3446    0.3463

Vanuatu Vatu

   0.0093    0.0091    0.0094    0.0092    0.0096    0.0092

Samoa Tala

   0.3725    0.3715    0.3803    0.3706    0.3841    0.3622

Tonga Panga

   0.4907    0.5007    0.4946    0.5026    0.5037    0.5035

Solomon Island Dollar

   0.1325    0.1260    0.1335    0.1264    0.1347    0.1264

 

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In addition, Latin Node transacts business using the Euro and the Guatemalan Quetzal. At June 30, 2007, the exchange rate for the Euro was $1.3767 and the exchange rate for the Quetzal was $0.3239. Results of operations and cash flows relating to Latin Node in these unaudited interim consolidated condensed financial statements were not significant.

Use of Estimates

The preparation of unaudited interim consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated condensed financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: the amount of uncollectible accounts receivable, the amount to be paid for the settlement of liabilities of discontinued operations, accrued expenses, the amount of costs capitalized in connection with the wireless licenses, the amount allocated to contract rights, customer lists and goodwill in connection with the acquisitions along with the estimated useful lives for amortizable intangibles and property and equipment, and the value assigned to the warrants granted in connection with the various financing arrangements. In addition, a portion of the purchase price charged upon acquisition of Latin Node is an estimate based on the results of our preliminary investigation to date. Actual results could differ from those estimates.

Making estimates about revenue recognition and cost estimates on our production contracts requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation or set of circumstances that existed at the date of the unaudited interim consolidated condensed 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 regarding estimates of our revenue and cost associated with long-term contracts could differ from our estimates.

Fair Values

We have determined the estimated fair value amounts presented in these unaudited interim consolidated condensed 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 consolidated condensed 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 to us as of June 30, 2007. As of June 30, 2007, the carrying value of all financial instruments approximates fair value.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 – Fair Value Measurements (“SFAS No. 157”). SFAS 157 establishes a framework for measuring fair value under U.S. GAAP and will be applied to existing accounting and disclosure requirements in U.S. GAAP that are based on fair value. SFAS 157 does not require any new fair value measurements. SFAS 157 emphasizes a “market-based” as opposed to an “entity-specific” measurement perspective, establishes a hierarchy of fair value measurement methods and expands disclosure requirements about fair value measurements including methods and assumptions and the impact on earnings. We do not expect that the adoption of SFAS 157, which is to be adopted effective January 1, 2008 and applied prospectively, will have a material impact on our financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides an option to report certain financial assets and liabilities at fair value primarily to reduce the complexity and level of volatility in the accounting for financial instruments resulting from measuring related financial assets and liabilities differently under existing U.S. GAAP. SFAS 159 is effective January 1, 2008. At this time, we do not anticipate SFAS 159 having a material impact on our financial statements.

In January 2007, we adopted the Financial Accounting Standards Board Staff Position EITF 00-19-2 (“FSP EITF 00-19-2”) which provides that the contingent obligation to make future payments under a registration payment arrangement should be accounted for as a separate agreement in accordance with FASB Statement No. 5, Accounting for Contingencies. The adoption of FSP EITF 00-19-2 did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

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Minority Interest

The minority interest in the Company’s unaudited interim consolidated condensed financial statements represents the allocable portion of the entities which are not 100% owned by eLandia. The following table shows the changes in minority interest for the six months ended June 30, 2007:

 

     Minority Interest  

Minority interest at January 1, 2007

   $ 1,335,920  

Allocable portion of year to date net income

     514,895  

Minority interest portion of sale/leaseback

     64,350  

Dividends paid

     (761,839 )

Foreign currency translation adjustment

     (26,110 )
        

Minority interest at June 30, 2007

   $ 1,127,216  
        

NOTE 6—Acquisitions

Latin Node, Inc. and Subsidiaries

On February 16, 2007, we entered into a Preferred Stock Purchase Agreement with Latin Node (the “Preferred Stock Purchase Agreement”), a wholly-owned subsidiary of Retail Americas VoIP, LLC (“Retail”), a Delaware limited liability company, pursuant to which we agreed to purchase 8,000,000 shares of Series A Preferred Stock of Latin Node for an aggregate price of $26,818,835 (including $600,000 paid to SGC as an advisory fee and $116,677 of other capitalized acquisition costs). The Latin Node Series A Preferred Stock is convertible into Latin Node common shares, in whole or in part, at a conversion price of $2.50 per share which represents 80% of the issued and outstanding shares of common stock of Latin Node.

Concurrent with entering into the Preferred Stock Purchase Agreement, we entered into a credit agreement with Latin Node pursuant to which we extended $20 million of financing to Latin Node under a secured promissory note with interest at an annual rate of 10% that was to mature on or before the earlier of the fourth anniversary of the execution date of the note, or on demand subject to certain conditions described in the Preferred Stock Purchase Agreement.

The purchase price consideration issued in exchange for the Latin Node Series A Preferred Stock amounted to $26,818,835, and includes (i) $24.5 million for the cancellation of the Latin Node Note Receivable (ii) $1,563,750 for the fair value of 375,000 shares of eLandia common stock (fair value of $4.17 per share), plus (iii) $716,677 of direct acquisition costs paid in cash.

Latin Node provided advanced telecommunications services to customers located in or communicating with South and Central America and, in some cases, Europe, using voice over Internet protocol, or VoIP, technology. The acquisition, which was subject to certain regulatory approvals (specifically approval by the FCC) was completed on June 28, 2007. As described in Note 3, subsequent to the completion of this acquisition, we identified certain matters during our investigation of the FCPA matter that resulted in changes to the valuation of the acquired business and the purchase price allocation that we recorded as of June 28, 2007, the effective date of the acquisition.

Pursuant to the terms of a concurrent stockholders’ agreement dated February 16, 2007 entered into between eLandia, Latin Node and Retail, Retail retained a right to obligate eLandia to issue certain shares of common stock of eLandia to Retail in exchange for all (but not less than all) of the 2,000,000 shares of common stock of Latin Node held by Retail. The number of eLandia common shares that were intended to be issued to Retail upon the exercise of this put right was to be determined based on an independent appraisal of the value of Latin Node. Conversely, eLandia, also under the terms of the stockholders agreement, has the right to obligate Retail to exchange all of the 2,000,000 shares of common stock of Latin Node held by Retail for shares of eLandia common stock. As a result of these put and call rights and obligations, we have consolidated 100% of Latin Node with our financial statements. In addition, we are not allocating any portion of Latin’s Node’s income or loss subsequent to the date of the acquisition as minority interest income or loss due to the put and call feature contained within the Stockholder’s Agreement.

 

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We believe that the alleged misrepresentations we identified during the course of our investigation of the FCPA Matter have nullified Retail’s put right, which was exercisable two years from the date of the acquisition. In addition, the shares underlying such put rights, if exercised would have been held in an escrow account for a period of up to one year following the date of exercise or upon the expiration of Retail’s warranty period. We have retained the right to obligate Retail to exchange all of its Latin Node common stock under the call right provided for in the stockholders agreement.

As part of the acquisition, we recorded a long-term minority interest purchase obligation representing the present value of our estimated future cost of acquiring the remaining 20% of the issued and outstanding shares of common stock of Latin Node in June of 2009. We determined that the fair value of the long-term minority interest purchase obligation amounted to $896,857 as of June 30, 2007.

The allocation of the purchase price plus direct transaction expenses is as follows:

 

Consideration paid:

  

Exchange of Note Receivable

   $ 24,538,408  

Fair value of common stock (375,000 shares)

     1,563,750  

Transaction expenses

     716,677  
        

Total consideration

   $ 26,818,835  
        

Allocated to:

  

Total current assets

   $ 14,358,218  

Property and equipment

     4,161,935  

Other

     1,469,329  

Current liabilities

     (15,412,734 )

Long-term liabilities

     (773,858 )
        

Net Tangible Assets

     3,802,890  

Value of excess of purchase price over net assets acquired allocated to:

  

Portion of purchase price charged upon acquisition

     20,626,802  

Telecommunications licenses and agreements

     3,286,000  

Minority interest purchase price obligation

     (896,857 )
        

Total

   $ 26,818,835  
        

The acquisition of Latin Node was accounted for under the purchase method of accounting. Accordingly, the consolidated financial statements include the results of operations of Latin Node beginning on June 29, 2007 through June 30, 2007.

 

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The following is the pro-forma unaudited consolidated condensed statement of operations giving effect to the Latin Node acquisition as though the transaction had occurred on the first day of the respective periods. The pro-forma results for the three and six months ended June 30, 2007 and 2006 are not necessarily indicative of the results that would have occurred had the acquisitions been completed on the first day of the respective periods.

 

     Pro-Forma Results of Operations for the  
     Three Months
Ended

June 30, 2007
    Three Months
Ended

June 30, 2006
    Six Months
Ended

June 30, 2007
    Six Months
Ended

June 30, 2006
 

Revenue

   $ 50,910,020     $ 50,276,852     $ 96,075,656     $ 101,265,357  

Cost of revenue

     42,725,039       42,699,820       80,560,723       84,010,352  

Operating expenses

     2,654,285       2,910,437       5,684,230       5,868,777  

General and administrative

     7,464,618       4,455,891       13,646,058       9,331,435  

Portion of purchase price charged upon acquisition of Latin Node

     20,626,802       —         20,626,802       —    

Depreciation and amortization

     1,198,403       1,779,770       2,619,137       3,368,145  
                                

Loss from continuing operations

     (23,759,127 )     (1,569,066 )     (27,061,294 )     (1,313,352 )

Other expenses

     (1,404,173 )     (1,092,968 )     (1,083,496 )     (2,482,064 )
                                

Net loss from continuing operations

   $ (25,163,300 )   $ (2,662,034 )   $ (28,144,790 )   $ (3,795,416 )
                                

Loss from continuing operations per share

   $ (1.17 )   $ (0.12 )   $ (1.31 )   $ (0.18 )
                                

Weighted average shares outstanding

     21,459,907       21,427,401       21,461,104       21,419,402  
                                

NOTE 7—Indebtedness

Laurus Master Fund, Ltd. Financing

On June 29, 2007, our 80% owned subsidiary, Latin Node consummated a $13.0 million debt financing transaction with Laurus. Pursuant to the terms of a Security Agreement and a Guaranty (the “Security Agreement”) executed in connection with this financing, eLandia provided an unsecured guarantee of all present and future obligations and liabilities of Latin Node to Laurus.

Laurus extended financing to Latin Node in the form of a $7.5 million Facility at an advance rate of up to 90% of Latin Node’s eligible accounts receivable. The Facility has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 2.5% per annum, subject to a floor of 10.0%. As of June 30, 2007, Latin Node had not borrowed any of the $7.5 million available.

In addition, Laurus extended financing to Latin Node in the form of a $5.5 million Secured Note secured by a first lien on all assets of Latin Node. The Secured Note has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 3.5% per annum, subject to a floor of 11.0%. As of June 30, 2007, the Wall Street Journal prime rate was 8.25%. Interest payments are due monthly over the term of the loan commencing immediately, while principal payments are due in 24 equal monthly installments beginning July 1, 2008. The terms of the Secured Note allow for optional redemption by paying 130% of the principal amount together with any accrued but unpaid interest. The Secured Note is convertible into common stock of eLandia at a price of $5.00 per share if converted within one year or convertible at a price of $5.75 per share if converted after one year. The Security Agreement is subject to a servicing fee amounting to 3.5% of the total investment amount of $13.0 million, which was paid to Laurus in advance.

In connection with the Security Agreement, Laurus was granted 533,158 warrants to purchase shares of common stock of Latin Node in an amount equal to 5.0% of Latin Node’s outstanding stock on a fully diluted basis. The warrants have a nominal exercise price. We valued the warrants issued to Laurus using the Black-Scholes pricing model thereby allocating a portion of the proceeds from the Secured Note to the warrants using the relative fair value of the debt and warrants to the actual proceeds

 

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from the Secured Note. The relative fair value of the warrant was $240,446 which we recorded as a deferred financing cost and a corresponding long-term warrant payable liability. This amount will be accreted to interest expense over the life of the Secured Note. During the three months ended June 30, 2007, $1,987 of the deferred financing cost was accreted into interest expense. As of June 30, 2007, the carrying value of the Secured Note with a face value of $5,500,000 was $5,261,541.

The warrants were valued using the Black-Scholes pricing model at $2.49 each utilizing the following factors:

 

Warrant lives

     10 years  

Volatility

     108 %

Risk-free interest rate

     5.029 %

Exercise price

   $ 0.01  

Market price

   $ 2.50  

Latin Node’s financial advisory firm, CIMA Capital Partners, LLC (“CIMA”), was paid a fee of $231,250 by Latin Node from the proceeds of the Facility. Total costs incurred to secure and close the loan, including the fee to CIMA, amounted to $885,943. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of three years. During the three months ended June 30, 2007, we amortized $2,720 into interest expense and other financing costs.

Pursuant to a registration rights agreement entered into with Laurus, we agreed to register the sale of the shares of eLandia common stock issuable to Laurus upon conversion of the Secured Note. We agreed to file the registration statement within 90 days of written demand by Laurus, which demand cannot be made prior to December 30, 2007. In addition, Latin Node entered into a registration rights agreement with Laurus pursuant to which it agreed to register the sale of the shares of Latin Node common stock issuable to Laurus upon exercise of the warrant. Latin Node agreed to file its registration statement within 30 days of the date Latin Node files and/or is required to file reports with the SEC.

In addition, in consideration for facilitating the Security Agreement with Laurus, Stanford Group Company (“SGC”), an affiliate of the Company’s majority stockholder, was paid a fee of $220,000 by eLandia and granted warrants to purchase 30,000 shares of the Company’s common stock at $5.75 per share. The $220,000 fee, along with the value of the warrant, which amounted to $83,809, has been recorded as a deferred financing cost and is amortized into interest expense and other financing costs over the life of the debt of three years. During the three months ended June 30, 2007, we amortized $562 of the fee paid and the value of the warrant granted into interest expense and other financing costs. We have valued the warrants using the Black-Scholes pricing model.

The warrants were valued using the Black-Scholes pricing model at $2.79 each utilizing the following factors:

 

Warrant lives

     7 years  

Volatility

     70 %

Risk-free interest rate

     4.684 %

Exercise price

   $ 5.00  

Market price

   $ 4.16  

Pursuant to the terms of a Shareholders’ Agreement between eLandia, Latin Node and Retail, Retail has the right to obligate eLandia to issue certain shares of common stock of eLandia to Retail in exchange for all (but not less than all) of the 2,000,000 shares of common stock of Latin Node held by Retail. If Retail exercises this right, Laurus may, but is not required to, require that eLandia issue shares of common stock of eLandia in exchange for those shares of common stock of Latin Node underlying Laurus’ warrant. The number of eLandia common shares to be issued to Retail and Laurus upon the exercise of the put right described above will be determined based on an independent appraisal of the value of Latin Node. In addition to the put right, eLandia has the right to obligate Retail to exchange all of the 2,000,000 shares of common stock of Latin Node held by Retail for shares of eLandia common stock. If eLandia exercises this call right, Laurus may, but is not required to, require that eLandia issue shares of common stock of eLandia in exchange for those shares of common stock of Latin Node underlying the warrant. As a result of the put right and the call right, we have a long-term minority interest purchase price obligation in the amount of $896,857on our unaudited interim consolidated condensed balance sheet at June 30, 2007. This amount represents the present value of our estimated future cost of acquiring the remaining 20% of the issued and outstanding shares of common stock of Latin Node in June of 2009.

The consummation of the Laurus funding and, in particular, the unsecured guaranty by eLandia of the Latin Node obligations, violates certain restrictions contained in the Continuing Guaranty eLandia executed in connection with the loan from ANZ

 

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Finance American Samoa, Inc. (“ANZ”) and gave rise to an event of default under the Loan Agreement with ANZ. Upon an occurrence of an event of default, ANZ may terminate the Loan Agreement and accelerate the loan. As of June 30, 2007, the amount outstanding to ANZ was $5,760,762. ANZ has verbally consented to the Laurus transaction and waived any event of default under the Loan Agreement. Management of eLandia is currently in the process of obtaining written confirmation of this consent and waiver. Since a formal written waiver of this event of default has not been received, $700,982 due to ANZ at June 30, 2007 has been reclassified as a current liability on our unaudited interim consolidated condensed balance sheet.

$25.3 Million Agreement—Related Party

On February 16, 2007, we entered into a Convertible Note Purchase Agreement (the “Purchase Agreement”) with Stanford International Bank Limited (“SIBL”), an affiliate of SVCH, pursuant to which we issued a Convertible Promissory Note in the amount of $25.3 million (the “Note”) and a warrant granting SIBL, and its assigns, the right to purchase up to 1,518,000 shares of common stock at $5.00 per share. The Note has a four year term, with all principal being due and payable at maturity, and bears interest at an annual rate of 10%, accruing from issuance and payable on the 24-month anniversary of the date of the Note and then quarterly thereafter. The Note will, at the option of SIBL, be convertible, in whole or in part, into shares of Series A Convertible Preferred Stock at an initial conversion price of $5.00 per share, at such time as we amend our Certificate of Incorporation to authorize the issuance of preferred stock. We are required to use the proceeds solely for the purposes of (i) providing bridge financing to Latin Node, and acquiring a controlling interest in Latin Node; (ii) refinancing the then outstanding indebtedness to SIBL in the amount of $3,300,000; and (iii) general working capital purposes. The Note is secured by the pledge of all of the shares of capital stock of Latin Node held by the Company at any time.

We valued the warrant issued to SIBL using the Black-Scholes pricing model thereby allocating a portion of the proceeds from the Note to the warrant using the relative fair value of the debt and warrant to the actual proceeds from the Note. The relative fair value of the warrant was $3,631,962 which we recorded as a discount to the Note. This amount will be accreted to interest expense over the life of the Note. From February 16, 2007 to June 30, 2007, $340,496 of the discount was accreted into interest expense, of which $226,998 was recorded during the three months ended June 30, 2007. As of June 30, 2007, the carrying value of the Note, with a face value of $25,300,000, was $22,008,534. As of June 30, 2007, we have accrued $1,040,773 of interest expense related to this Note, which includes interest previously accrued on the $3,300,000 loan.

In connection with facilitating the transaction, SGC, an affiliate of SIBL, was granted 200,000 warrants exercisable within 7 years with an exercise price of $5.00 per share. We have valued these warrants at $558,728 using the Black-Scholes pricing model. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of four years. From February 16, 2007 to June 30, 2007, we have amortized $52,381 into interest expense and other financing costs, of which $34,921 was recorded during the three months ended June 30, 2007.

The warrants were valued using the Black-Scholes pricing model at $2.79 each utilizing the following factors:

 

Warrant lives

     7 years  

Volatility

     70 %

Risk-free interest rate

     4.684 %

Exercise price

   $ 5.00  

Market price

   $ 4.16  

In addition to the warrants, we paid SGC a $2,000,000 fee, of which $1,400,000 was for facilitating the transaction. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of four years. From February 16, 2007 to June 30, 2007, we amortized $131,250 into interest expense and other financing costs, of which $87,500 was recorded during the three months ended June 30, 2007. The remaining $600,000 was recorded as a deferred acquisition cost in connection with the Latin Node acquisition.

We agreed to register the sale of the shares of common stock issuable upon exercise of the warrant and conversion of the Note and preferred stock pursuant to the terms of a Registration Rights Agreement entered into simultaneously with the Convertible Note Purchase Agreement. In the event that (i) the registration statement is not filed by us in a timely manner; or (ii) such registration statement is not maintained as effective for the period set forth in the Registration Rights Agreement, then we will issue to each of the holders as of the first day of such registration default and for every consecutive quarter in which such registration default is occurring, as liquidated damages, and not as a penalty, seven (7) year warrants exercisable at a price per

 

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share equal to the then applicable exercise price under the warrants to purchase an aggregate amount of shares of common stock (“Default Warrants”) equal to 10% of the amount of warrants initially issued to each holder until such corresponding registration default no longer exists; provided however, that the issuance of such Default Warrants shall not relieve us from our obligations to register the registrable securities.

$5.0 Million Agreement—Related Party

On June 25, 2007, we closed on a second Convertible Note Purchase Agreement (the “Second Purchase Agreement”) with SIBL, pursuant to which we issued a Convertible Promissory Note in the amount of $5.0 million (the “Second Note”) and a warrant granting SIBL, and its assigns, the right to purchase up to 300,000 shares of common stock at $5.00 per share. The Second Note has a four year term, with all principal being due and payable at maturity, and bears interest at an annual rate of 10%, accruing from issuance and payable on the 24-month anniversary of the date of the Second Note and then quarterly thereafter. The Second Note will, at the option of SIBL, be convertible, in whole or in part, into shares of Series A Convertible Preferred Stock at an initial conversion price of $5.00 per share, at such time as we amend our Certificate of Incorporation to authorize the issuance of preferred stock. We are required to use the proceeds solely for the funding of Latin Node. The Second Note is secured by the pledge of all of the shares of capital stock of Latin Node held by the Company at any time.

We valued the warrant issued to SIBL using the Black-Scholes pricing model thereby allocating a portion of the proceeds from the Second Note to the warrant using the relative fair value of the debt and warrant to the actual proceeds from the Second Note. The relative fair value of the warrant was $717,779 which we recorded as a discount to the Second Note. This amount will be accreted to interest expense over the life of the Second Note. During the three months ended June 30, 2007, $14,954 of the discount was accreted into interest expense. As of June 30, 2007, the carrying value of the Second Note with a face value of $5,000,000 was $4,297,175. As of June 30, 2007, we have accrued $14,954 of interest expense related to this note.

In connection with facilitating the transaction, SGC was granted 50,000 warrants exercisable within 7 years with an exercise price of $5.00 per share. We have valued these warrants at $139,682 using the Black-Scholes pricing model. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of four years. During the three months ended June 30, 2007, we have amortized $2,910 into interest expense and other financing costs.

The warrants were valued using the Black-Scholes pricing model at $2.79 each utilizing the following factors:

 

Warrant lives

     7 years  

Volatility

     70 %

Risk-free interest rate

     4.684 %

Exercise price

   $ 5.00  

Market price

   $ 4.16  

In addition to the warrants, we paid SGC a $500,000 fee for facilitating the transaction. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of four years. During the three months ended June 30, 2007, we amortized $10,417 into interest expense and other financing costs.

We agreed to register the sale of the shares of common stock issuable upon exercise of the warrant and conversion of the Second Note and preferred stock pursuant to the terms of a Registration Rights Agreement entered into simultaneously with the Convertible Note Purchase Agreement. In the event that (i) the registration statement is not filed by us in a timely manner; or (ii) such registration statement is not maintained as effective for the period set forth in the Registration Rights Agreement, then we will issue to each of the holders as of the first day of such registration default and for every consecutive quarter in which such registration default is occurring, as liquidated damages, and not as a penalty, seven (7) year warrants exercisable at a price per share equal to the then applicable exercise price under the warrants to purchase an aggregate amount of shares of common stock equal to 10% of the amount of warrants initially issued to each holder until such corresponding registration default no longer exists; provided however, that the issuance of such Default Warrants shall not relieve us from our obligations to register the registrable securities.

 

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Summary of Outstanding Debt Obligations

The following table summarizes all of our outstanding debt obligations at June 30, 2007 and December 31, 2006:

 

     June 30, 2007    December 31, 2006
Network Services Limited is obligated under a capital lease obligation with monthly installments including interest of $390 at a rate of 10% which was paid in June 2007    $ —      $ 1,895
Datec Samoa Limited is obligated under various capital lease agreements with monthly installments of $1,868 including interest at 14.50% per annum. The final payments are due on various dates through October 2008      18,969      34,127
Datec Fiji Limited is obligated under various capital lease agreements with monthly installments of $9,973 including interest ranging from 8% to 10% per annum. The final payments are due on various dates through February 2010      81,906      137,128
Datec Vanuatu is obligated under a loan agreement with monthly installments of $967 including interest at 13.50% per annum. The final payments are due during the first quarter of 2010      26,098      —  
Pursuant to a Note Purchase Agreement, we secured a loan from an affiliate of our majority stockholder in the amount of $2,300,000 (increased to $3,300,000 on July 24, 2006). Interest payments are due and payable on a quarterly basis commencing on April 1, 2006. The loan bears interest at a rate of 8% and is payable on December 31, 2007 or upon the occurrence of an equity or debt financing in excess of $8,000,000. Such note was refinanced pursuant to the $25,300,000 Convertible Promissory Note discussed below      —        3,300,000
AST is obligated under a Loan Agreement with ANZ Finance American Samoa, Inc. and ANZ America Samoa Bank (collectively, “ANZ”), for $5,800,000. Of this amount, $800,000 is in the form of a term loan and $5,000,000 is in the form of a revolving loan. The term loan bears interest at the rate of 1.25% above the Prime Rate, or the base rate on corporate loans posted by at least 75% of the United States’ 30 largest banks, commonly known as the U.S. Prime Rate of Interest as published from time to time in the Wall Street Journal. The revolving loan bears interest at the rate of 1.0% above the Prime Rate and is subject to certain financial covenants. Payments of principal and interest under the term loan in the amount of $10,940 are due on the first day of each month. The revolving loan is due on October 30, 2007 and the term loan is due on October 30, 2015. AST has pledged all of its assets to secure this obligation. The proceeds from the ANZ loan were used to repay the amounts due under AST’s previously outstanding line of credit with the Bank of Hawaii and for working capital. As of December 31, 2006, we were not in compliance with such covenants, however, a waiver was granted by ANZ on April 17, 2007. The consummation of the Laurus funding and, in particular, the guaranty by eLandia of the Latin Node obligations gave rise to an event of default with ANZ as of June 30, 2007. ANZ has verbally consented to the Laurus transaction and has waived any event of default under the Loan Agreement. Management is currently in the process of obtaining written confirmation of this consent and waiver. Since a formal written waiver of this event of default has not been received, $700,892 due to ANZ at June 30, 2007 has been reclassified as a current liability on our unaudited interim consolidated condensed balance sheet      5,760,762      4,840,416
Pursuant to a Convertible Note Purchase Agreement, on February 16, 2007 we issued a convertible promissory note with a face value of $25.3 million to an affiliate of our majority stockholder. The note has a 4 year term with all principal being due and payable at maturity. Interest accrues at an annual rate of 10% and is payable on the 24 month anniversary of the note and then quarterly thereafter      25,300,000      —  
Pursuant to a Convertible Note Purchase Agreement, on June 25, 2007 we issued a convertible promissory note with a face value of $5.0 million to an affiliate of our majority stockholder. The note has a 4 year term with all principal being due and payable at maturity. Interest accrues at an annual rate of 10% and is payable on the 24 month anniversary of the note and then quarterly thereafter      5,000,000      —  

 

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     June 30, 2007    December 31, 2006
On June 29, 2007, our 80% owned subsidiary, Latin Node consummated a $13.0 million debt financing transaction with Laurus. Laurus extended financing to Latin Node in the form of a $7.5 million Facility based on accounts receivable. The Facility has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 2.5% per annum, subject to a floor of 10.0%. Latin Node has not borrowed any of the $7.5 million available under the Facility as of June 30, 2007. In addition, Laurus extended financing to Latin Node in the form of a $5.5 million Secured Note secured by a first lien on all assets of Latin Node. The Secured Note has a three year term and accrues interest at a rate equal to the Wall Street Journal Prime rate plus 3.5% per annum, subject to a floor of 11.0%. Principal payments of $229,167 are due in 24 equal monthly installments beginning June 29, 2008 and continuing through July 29, 2010      5,500,000      —  
Latin Node is obligated under various capital lease agreements with monthly installments of up to $12,091 ($53,105 in the aggregate) including interest at rates ranging from 5.169% to 16.695% per annum. The final payments are due on various dates through June 2010      1,348,707      —  
Latin Node is obligated under a note payable to Dimension Data, collateralized by equipment, payable in monthly installments of $1,746, including 12% interest. The note matures on September 15, 2008      27,680      —  
Latin Node is obligated under a note payable to Cisco Systems Capital Corporation, collateralized by equipment, payable in monthly installments of $25,000 plus interest at the prime rate plus 2%. The note matures on July 17, 2007 and is personally guaranteed by the President of Latin Node      50,000      —  
             

Sub-Total

     43,114,122      8,313,566
Unamortized discounts on notes payable      4,083,698      —  
             
Total notes payable and capital lease obligations, net of unamortized discounts      39,030,424      8,313,566
Less: current portion of long-term debt and capital lease obligations      6,495,072      4,246,019
             
Long-Term Debt and Capital Lease Obligations    $ 32,535,352    $ 4,067,547
             

 

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Maturities of notes payable and capital lease obligations are as follows:

 

For the Years
Ending December 31,

   Unrelated Party    Related Party    Total
2007    $ 6,256,682    $ —      $ 6,256,682
2008      1,978,802      —        1,978,802
2009      3,097,505      —        3,097,505
2010      1,481,133      —        1,481,133
2011         30,300,000      30,300,000
Thereafter      —        —        —  
                    
Total    $ 12,814,122    $ 30,300,000    $ 43,114,122
                    

The capital lease obligations are collateralized by underlying vehicles and equipment.

NOTE 8—Commitments and Contingencies

Bank Overdraft Facilities

As of June 30, 2007 and December 31, 2006, we had amounts overdrawn with various banks in the amount of $1,874,830 and $657,281, respectively. These amounts are included in accounts payable on the unaudited interim consolidated condensed balance sheets. All overdraft facilities with the exception of the overdraft facility at Datec PNG were repaid and cancelled during the first quarter of 2007. The remaining bank overdraft facility with a maximum borrowing availability of approximately $2,390,000 incurs interest at a rate of 6.70%. Datec PNG’s overdraft facility is a revolving facility with no fixed repayment date and is secured by the assets of Datec PNG.

Concentration of Credit Risk

In the normal course of business, we incurred credit risk from accounts receivable and transactions with financial institutions. We have a credit policy which is used to manage the risk. As part of this policy, limits on exposure with counterparties have been set and are monitored on a regular basis. Anticipated bad debt losses have been provided for in the allowance for doubtful accounts.

During the three and six months ended June 30, 2007 approximately 22% and 20%, respectively, of our cost of sales were purchased from one company. During the three and six months ended June 30, 2006 approximately 13% and 17%, respectively, of our cost of sales were purchased from one company.

Operating Lease Agreements

We lease certain cell towers, satellite and networking sites, office and warehouse space as well as machinery, vehicles, data processing and other equipment under lease agreements that expire at various dates through March 2019. Certain leases have renewal options at reduced rates and provisions requiring us to pay maintenance, property taxes and insurance. Generally, all rental payments are fixed. We are leasing office and retail facilities under lease agreements that expire at various dates through March 31, 2019. For the three and six months ended June 30, 2007 and 2006, the rent expense for all operating leases was $340,768 and $620,528, and $743,673 and $611,072, respectively. Future minimum commitments on the above agreements are as follows:

 

For the Years Ending

December 31,

   Related Party    Unrelated Party    Total

2007

   $ 356,579    $ 489,836    $ 846,415

2008

     648,242      417,847      1,066,089

2009

     682,860      296,540      979,400

2010

     173,936      211,850      385,786

2011

     —        179,226      179,226

Thereafter

     —        916,518      916,518
                    

Total

   $ 1,861,617    $ 2,511,817    $ 4,373,434
                    

 

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Employment Agreements

Effective January 1, 2007, we entered into an Employment Agreement with our President of Business Development and Vice President. The employment agreement has an initial term of five years but will automatically be extended for successive two-year terms unless either party gives written notice no less than one hundred twenty days prior to the end of the term. The President of Business Development’s initial base salary is $210,000 with the potential for an annual performance bonus in accordance with criteria set by our Board of Directors. In the event of a change in control, the President of Business Development shall have the right to terminate his employment under the employment agreement by giving 30 days written notice at any time within one year of the change in control. In the event of such a termination, the President of Business Development shall be entitled to severance in an amount equal to his annual base salary for twelve months. In addition, we will waive any lapse provisions of stock options or restricted stock grants made by us that have vested.

Effective February 7, 2007, we entered into an Employment Agreement with our Chief Operating Officer—Pacific Operations and Vice President. The employment agreement has an initial term of five years but will automatically be extended for successive two-year terms unless either party gives written notice no less than one hundred twenty days prior to the end of the term. The Chief Operating Officer’s initial base salary is $210,000 with the potential for an annual performance bonus in accordance with criteria set by our Board of Directors. In the event of a change in control, the Chief Operating Officer shall have the right to terminate his employment under the employment agreement by giving 30 days written notice at any time within one year of the change in control. In the event of such a termination, the Chief Operating Officer shall be entitled to severance in an amount equal to his annual base salary for twelve months. In addition, we will waive any lapse provisions of stock options or restricted stock grants made by us that have vested.

Effective April 23, 2007, we entered into an Employment Agreement with our General Counsel and Senior Vice President (“General Counsel”). The employment agreement has an initial term of one year and is renewable upon mutual agreement for subsequent one-year terms. The General Counsel’s initial base salary is $250,000 with the potential for an annual performance bonus in accordance with criteria set by our Board of Directors. In the event that a change in control of the Company shall occur at any time during the term of the employment agreement, under certain circumstances, the General Counsel shall be entitled to payment of salary for the remainder of term currently in effect.

The following table summarizes the employment agreements currently in effect with our key executives:

 

Position

   Effective Date    Term    Base Annual
Salary

Chief Financial Officer

   July 1, 2005    5 years    $ 210,000

Chief Technology Officer (AST) (to be provided by Level Best, Inc., a related party)

   January 31, 2006    3 years    $ 179,375

President (AST)

   February 1, 2006    3 years    $ 179,375

Chief Executive Officer

   August 28, 2006    4 years    $ 300,000

President of Business Development

   January 1, 2007    5 years    $ 210,000

Chief Operating Officer — Pacific Operations

   February 7, 2007    5 years    $ 210,000

General Counsel and Senior Vice President

   April 23, 2007    1 year    $ 250,000

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 peculiar to each country. With respect to any particular country, these risks may include:

 

   

Expropriation and nationalization of our assets or 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

 

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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

 

   

Trade restrictions and economic embargoes imposed by the United States and other countries

Fiji

Over the past 20 years, Fiji has been the subject of considerable political tension between ethnic Fijians who make up approximately one-half of the population and ethnic Indians who make up somewhat less than one-half. In December 2006, Fiji’s military commander seized control of the country, marking the fourth coup in two decades. The military takeover adds to concerns about political instability in Fiji and other Pacific Island Nations. These concerns may affect travel in Fiji and other Pacific Island Nations, currency exchange rates and the overall economic climate. These political events and any subsequent developments may have a negative impact on our business.

Foreign Currency

We did not enter into any forward exchange contracts during the six months ended June 30, 2007.

Pending Legal Matters

On February 6, 2006, an action against the Company was commenced in the Sixth Judicial Circuit Court in Pasco County, Florida by Cornerstone Businesses, Inc. In a complaint related to a subcontractor agreement between Cornerstone Businesses, Inc. and Midwest Cable Communications of Arkansas, Inc., Cornerstone Businesses, Inc. seeks relief based upon claims of breach of contract, tortuous interference with a contractual right, tortuous interference with a business relationship and fraud and negligent misrepresentation. The complaint seeks unspecified monetary damages, including pre-judgment costs and expenses. It is not possible at this time to predict the outcome of the legal matter and what effects, if any, it would have on our financial statements. Therefore, we have not recorded any amounts in its financial statements related to the possible outcome of this matter.

During 2003, Latin Node, our recently acquired 80% owned subsidiary, disputed certain billing transactions from a Colombian telecommunications provider. In September 2003, Latin Node filed a lawsuit against Citibank NA (“Citibank”) regarding a letter of credit (“LC”) in the amount of $350,000 held by Citibank in favor of the Colombian telecommunications provider. In addition, Latin Node filed a motion to prevent the payment of the LC and requested the release of the Certificate of Deposit held by Citibank. Latin Node has been attempting to negotiate a settlement with the Colombian telecommunications provider. As of June 30, 2007, the funds are still being held by Citibank. The Company has a reserve for this potential liability amounting to $350,000 on the unaudited interim consolidated condensed balance sheet. In addition, the Company has a Certificate of Deposit in the amount of $350,000 at Citibank as security for the LC. This amount is included in restricted cash on the unaudited interim consolidated condensed balance sheet. The final outcome may differ from this amount.

From time to time, we are involved in various other legal matters. At June 30, 2007, management does not believe that any pending matters (except as disclosed above) are material to the unaudited interim consolidated condensed financial statements.

NOTE 9—Uncertain Tax Positions

In July 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB 109 (“FIN 48”), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our unaudited interim consolidated condensed financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. We adopted FIN 48 on January 1, 2007. The impact of our reassessment of our tax positions in accordance with the requirements of FIN 48 did not have a material impact on our unaudited interim consolidated condensed financial statements.

We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes on our consolidated condensed statements of operations. Our classification of interest and penalties did not change as a result of adopting FIN 48.

 

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There have not been any material changes in our liability for unrecognized tax benefits, including interest and penalties, during the six months ended June 30, 2007. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

NOTE 10—Related Party Transactions

Latin Node, our 80% owned subsidiary, has a 50% interest in DSR Comunicaciones, S.A. (“DSR”), a telecommunications company located in Argentina. Such investment amounted to $348,014, at June 30, 2007. In addition, we have a $139,052 receivable from DSR at June 30, 2007, which is classified as Due from Affiliates on our unaudited interim consolidated condensed balance sheet.

On February 14, 2003, AST had entered into a management agreement with Level Best, Inc. (“LBI”). Under the terms of the agreement, LBI was to provide day to day management services to AST for a period of three years. Effective January 31, 2006, AST amended and restated its management agreement with LBI. Under the terms of the new agreement, LBI supplied us with our Chief Operating Officer until January 31, 2007 and is to supply us with our Chief Technology Officer until January 31, 2009. For the three and six months ended June 30, 2007 and 2006, management fees charged under this agreement amounted to $47,244 and $109,123, and $82,987 and $166,671, respectively.

During February 2003, AST entered into a consulting agreement with SVCH for a three-year term beginning April 1, 2003. Under the terms of the agreement, SVCH provided us with general business consulting services including strategic planning, expansion opportunities and financing matters. Consulting fees payable under this agreement were $40,000 per annum. This agreement was terminated during February 2006. For the six months ended June 30, 2006, such consulting fees amounted to approximately $6,600.

For the three and six months ended June 30, 2007 and 2006, AST paid $46,724 and $107,803, and $11,981 and $42,020 respectively, for lease payments and legal fees to related parties.

Effective January 4, 2007, we entered into an agreement with SGC, an affiliate of our majority stockholder, whereby SGC will serve as (i) our exclusive financial advisor in connection with possible merger, acquisition or other form of entity combination involving eLandia, and (ii) our exclusive placement agent in the proposed placement of our securities. As compensation for services to be provided, we agreed to pay SGC a non-refundable monthly retainer of $15,000 for the term of the engagement, as well as reimburse SGC for all reasonable out of pocket expenses. In addition, we agreed to pay SGC a placement fee equal to 7% of the gross proceeds of any equity placement and 4% of the gross proceeds of any debt placement (in either case, a “Placement Fee”), as well as warrants to purchase shares representing a percentage of the securities sold in connection with the placement: 5% in connection with an equity placement and 2.5% in connection with a debt placement. The warrants will range from five to seven years, will be exercisable at the exercise price or conversion price of the securities sold and will contain standard provisions regarding cashless exercise, anti-dilution and other customary terms. In connection with a business combination, we agreed to pay SGC an advisory fee equal to 3% of the consideration paid or received in connection with the business combination. During the six months ended June 30, 2007, in connection with the Laurus financing and the funding of the Latin Node acquisition, we paid SGC $2.72 million in cash, issued 250,000 warrants to purchase eLandia common stock at $5.00 per share, and issued 30,000 warrants to purchase eLandia common stock at $5.75 per share. We have valued these warrants using the Black-Scholes pricing model. This amount has been recorded as deferred financing costs and is amortized into interest expense and other financing costs over the life of the debt of four years.

During February 2007, we issued 27,000 shares of common stock pursuant to a director compensation plan adopted by the Board of Directors during December 2005. Such shares were issued in 2007 to the six non-management Board members in consideration for their services as members of the Board and its committees. We recorded a charge for non-cash compensation expense amounting to $112,590 based on the fair market value at the date of issuance.

On February 16, 2007, we entered into a Convertible Note Purchase Agreement with SIBL pursuant to which we issued a Convertible Note Promissory Note in the amount of $25.3 million and a warrant to purchase shares of our common stock. Purchase Agreement. On June 25, 2007, we closed on a second Convertible Note Purchase Agreement with SIBL pursuant to which we issued a Convertible Note Promissory Note in the amount of $5.0 million and a warrant to purchase shares of our common stock.

During the three months ended June 30, 2007, we paid $90,000 to a director for services rendered for his extensive business experience and professional relationships in Fiji and other Pacific Island Nations. We have in the past and may again in the future engage this director on a consulting basis to assist with special projects.

 

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During June 2007, we issued 54,001 shares of common stock pursuant to a stock purchase agreement between us and the Chief Financial Officer dated July 29, 2005. Accordingly, we recorded a charge for non-cash compensation expense amounting to $225,185 based on the fair market value at the date of issuance.

NOTE 11—Segment Information

We operate and manage our operations based on the following segments:

 

   

Papua New Guinea;

 

   

Fiji and other Pacific Island nations;

 

   

The Samoas;

 

   

Central and South America; and

 

   

North America, including the Caribbean.

Below is a summary of the results by segment for the three months ended June 30, 2007:

 

     Papua New
Guinea
    Fiji and
Other
Pacific
Island
Nations
    Samoas     Central
and South
America**
    North
America *
    Total  

Revenues

   $ 9,230,490     $ 2,616,251     $ 2,663,842     $ 730,049     $ —       $ 15,240,632  

Minority interest in net income of subsidiaries

     (300,707 )     —         —         —         —         (300,707 )

Net income (loss)

     168,176       (383,512 )     238,842       (8,746 )     (22,585,618 )     (22,570,858 )

Depreciation and amortization

     335,869       97,207       270,510       1,099       2,373       707,058  

Amortization of intangible assets

     258,420       79,333       107,014       —         —         444,767  

Net interest expense

     (54,320 )     (57,995 )     (66,641 )     (3,246 )     (475,395 )     (657,597 )

Identifiable assets

     22,884,404       7,071,731       11,185,870       24,935,785       5,689,991       71,767,781  

Below is a summary of the results by segment for the six months ended June 30, 2007:

 

     Papua New
Guinea
    Fiji and
Other
Pacific
Island
Nations
    Samoas     Central
and South
America**
    North
America *
    Total  

Revenues

   $ 17,211,383     $ 5,293,341     $ 5,607,524     $ 730,049     $ —       $ 28,842,297  

Minority interest in net income of subsidiaries

     (514,895 )     —         —         —         —         (514,895 )

Net income (loss)

     123,946       (418,939 )     627,324       (8,746 )     (22,630,548 )     (22,306,963 )

Depreciation and amortization

     631,196       183,425       535,638       1,099       8,949       1,360,307  

Amortization of intangible assets

     516,840       158,666       214,028       —         —         889,534  

Net interest expense

     (55,903 )     (140,967 )     (146,924 )     (3,246 )     (937,144 )     (1,284,184 )

Identifiable assets

     22,884,404       7,071,731       11,185,870       24,935,785       5,689,991       71,767,781  

 

* Includes a charge upon acquisition of Latin Node of $20,626,802 during the three and six months ended June 30, 2007 and a gain on sale of a telecommunications license held for sale of $1,842,875 during the six months ended June 30, 2007.
** Represents results of operations for the two days from June 29, 2007 to June 30, 2007.

 

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Below is a summary of the results by segment for the three months ended June 30, 2006:

 

     Papua New
Guinea
   Fiji and
Other Pacific
Island Nations
    Samoas     North
America
    Total  

Revenues

   $ 7,840,350    $ 2,453,056     $ 1,937,214     $ —       $ 12,230,620  

Minority interest in net income of subsidiaries

     328,407      —         —         —         328,407  

Net income (loss)

     32,426      (423,865 )     (319,648 )     (940,689 )     (1,651,776 )

Depreciation and amortization

     268,784      86,544       240,666       11,780       607,674  

Amortization of intangible assets

     297,769      216,548       105,426       —         619,743  

Net interest expense

     1,712      (52,730 )     (60,649 )     (38,775 )     (150,442 )

Identifiable assets

     18,291,992      11,412,052       10,943,517       2,610,177       43,257,738  

Below is a summary of the results by segment for the six months ended June 30, 2006:

 

     ***Papua
New Guinea
   ***Fiji and
Other Pacific
Island Nations
    Samoas     North
America
    Total  

Revenues

   $ 12,364,088    $ 4,088,072     $ 3,882,668     $ —       $ 20,334,828  

Minority interest in net income of subsidiaries

     552,208      —         —         —         552,208  

Net income (loss)

     56,057      (777,363 )     (361,930 )     (1,826,836 )     (2,910,072 )

Depreciation and amortization

     439,294      142,142       477,932       21,189       1,080,557  

Amortization of intangible assets

     496,283      360,913       175,708       —         1,032,904  

Net interest expense

     1,369      (83,924 )     (108,503 )     (180,269 )     (371,327 )

Identifiable assets

     18,291,992      11,412,052       10,943,517       2,610,177       43,257,738  

 

*** Represents results of operations from February 1, 2006 to June 30, 2006.

NOTE 12—Subsequent Events

In July 2007, the Company entered into a Purchase Agreement with Digicel, Inc. for the sale of its wireless telecommunications license for the U.S. Virgin Islands. The negotiated sales price is $1,300,000 and is payable in cash upon closing. Closing of the transaction is subject to, among other things, approval of the FCC. If FCC approval is obtained and all other conditions to closing are satisfied, management anticipates that this transaction would be consummated in the first quarter of 2008.

In July 2007, the Board of Directors authorized the creation of 35 million shares of Preferred Stock, of which a portion will be designated Series A Convertible Preferred Stock, pursuant to our agreement with SIBL. The effectiveness of this action is currently pending stockholder approval.

In July 2007, the Board of Directors authorized the creation of the 2007 Stock Option and Incentive Plan, which authorizes the issuance of equity grants of up to 2,606,700 shares to certain key employees. The effectiveness of this action is currently pending stockholder approval.

In August 2007, the Chief Executive Officer of Latin Node was granted an option to purchase 130,000 shares of Latin Node common stock at an exercise price of $2.00 per share. The options are exercisable for a period of 4 years.

 

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ITEM 2. MANAGEMENT’S 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 management’s 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’s Annual Report on Form 10-K filed with the SEC on April 18, 2007. 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.

Items Amended by this Form 10-Q/A

This Amendment No. 1 (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 as originally filed with the U. S. Securities and Exchange Commission (“SEC”) on August 20, 2007 (the “Original Form 10-Q”) amends certain sections of the Original Form 10-Q to reflect the restatement of our unaudited interim consolidated condensed financial statements (and related disclosures) as of June 30, 2007 and for the three and six months ended June 30, 2007 as described below. With this Form 10-Q/A, we are amending:

 

   

Part I, Item 1 “Unaudited Financial Statements;”

 

   

Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”

This Form 10-Q/A also amends Part II, Item 6 “Exhibits,” and includes updated certifications from our Chief Executive Officer and Chief Financial Officer required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

This Form 10-Q/A makes only the changes described above and does not modify or update such items in any other respect, or any other items or disclosures presented in the Original Form 10-Q. Further, this Form 10-Q/A does not reflect any other events occurring after August 20, 2007, the date we filed the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC since the filing date of the Original Form 10-Q, including our Current Reports on Form 8-K and the Annual Report on Form 10-K for the year ended December 31, 2007.

Restatement of Prior Period Financial Statements

With the filing of this Form 10-Q/A, we are filing amendments to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, as originally filed with the SEC, to restate our unaudited interim consolidated condensed financial statements. In addition, we intend to file an amended Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2007. For this reason, the unaudited interim consolidated condensed financial statements and related financial information contained in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 should no longer be relied upon.

Background of the Restatement

Subsequent to the filing of our unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 filed with the SEC on August 20, 2007, information was discovered that suggested possible misstatements in connection with the recording of the acquisition of Latin Node, Inc. and Subsidiaries (“Latin Node”) on June 28, 2007.

As disclosed in our Current Report on Form 8-K/A filed with the SEC on September 14, 2007, we engaged in a review of Latin Node’s internal controls and legal compliance procedures within its finance and accounting department as a part of our acquisition and integration of Latin Node. As a result of this review, certain past payments in Central America were identified as having been made in the absence of adequate records and controls for a U.S. public company. We have initiated an internal investigation to determine whether any direct or indirect payments by Latin Node prior and subsequent to its acquisition by us were made in violation

 

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of the Foreign Corrupt Practices Act (“FCPA”). The internal investigation of the FCPA matter is being conducted by a Special Committee of the Board of Directors. The Special Committee has retained independent legal counsel to assist in the investigation of the FCPA matter.

The internal investigation has preliminarily revealed that certain payments from Latin Node may have been made in violation of the FCPA. Based on these preliminary results, Latin Node and/or eLandia may be subject to fines and penalties assessed by governmental authorities, and will incur substantial expenses associated with investigating the FCPA matter, responding to government inquiries and other matters arising from the acquisition of Latin Node. The adjustment to effect the restatement, which has been recorded effectively as of June 30, 2007, relates to the reallocation of the $26,818,835 purchase price along with the revaluation of certain warrants issued in connection with obtaining debt as part of the acquisition. We conducted a valuation of the acquired business of Latin Node, including the assets acquired and the liabilities assumed in order to evaluate whether the purchase price paid for Latin Node represented fair value. This valuation considered the alleged misrepresentations by the sellers about the FCPA matter, as well as the financial impact of the Latin Node management restructuring undertaken as a result of the investigation. We determined that the $26.8 million purchase price was approximately $20.6 million in excess of the fair value of the net assets acquired from Latin Node mostly due to the cost of the FCPA investigation, the resulting fines and penalties to which it may be subject, the termination of Latin Node’s senior management, and the resultant loss of business. Therefore, we allocated approximately $20.6 million of the purchase price as a direct charge to operations during the quarter ended June 30, 2007.

Effective November 19, 2007, the Board of Directors of Latin Node terminated the employment of the Chief Executive Officer of Latin Node and certain other members of senior management. These terminations are part of a restructuring of the senior management of Latin Node.

The internal investigation of the FCPA matter has not been completed, and accordingly, there is no assurance that additional adjustments will not be necessary and that such adjustments, which could include further reductions in the carrying values of Latin Node’s assets, will not be material.

 

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Summary of the Effects of the Restatement

The effect of the restatement on our previously issued unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2007 is as follows:

 

     Restated Balance Sheet as of June 30, 2007  
     As Reported     Adjustments     Restated  

ASSETS

      

Total Current Assets

   $ 29,306,238       2,095,600     $ 31,401,838  

Telecommunications Licenses and Agreements

     2,344,000       1,286,000       3,630,000  

Deferred Financing Costs

     3,656,255       149,052       3,805,307  

Goodwill

     35,431,661       (22,576,961 )     12,854,700  

Other Long-Term Assets

     20,075,936         20,075,936  
                        

TOTAL ASSETS

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Total Current Liabilities

   $ 32,633,880       $ 32,633,880  
                  

Warrant Liability

     1,072,887       (832,441 )     240,446  

Minority Interest Purchase Price Obligation—Latin Node

     4,003,824       (3,106,967 )     896,857  

Notes Payable, Net of Discount

     4,429,100       981,493       5,410,593  

Other Long-Term Liabilities

     28,609,269         28,609,269  
                        

Total Long-Term Liabilities

     38,115,080       (2,957,915 )     35,157,165  
                        

Total Liabilities

     70,748,960       (2,957,915 )     67,791,045  
                        

Minority Interest

     1,127,216         1,127,216  
                  

Accumulated Deficit

     (25,378,936 )     (20,626,802 )     (46,005,738 )

Other Stockholders’ Equity

     44,316,850       4,538,408       48,855,258  
                        

Total Stockholders’ Equity

     18,937,914       (16,088,394 )     2,849,520  
                        

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 90,814,090     $ (19,046,309 )   $ 71,767,781  
                        

 

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     Restated Statements of Operations  
     Three Months Ended June 30, 2007     Six Months Ended June 30, 2007  
     As Reported     Adjustments     Restated     As Reported     Adjustments     Restated  

Revenue

   $ 15,240,632       —       $ 15,240,632     $ 28,842,297       —       $ 28,842,297  
                                                
       —             —      

Cost of Revenue

     8,314,323       —         8,314,323       15,272,073       —         15,272,073  

Operating Expenses

     2,472,379       —         2,472,379       4,976,115       —         4,976,115  

General and Administrative Expenses

     4,083,681       —         4,083,681       7,782,841       —         7,782,841  

Portion of Purchase Price Charged upon Acquisition of Latin Node

     —         20,626,802       20,626,802       —         20,626,802       20,626,802  

Depreciation and Amortization

     707,058       —         707,058       1,360,307       —         1,360,307  

Amortization of Intangible Assets

     444,767       —         444,767       889,534       —         889,534  
                                                

Total Costs and Expenses

     16,022,208       20,626,802       36,649,010       30,280,870       20,626,802       50,907,672  
                                                

Operating Loss

     (781,576 )     (20,626,802 )     (21,408,378 )     (1,438,573 )     (20,626,802 )     (22,065,375 )

Other (Expense) Income

     (1,174,596 )     —         (1,174,596 )     (264,380 )       (264,380 )
                                                

Net Loss from Continuing Operations

     (1,956,172 )     (20,626,802 )     (22,582,974 )     (1,702,953 )     (20,626,802 )     (22,329,755 )

Income from Discontinued Operations

     12,116       —         12,116       22,792       —         22,792  
                                                

Net Loss

   $ (1,944,056 )   $ (20,626,802 )   $ (22,570,858 )   $ (1,680,161 )   $ (20,626,802 )   $ (22,306,963 )
                                                

Net Loss per Share

   $ (0.15 )     $ (1.72 )   $ (0.13 )     $ (1.70 )

Weighted Average Basic and Diluted Shares Outstanding

     13,093,149         13,093,149       13,090,248         13,090,248  
                                    

Vendor Dispute

As a result of the investigation, we also discovered that one of Latin Node’s primary vendors has disputed the amounts owed to it by Latin Node, claiming that it was underpaid by approximately $4.4 million. This vendor accounted for approximately 16.1% of Latin Node’s 2007 cost of sales and has terminated its contract with Latin Node effective as of November 2, 2007. Latin Node has identified and is currently obtaining services from other vendors that are providing it with substantially similar services. We are currently reviewing the basis for this claim and we intend to vigorously defend any legal claim that may arise from these disputed amounts.

 

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Introduction

On January 31, 2006, we consummated a merger with AST Telecom, LLC (“AST”), pursuant to which we acquired AST, a provider of wireless telephone services in American Samoa via its wireless network, operating under the brand name Blue Sky Communications. This acquisition was accounted for as a common control merger (similar to a pooling) for the majority membership interested owned by Stanford Venture Capital Holdings (“SVCH”), our major stockholder. The remaining 35% interest, acquired on January 31, 2006, is accounted for using the purchase method of accounting. Accordingly, the financial information contained within this report and the discussion below both include the operations of AST from the beginning of each respective reporting period.

On February 1, 2006, we consummated a plan of arrangement under the laws of New Brunswick, Canada, whereby we acquired the operating subsidiaries of Datec Group, Ltd. (“Datec”). This acquisition has been accounted for as a purchase business combination. As a result, our unaudited interim consolidated condensed financial statements included elsewhere within this report include the operations of Datec for the three and six months ended June 30, 2007 and for the period from February 1, 2006, the effective date of the acquisition, through June 30, 2006. However, for purposes of comparison, the discussion below includes the financial information of Datec (on a pro-forma basis) as if the acquisition had been completed on January 1, 2006. The information which has been presented on a consolidated basis is not necessarily indicative of the financial position of our company had the acquisition of the Datec operating subsidiaries occurred at the beginning of each period or the financial results of our company as they may be in the future.

Effective June 28, 2007, we acquired 8 million shares of Series A 10% Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”), of Latin Node. The Series A Preferred Stock is convertible, in whole or in part and at a conversion price of $2.50 per share, into shares of common stock of Latin Node representing 80% of the issued and then outstanding shares of common stock of Latin Node. The purchase price for the Series A Preferred Stock was $26,818,835 which was paid as follows:

 

  i) $24.5 million for the cancellation of a note receivable from Latin Node,

 

  ii) $1,563,750 for the fair value of 375,000 shares of eLandia common stock (fair value of $4.17 per share), and

 

  iii) $716,677 of direct acquisition costs paid in cash.

Overview

Through our subsidiaries, we provide telecommunications services and information technology (“IT”) solutions and services. We offer a wide range of telecommunications services, technology products, Internet access services, professional services and other solutions in locations which we believe represent underserved geographic markets including American Samoa, Papua New Guinea, Fiji and Other Pacific Island Nations, and Central and South America regions. The products and services we offer in each of the geographic areas we serve varies depending on the infrastructure, existing telecommunication systems and the local economy and other needs of the region.

We generate revenue from the sale of telecommunications services including advanced telecommunication services, such as wholesale and retail long-distance services (including the use of VoIP, wireless coverage and internet access and data delivery services. To a lesser extent, we generate reverse toll fees by providing other wireless service providers with the ability to use our network to terminate calls into the regions we serve that the other wireless service providers do not otherwise serve. We also generate revenue from the sale of technology products, such as various hardware and related peripheral products, and software solutions including Microsoft products, database applications, accounting applications and other system applications. In addition, we provide professional services to assist our customers with implementation of customized business solutions and ongoing support and maintenance.

We conduct business operations through operating subsidiaries in five geographic segments, as follows:

 

   

Datec PNG Pty Limited (“Datec PNG”) conducts business in Papua New Guinea;

 

   

Several of our subsidiaries conduct business in Fiji and other Pacific Island Nations, which include Australia, the Cook Islands, New Zealand, Samoa, the Solomon Islands, Tonga and Vanuatu;

 

   

AST conducts business in the Samoas, which includes American Samoa, an unincorporated Territory of the United States, and the Independent State of Samoa, a country comprising a group of islands in the South Pacific (f/k/a Western Samoa);

 

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Latin Node, based in Miami, Florida, along with its subsidiaries based in Colombia, Guatemala, Honduras, Nicaragua, France and Germany, conducts business throughout South and Central America and in selected portions of Europe; and

 

   

Our parent company, eLandia, and another of its wholly-owned subsidiaries, eLandia Technologies, Inc., perform administrative functions, but do not presently conduct revenue generating operations.

Segment results presented in this item are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.

Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends going forward; however, this discussion should be read in conjunction with our Annual Report on Form 10-K.

Performance Measures

In managing our operations and assessing our financial performance, management supplements the information provided by financial statement measures with several customer–focused performance metrics, including:

Average Revenue Per User, or ARPU

This is a telecommunications industry metric that measures service revenue divided by the weighted average number of customers, divided by the number of months during the period being measured. Management uses ARPU to identify average revenue per customer per month, to track changes in average customer revenue over time, to help evaluate how changes in our business, including changes in our service offerings and fees, affect average revenue per customer, and to forecast future service revenue. In addition, ARPU provides management with a useful measure to compare our subscriber revenue to that of other wireless communications providers. We believe investors use ARPU primarily as a tool to track changes in average revenue per customer and to compare per customer service revenue to those of other wireless communications providers.

Minutes of Use, or MOU

MOU measures minutes of use within a given period. MOU is a non-GAAP financial measure. A non-GAAP financial measure is a numerical measure of a company’s financial performance or cash flows that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the consolidated balance sheet, consolidated statement of operations or consolidated statement of cash flows, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

Churn

This is a telecommunications industry metric that measures customer turnover. It is calculated as the number of customers that disconnect from our services divided by the weighted average number of customers divided by the number of months during the period being measured. Management uses churn to measure customer turnover and customer retention over time and to help evaluate how changes in our business affect customer retention. In addition, churn provides management with a useful measure to compare our customer turnover activity to that of other wireless communications providers. We believe investors use churn primarily as a tool to track changes in our customer retention over time and to compare our customer retention to that of other wireless communications providers.

Revenue Per Employee

This is a metric that takes the total revenue for a period divided by the total number of employees in the business. Management uses revenue per employee as an efficiency and growth gauge across diverse geographic areas with differing economic conditions. Monthly changes to revenue per employee can also provide insight into total staffing requirements for any particular country in which we operate.

Stable Revenue

This is a metric which calculates services revenue as a percentage of total cost excluding cost of revenue for product sales. Stable revenue consists of all sources of revenue excluding product revenue. The basis for this measurement is that product revenue are seasonal and variable whereas service revenue are more consistent as they are based on contracted revenue streams such as ISP revenue, services projects and maintenance and support to customers. Stable revenue is an important measure in determining the amount of non-contract or non-recurring revenue that must be sold to achieve profitability.

 

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Personal Computer (PC) and Server Revenue

This is a series of measurements which tracks the total amount of PC and server based sales for a particular period and as a total percentage of product sales. This metric is used to pinpoint overall trends in our product sales business from consumer purchases to business or government based purchases. Due to the increasing pressure on our operating margins from competition, this metric is useful in determining how resources will be allocated among our product sale vendors and our internal support staff.

Management also measures the performance of operations by analyzing our increase or decrease in the number of customers during any particular period.

We analyze this information periodically through operating reviews which include detailed discussions, proposed investments in new business opportunities or property and integration and cost reduction efforts. Measuring these key performance indicators is an important tool that our management uses to make operational decisions. These tools enable our management to make more informed, better and quicker decisions about the allocation of costs and resources which, we believe, can help us improve our performance.

Critical Accounting Policies and Estimates

Use of Estimates

Except as discussed above regarding the acquisition of Datec, our discussion and analysis of financial condition and results of operations are based upon our unaudited interim consolidated condensed financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of unaudited interim consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated condensed financial statements and accompanying notes. Such estimates and assumptions impact, among other things: the amount of uncollectible accounts receivable, the amount to be paid for the settlement of liabilities of discontinued operations, the amount to be paid for tax liabilities, accrued expenses, the amount of costs capitalized in connection with the wireless licenses, the amount allocated to contract rights, customer lists and goodwill in connection with the acquisitions along with the estimated useful lives for amortizable intangibles and property and equipment, and the value assigned to the warrants granted in connection with the financing via the convertible promissory note from SIBL, an affiliate of our major stockholder. In addition, a portion of the purchase price charged upon acquisition of Latin Node is an estimate based on the results of our preliminary investigation to date. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates.

Making estimates about revenue recognition and cost estimates on our production contracts requires management to make significant judgment. It is at least reasonably possible that the estimate of the effect on the financial statement of a condition, situation or set of circumstances that existed at the date of the 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 regarding estimates of our revenue and cost associated with long-term contracts could differ materially from our estimates.

Accounting Policies

In July 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB 109 (“FIN 48”), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our consolidated condensed financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. We adopted FIN 48 on January 1, 2007. For transition purposes, we adopted FIN 48 as a change in accounting principle through a cumulative-effect adjustment to retained earnings. The impact of our reassessment of our tax positions in accordance with the requirements of FIN 48 was immaterial to our unaudited interim consolidated condensed financial statements.

Other than FIN 48 described above, during six months ended June 30, 2007, there were no material changes in Critical Accounting Policies and Estimates from those reported in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

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Results of Operations, Papua New Guinea

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Three Months Ended June 30,  
     2007     2006  
     Dollars     % of
Revenue
    Dollars     % of
Revenue
 

Revenue

   $ 9,230,490     100.0 %   $ 7,840,350     100.0 %

Cost of Revenue

     5,199,487     56.3       4,500,500     57.4  

Expenses

     3,049,008     33.0       2,626,509     33.5  

Amortization of Intangibles

     258,420     2.8       297,710     3.8  
                            

Operating Income

     723,575     7.9       415,631     5.3  

Other Income

     85,794     0.9       199,171     2.5  
                            

Income Before Income Tax

     809,369     8.8       614,802     7.8  

Income Tax Expense

     (340,484 )   (3.7 )     (253,969 )   (3.2 )

Minority Interest

     (300,707 )   (3.3 )     (328,407 )   (4.2 )
                            

Net Income

   $ 168,178     1.8 %   $ 32,426     0.4 %
                            

In this operating segment, we derive revenue from product sales, IT solutions and data delivery. Product sales revenue refers to all computer hardware, communications hardware, consumables and commercial off-the-shelf software sold through our retail locations or by our direct sales force. IT solutions refers to support provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems, or applications. Data delivery refers to our ISP and data network infrastructure services to customers in Papua New Guinea.

 

     Three Months Ended June 30,  
     2007    2006    Change $    Change %  

Revenue:

           

Product sales

   $ 5,660,266    $ 5,194,052    $ 466,214    9.0 %

IT solutions

     1,750,402      1,286,056      464,346    36.1  

Data delivery

     1,819,822      1,360,242      459,580    33.8  
                           

Total

   $ 9,230,490    $ 7,840,350    $ 1,390,140    17.7 %
                           

We attribute the increase in product sales revenue primarily to increased sales of low-end servers, PCs, peripherals and consumable products both in the retail and corporate sectors, coupled with a major sale of a large Bank server solution in June 2007. We anticipate continued strong sales in low-end servers, PCs and related hardware. In the second quarter of 2007 we have seen an improvement in the margin derived from product sales as compared to the first quarter of 2007 results. This has been predominantly a result of closer management of exchange rate movements and successful marketing and product positioning against the competition.

We attribute the increase in revenue from IT solutions to a significant increase in the level of activity in our software analysis and development division, coupled with an improvement in the revenue derived from maintenance agreements in the office automation division.

We attribute the increase in data delivery revenue to a continued increase in the volume of data utilized by our ISP customers. Customers are charged on a data usage model and any increase in data volume correlates to an increase in revenue. We anticipate that we will continue to achieve growth in the revenue derived from the ISP operation. Also contributing to the increase in data delivery revenue was an increase in ISP revenue resulting from the addition of two new corporate customers.

 

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     Three Months Ended June 30,    Change  
     2007    2006    Amount     Percent  

Costs and Expenses:

          

Cost of revenue — product sales

   $ 4,618,059    $ 4,125,127    $ 492,932     11.9 %

Cost of revenue — data delivery

     581,428      375,373      206,055     54.9  

Operating expenses

     1,358,490      1,246,494      111,996     9.0  

General and administrative

     1,354,649      1,111,231      243,418     21.9  

Depreciation

     335,869      268,784      67,085     25.0  

Amortization

     258,420      297,710      (39,290 )   (13.2 )
                            

Total

   $ 8,506,915    $ 7,424,719    $ 1,082,196     14.6 %
                            

Cost of revenue for product sales increased at a slightly faster rate than the increase in product sales revenue due to the competitive price pressure for product at the beginning of the period. In the later months of the second quarter of 2007 we saw an improvement in the level of margin achieved due to exchange rate management and product positioning.

Cost of revenue for data delivery increased at a faster rate than revenue as a result of investments made to incorporate new compression technology in the ISP infrastructure and costs incurred in connection with the addition of two new corporate customers.

Operating expenses increased $111,996, although as a percentage of revenue, operating expenses were 14.7% for the three months ended June 30, 2007, which is down from 15.9% for the same period last year. The increase in expenses can be primarily attributed to an increase in the provisions made for stock obsolescence and an increase in advertising and marketing expenses.

General and administrative costs increased $243,418. This increase can be attributed to higher management expenses, repairs and maintenance costs, a higher provision for bad debts and general increases in other operating costs such as utilities and telecommunications.

Depreciation increased as a result of an increase in automated teller machines purchased in March and April of 2007, the procurement of network facilities for a major customer in March and the introduction of new technology to the ISP in April and June of 2007, additional deployment of network facilities for a major customer and upgrade to the ISP infrastructure. Amortization decreased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

Increased revenue in all areas, combined with lower general and administrative expenses and lower amortization costs, resulted in net income of $168,178 for the three months ended June 30, 2007 compared to net income of $32,426 for the same period last year.

 

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Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Six Months Ended June 30,  
     2007     2006  
     Dollars     % of
Revenue
    Dollars     % of
Revenue
 

Revenue

   $ 17,211,383     100.0 %   $ 14,038,267     100.0 %

Cost of Revenue

     9,979,188     58.0       7,768,527     55.3  

Expenses

     5,798,810     33.7       5,015,476     35.7  

Amortization of Intangibles

     516,840     3.0       496,283     3.5  
                            

Operating Income

     916,545     5.3       757,981     5.5  

Other Income

     218,791     1.3       409,688     2.9  
                            

Income Before Income Tax

     1,135,336     6.6       1,167,669     8.4  

Income Tax Expense

     (496,495 )   (2.9 )     (460,576 )   (3.3 )

Minority Interest

     (514,895 )   (3.0 )     (601,623 )   (4.3 )
                            

Net Income

   $ 123,946     0.7 %   $ 105,470     0.8 %
                            

In this operating segment, we derive revenue from product sales, IT solutions and data delivery. Product sales revenue refers to all computer hardware, communications hardware, consumables and commercial off-the-shelf software sold through our retail locations or by our direct sales force. IT solutions refers to support provided to our clients by our hardware engineers, software analysts, architects, developers and staff for new or existing software, hardware, systems, or applications. Data delivery refers to our ISP and data network infrastructure services to customers in Papua New Guinea.

 

     Six Months Ended June 30,  
     2007    2006    Change $    Change %  

Revenue:

           

Product sales

   $ 10,610,820    $ 8,912,144    $ 1,698,676    19.1 %

IT solutions

     3,097,835      2,436,479      661,356    27.1  

Data delivery

     3,502,728      2,689,644      813,084    30.2  
                           

Total

   $ 17,211,383    $ 14,038,267    $ 3,173,116    22.6 %
                           

We attribute the increase in product sales revenue primarily to increased sales of low-end servers, PCs, peripherals and consumable products both in the retail and corporate sectors coupled with a major sale of a large Bank server solution in June of 2007. We anticipate continued strong sales in low-end servers, PCs and related hardware. We have experienced an increase in the product sales revenue, we have also seen an erosion in the margin achieved on these sales. This was predominantly a result of aggressive pricing strategies adopted by our main competition in an effort to gain market share by targeting a number of our key customers. Management has been successful in countering this strategy and has managed to maintain, if not improve, our market share, however in the earlier part of the year it was done at the expense of margin. We have seen an improvement in the margin derived from product sales in the latter part of the second quarter as a result of the market adjustment in pricing, to more sustainable levels. It is anticipated that the competition will continue to take an aggressive approach and management will be required to monitor the market carefully while at the same time seek ways to ensure that margins are maximized.

We attribute the increase in revenue from IT solutions to a significant increase in the level of activity in our software analysis and development division, coupled with an improvement in the revenue derived from maintenance agreements in the office automation division.

We attribute the increase in data delivery revenue to a continued increase in the volume of data utilized by our ISP customers. Customers are charged on a data usage model and any increase in data volume correlates to an increase in revenue. We anticipate that we will continue to achieve growth in the revenue derived from the ISP operation. Also contributing to the increase in data delivery revenue was an increase in ISP revenue resulting from the addition of two new corporate customers.

 

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     Six Months Ended June 30,  
     2007    2006    Change $    Change %  

Costs and Expenses:

           

Cost of revenue — product sales

   $ 8,867,859    $ 7,087,627    $ 1,780,232    25.1 %

Cost of revenue — data delivery

     1,111,329      680,900      430,429    63.2  

Operating expenses

     2,701,219      2,382,056      319,163    13.4  

General and administrative

     2,466,395      2,110,256      356,139    16.9  

Depreciation

     631,196      523,164      108,032    20.6  

Amortization

     516,840      496,283      20,557    4.1  
                           

Total

   $ 16,294,838    $ 13,280,286    $ 3,014,552    22.7 %
                           

Cost of revenue for product sales increased at a slightly faster rate than the increase in sales due to the competitive price pressure for product at the beginning of the year. Although we do expect to see a continuation of strong competition which will keep pressure on margins, we have seen some success in our competitive strategy and have seen an improvement in the level of margin achieved in the latter part of the second quarter of 2007.

Cost of revenue for data delivery increased at a faster rate than revenue as a result of investments made to incorporate new compression technology in the ISP infrastructure and costs incurred in connection with the addition of two new corporate customers.

Operating expenses increased $319,163, although as a percentage of revenue, operating expenses were 15.7% for the six months ended June 30, 2007, which is down from 17.0% for the same period last year. The increase in expenses can be primarily attributed to an increase in the provisions made for stock obsolescence and an increase in advertising and marketing exercises.

The increase in general and administrative expenses can be attributed to higher management expenses, repairs and maintenance costs, a higher provision for bad debts and general increases in other operating costs such as utilities and telecommunications.

Depreciation increased as a result of an increase in ATM’s purchased in March and April, the procurement of network facilities for a major customer in March and the introduction of new technology to the ISP in April and June of 2007. Amortization increased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

Increased data delivery margins, increased product sales and an increase in the revenue derived from IT solutions, resulted in net income of $123,946 for the six months ended June 30, 2007 compared to net income of $105,470 for the same period last year.

Performance Measures

In managing our operations and assessing our financial performance in Papua New Guinea, management supplements the information provided by financial statement measures with several customer–focused performance metrics that are internally used to manage our business. The following table contains the key operating data:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Revenue per employee

   $ 37,370     $ 33,701     $ 69,682     $ 60,772  

Stable revenue

     100.1 %     80.2 %     96.3 %     87.6 %

Total PC revenue

   $ 1,035,288     $ 772,961     $ 2,106,311     $ 1,383,604  

Total server revenue

   $ 750,042     $ 76,137     $ 818,909     $ 308,003  

Total PC & server revenue as a percentage of total product revenue

     32 %     16 %     28 %     19 %

As a result of revenue growth while maintaining consistent headcount levels, we continue to see improvement in the revenue per employee figures. Management will continue to evaluate staff and take the necessary steps to maintain this positive trend in our efficiency and revenue per employee. Stable revenue continues to improve due to the proportionately greater revenue growth rates for data delivery and IT solutions as compared with product sales.

 

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Total PC revenue increased 52.2% for the six months ended June 30, 2007 over the same period last year. Average total sales value increased due to successful strategies in advertising and targeting corporate clients; however, margins on these products remain under pressure. In an attempt to compensate for the lower margins, we use the sales of PCs to generate opportunities to sell service contracts and peripheral products.

The 165.9% growth rate for servers during the six months ended June 30, 2007 compared with the same period last year was primarily a result of several high-end Intel Server sales completed during the six months ended June 30, 2007. There were no comparable sales during the six months ended June 30, 2006. Given the decreasing frequency of sales of high-end servers , and as functionality and performance of the lower cost servers continues to increase, we expect our average sale amount to decline.

Results of Operations, Fiji and Other Pacific Island Nations

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Three Months Ended June 30,  
     2007     2006  
     Dollars     % of
Revenue
    Dollars     % of
Revenue
 

Revenue

   $ 2,616,252     100.0 %   $ 2,453,056     100.0 %

Cost of Revenue

     1,360,196     52.0       990,963     40.4  

Expenses

     1,477,717     56.5       1,527,049     62.3  

Amortization of Intangibles

     79,333     3.0       216,548     8.8  
                            

Operating loss

     (300,995 )   (11.5 )     (281,504 )   (11.5 )

Other (Expense) Income

     (76,834 )   2.9       4,340     (0.2 )
                            

Loss Before Income Tax

     (377,829 )   (14.4 )     (277,164 )   (11.3 )

Income Tax Expense

     (5,683 )   (0.2 )     (146,701 )   (6.0 )
                            

Net Loss

   $ (383,512 )   (14.7 )%   $ (423,865 )   (17.3 )%
                            

In this operating segment, we derive revenue from product sales and IT solutions. We do not currently provide ISP and data network infrastructure to customers in Fiji and other Pacific Island Nations

 

     Three Months Ended June 30,  
     2007    2006    Change $     Change %  

Product sales

   $ 1,486,285    $ 1,228,716    $ 257,569     21.0 %

IT solutions

     1,129,967      1,224,340      (94,373 )   (7.7 )%
                            

Total

   $ 2,616,252    $ 2,453,056    $ 163,196     6.7 %
                            

During the second quarter of 2007, we made a significant one-time sale to the Fiji government. Excluding the effects of that sale, revenue from product sales for the three months ended June 30, 2007 was consistent with revenue from product sales for the same period last year.

Management has implemented several changes in the Fijian operations that have resulted in higher productivity. Gains in Fiji began to materialize during the second quarter as a result of our efforts; however, these gains were offset by a decrease in revenue generated from a software development company customer in New Zealand.

 

     Three Months Ended June 30,  
     2007    2006    Change $     Change %  

Costs and Expenses:

          

Cost of revenue — product sales

   $ 1,233,661    $ 922,902    $ 310,759     33.7 %

Cost of revenue — IT solutions

     126,535      68,061      58,474     85.9  

Operating expenses

     816,659      723,631      93,028     12.9  

General and administrative

     563,852      716,874      (153,022 )   (21.3 )

Depreciation

     97,207      86,544      10,663     12.3  

Amortization

     79,333      216,548      (137,215 )   (63.4 )
                            

Total

   $ 2,917,247    $ 2,734,560    $ 182,687     6.7 %
                            

 

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Cost of revenue for product sales increased at a slightly faster rate than the increase in product sales revenue due to the continued competitive price pressure for product. Although we do expect to see a continuation of strong competition which will keep pressure on margins, we are attempting to compensate with other initiatives, such as shifting our focus to the provision of services which generally result in higher margins.

The cost of providing IT solutions increased during the three months ended June 30, 2007 compared to the same period last year was the result of a sharp increase in the volume of spare parts usage associated with our customer services division.

The increase in operating costs for the three months ended June 2007 compared to the same period last year is attributable to the contract employees for the major software upgrade project provided by our Queensland operation. That project was completed in May of 2007, so expenses are expected to return to previous levels in the second half of 2007.

The decrease in general and administration expenses for the three months ended June 2007 compared to the same period last year are attributable to savings resulting from a restructuring of management in the first part of 2007.

Depreciation expense increased as a result of equipment purchased connected to the operational changes recently implemented by management. Amortization decreased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

The net loss of $383,512 for the three months ended June 30, 2007 was slightly better than the net loss experienced for the same period last year. Higher operating expenses incurred in connection with the strategic shift to the provision of IT solutions were offset by the reduction or elimination of certain minor general and administrative expenses. Management is currently implementing a number of strategic changes to the premises and operational structure of the Samoa, Vanuatu and Solomon Islands operations in an effort to improve the fiscal performance and general profile of these business units. The benefits of these changes will start to be seen in the last quarter of 2007.

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Six Months Ended June 30,  
     2007     2006  
     Dollars     % of
Revenue
    Dollars     % of
Revenue
 

Revenue

   $ 5,293,341     100.0 %   $ 5,133,761     100.0 %

Cost of Revenue

     2,269,719     42.9       2,343,860     45.7  

Expenses

     3,141,384     59.3       3,070,836     59.8  

Amortization of Intangibles

     158,666     3.0       360,913     7.0  
                            

Operating Loss

     (276,428 )   (5.2 )     (641,848 )   (12.5 )

Other (Expense) Income

     (153,885 )   (2.9 )     54,035     1.1  
                            

Loss Before Income Tax

     (430,313 )   (8.1 )     (587,813 )   (11.4 )

Income Tax Benefit (Expense)

     11,375     0.2       (141,131 )   (2.7 )
                            

Net Loss

   $ (418,938 )   (7.9 )%   $ (728,944 )   (14.2 )%
                            

In this operating segment, we derive revenue from product sales and IT solutions. We do not currently provide ISP and data network infrastructure to customers in Fiji and other Pacific Island Nations.

 

     Six Months Ended June 30,  
     2007    2006    Change $     Change %  

Product sales

   $ 2,557,538    $ 2,762,871    $ (205,333 )   (7.4 )%

IT solutions

     2,735,803      2,370,890      364,913     15.4 %

Total

   $ 5,293,341    $ 5,133,761    $ 159,580     3.1 %

The decrease in product sales results from a strategic shift by us from product sales to IT solutions which provide us with greater margins.

 

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The increase in IT solutions was a result of revenue attributable to a major software upgrade project provided by our Queensland operation. That project was successfully completed in May 2007.

 

     Six Months Ended June 30,  
     2007    2006    Change $     Change %  

Costs and Expenses:

          

Cost of revenue — product sales

   $ 2,040,468    $ 2,051,146    $ (10,678 )   (0.5 )%

Cost of revenue — IT solutions

     229,251      292,714      (63,463 )   (21.7 )

Operating expenses

     1,666,473      1,433,566      232,907     16.2  

General and administrative

     1,291,487      1,466,338      (174,851 )   (11.9 )

Depreciation

     183,425      170,932      12,493     7.3  

Amortization

     158,666      360,913      (202,247 )   (56.0 )
                            

Total

   $ 5,569,770    $ 5,775,609    $ (205,839 )   (3.6 )%
                            

The cost of product sales for the six months ended June 30, 2007 remained relatively consistent with the amount of expense in the same period last year despite a decrease in revenue over the same periods. This pressure on margins is expected to continue and is a primary reason for the strategic adjustment to focus on IT solutions rather than product sales as IT solutions generally return higher margins.

The cost of providing IT solutions decreased during the six months ended June 30, 2007 compared to the same period last year as a result of the elimination of certain contracted professional services staff in Australia.

The increase in operating costs for the six months ended June 30, 2007 compared to the same period last year is attributable to the contract employees for the major software upgrade project provided by our Queensland operation. That project was completed in May of 2007, so expenses are expected to return to previous levels in the second half of 2007.

The decrease in general and administration expenses for the six months ended June 30, 2007 compared to the same period last year are attributable to savings resulting from a restructuring of management in the first part of 2007.

Depreciation increased as a result of a motor vehicle replacement plan which will continue into the third quarter of 2007. Amortization decreased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

The net loss of $418,938 for the six months ended June 30, 2007 is significantly better than the net loss experienced for the same period last year. Higher operating expenses incurred in connection with the strategic shift to the provision of IT solutions were offset by higher overall gross margins and the reduction or elimination of certain minor general and administrative expenses. Management is currently implementing a number of strategic changes to the premises and operational structure of the Samoa, Vanuatu and Solomon Islands operations in an effort to improve the fiscal performance and general profile of these business units. The benefits of these changes will start to be seen in the last quarter of 2007.

Performance Measures

In managing our operations and assessing our financial performance in Fiji and the other Pacific Island Nations, management supplements the information provided by financial statement measures with several customer–focused performance metrics that are internally used to manage our business. The following table shows metric information for the periods indicated.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Revenue per employee

   $ 14,616     $ 13,840     $ 29,572     $ 28,985  

Stable revenue

     70 %     77 %     81 %     68 %

Total PC revenue

   $ 173,804     $ 497,775     $ 477,810     $ 785,150  

Total server revenue

   $ 74,653     $ 115,830     $ 219,693     $ 664,063  

Total PC & server revenue as a percentage of total product revenue

     17 %     50 %     28 %     52 %

Revenue per employee has grown slightly in 2007 compared to 2006, mainly due to the modest growth in revenue.

 

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Stable revenue, although down in the second quarter of 2007 compared to the second quarter of 2006, is higher for the six months ended June 30, 2007 compared to the same period last year. This is consistent with the strategic adjustment toward the provision of IT solutions and the higher revenues experienced in that division during the six months ended June 30, 2007 compared to the same period last year. Revenue from IT solutions provided 51.7% of the toil revenue for the six months ended June 30, 2007 compared with 46.2% for the same period last year.

PC revenue decreased for both the three month period ended June 30, 2007 compared to the same period in 2006 and the six month period June 30, 2007 compared to the same period in 2006. We attribute this decrease in revenue to reduced PC and server sales in Fiji as a result of increased competition in the market and continued PC pricing pressures throughout all of our markets.

Server revenue decreased for both the three month period ended June 30, 2007 compared to the same period in 2006 and the six month period June 30, 2007 compared to the same period in 2006. In addition to the server price compression being experienced in all of our markets (low-end servers becoming more powerful and reliable), the significant level of server sales experienced in Samoa in 2006 was not repeated in 2007.

Results of Operations, Samoas

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Three Months Ended June 30,  
     2007     2006  
     Dollars     % of Revenue     Dollars     % of Revenue  

Revenue

   $ 2,663,842     100.0 %     1,937,214     100.0 %

Cost of Revenue

     1,152,489     43.3 %     986,985     51.0 %

Expenses

     1,102,245     41.4 %     1,105,804     57.2 %

Amortization

     107,014     4.0 %     103,426     5.3 %
                            

Operating Income (Loss)

     302,094     11.3 %     (259,001 )   (13.4 )%

Other Expense

     (63,251 )   (2.4 )%     (60,647 )   (3.1 )%
                            

Net Income (Loss)

   $ 238,843     9.0 %   $ (319,648 )   (16.5 )%
                            

In the Samoas, we derive revenue from our wireless services, our data delivery services, equipment sales and service and long distance toll fees that we charge other telecommunications providers who need to access our networks. In addition, since November 2006, we have been receiving payments from the Universal Service Fund.

 

     Three Months Ended June 30,  
     2007    2006    Change $     Change %  

Revenue:

          

Wireless

   $ 1,262,684    $ 1,274,797    $ (12,113 )   (1.0 )%

Data delivery

     209,601      140,192      69,409     49.5 %

Equipment sales and service

     488,504      380,677      107,827     28.3 %

Long distance reverse toll fees

     220,186      141,548      78,638     55.6 %

Universal Service Fund program

     482,867      —        482,867     100.0 %
                            

Total

   $ 2,663,842    $ 1,937,214    $ 726,628     37.5 %
                            

The decrease in our wireless revenues is mainly attributed to the increased prepaid card sales discounts being offered to our subscribers as a means of stimulating increased usage and revenue of our prepaid wireless system and to the increase in prepaid card sales to our vendors for which we provide discounts. Partially offsetting the increase in discounts was an increase in prepaid long distance revenue, an increase in local prepaid revenue and an increase in SMS revenue. We anticipate that the result of pursuing this marketing strategy will be reflected in increasing wireless revenues for the remainder of the year.

 

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We attribute the increase in our data delivery revenue primarily to the increase in subscribers for both our residential and large broadband services. In addition, AST Telecom was awarded the Year 10 E-Rate contract by the American Samoa Department of Education, which is scheduled to begin on July 1, 2007. As a result of providing this service, we anticipate that revenues will continue to increase throughout the third and fourth quarters of 2007.

We attribute the increase in our equipment sales and service revenue primarily to the growth in the number of customers for our wireless services between the two periods, but especially to the continued growth in our customer base for our IT products, software and services through Datec American Samoa.

The increase in long distance reverse toll fees is primarily due to the increase in traffic sent across our network from our carriers. We expect a continued and steady increase in this revenue stream throughout the rest of the year.

Since November 2006, we have been receiving payments from the Universal Service Fund. This fund was created by the FCC to ensure that all Americans have access to high quality and affordable telecommunications, including low-income consumers, those living in rural areas that are costly to serve, and schools, libraries and rural health care providers. The Universal Service Fund is funded through contributions by interstate telecommunications carriers, which are generally passed through to their end-users. Since we have an ETC designation and because we provide service in rural areas, we are eligible to receive payments from the Universal Service Fund as of the date of our ETC designation.

Of the total 37.5% increase in revenue, 66.5% is attributable to the receipt of Universal Service Funds, which we began receiving in the fourth quarter of 2006.

 

     Three Months Ended June 30,  
     2007    2006    Change $     Change %  

Costs and Expenses:

          

Cost of revenue — wireless

   $ 768,961    $ 743,602    $ 25,359     3.4 %

Cost of revenue — equipment sales and service

     383,529      243,383      140,146     57.6 %

Operating expenses

     294,013      355,366      (61,353 )   (17.3 )%

General and administrative

     537,721      509,773      27,948     5.5 %

Depreciation

     270,510      240,665      29,845     12.4 %

Amortization — intangible assets

     107,014      103,426      3,588     3.5 %
                            

Total

   $ 2,361,748    $ 2,196,215    $ 165,533     7.5 %
                            

The increase in the cost of revenue for wireless services is mainly attributed to the higher cost of long distance services due to higher Carrier Access Billing System costs to the local exchange carrier for calls originating from our network and terminating on their network. In addition, cost of revenue for wireless services increased as a result of the introduction of international SMS services for our subscribers. As a result, the cost of revenue for wireless service for the three months ended June 30, 2006, which was 58.0% of wireless revenues, increased to 60.9% for the three months ended June 30, 2007.

The increase in the cost of revenue for equipment sales and service is primarily attributable to a corresponding increase in revenue for equipment sales and services. However, the cost as a percentage of equipment sales and services revenue is 78.5% for the three months ended June 30, 2007 compared to 64.0% for the three months ended June 30, 2006. This is due to the higher percentage of low-margin products sold in the second quarter of 2007, both in our PCS and IT products. Management anticipates continuing its market strategy of offering entry-level and low-margin products as a means to increase and grow its customer base.

Operating expenses for the three months ended June 30, 2007 decreased from the three months ended June 30, 2006 primarily due to the reduction in advertising and bad debt expenses. Marketing has re-evaluated its advertising campaigns, increasing in-house production of most of the advertising designs. Bad debt expense has decreased primarily due to the increased collections of past due accounts.

General and administrative expenses increased over the same period in 2006 due to legal fees associated with projects to expand our geographic reach and to address certain local competitive conflicts.

 

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Depreciation expense increased between the two periods as a result of the completion of projects during the quarter that were previously in construction. Amortization increased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

Receipt of funds from the Universal Service Fund, combined with relatively flat expenses, resulted in net income of $238,842 for the three months ended June 30, 2007 compared with a net loss of $(319,648) for the three months ended June 30, 2006.

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

The following table sets forth, for the periods indicated, unaudited interim consolidated condensed statements of operations information and information from our unaudited interim consolidated condensed statements of operations expressed as a percentage of revenue.

 

     Six Months Ended June 30,  
     2007     2006  
     Dollars     % of Revenue     Dollars     % of Revenue  

Revenue

   $ 5,607,524     100.0 %   $ 3,882,668     100.0 %

Cost of Revenue

     2,421,015     43.2 %     1,871,443     48.2 %

Expenses

     2,223,561     39.7 %     2,088,945     53.8 %

Amortization

     214,028     3.8 %     175,709     4.5 %
                            

Operating Income (Loss)

     748,920     13.4 %     (253,429 )   (6.5 )%

Other Expense

     (121,595 )   (2.2 )%     (108,501 )   (2.8 )%
                            

Net Income (Loss)

   $ 627,324     11.2 %   $ (361,930 )   (9.3 )%
                            

In the Samoas, we derive revenue from our wireless services, our data delivery services, equipment sales and service and long distance toll fees that we charge other telecommunications providers who need to access our networks. In addition, since November 2006, we have been receiving payments from the Universal Service Fund. This fund was created by the FCC to ensure that all Americans have access to high quality and affordable telecommunications, including low-income consumers, those living in rural areas that are costly to serve, and schools, libraries and rural health care providers. The Universal Service Fund is funded through contributions by interstate telecommunications carriers, which are generally passed through to their end-users. Since we have an ETC designation and because we provide service in rural areas, we are eligible to receive payments from the Universal Service Fund as of the date of our ETC designation.

 

     Six Months Ended June 30,  
     2007    2006    Change $     Change %  

Revenue:

          

Wireless

   $ 2,574,932    $ 2,651,251    $ (76,319 )   (2.9 )%

Data delivery

     417,431      284,855      132,576     46.5 %

Equipment sales and service

     1,142,934      646,883      496,051     76.7 %

Long distance reverse toll fees

     436,768      299,679      137,089     45.7 %

Universal Service Fund program

     1,035,459      —        1,035,459     100.0 %
                            

Total

   $ 5,607,524    $ 3,882,668    $ 1,724,856     44.4 %
                            

We attribute the decrease in our wireless revenue to the reduction of our long distance and local on-net rates per minute in an effort to maintain a competitive pricing structure in the face of decreasing rates from our competitors. In addition, we pursued a marketing strategy of stimulating increased usage and sales of our prepaid cards by offering certain discounts to our customers, which in the short term reduced our revenues. However, we anticipate that as a result of the increase in prepaid card sales, customer usage and revenue will increase throughout the remainder of this year.

We attribute the increase in our data delivery revenue primarily to the addition of new residential broadband and large broadband customers, including the National Park Service, the U.S. Department of Agriculture, the local community college, the local public utility, a local television station and other companies and residents in American Samoa.

 

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We anticipate that our revenues for data delivery will continue to increase throughout the remainder of this year as AST was awarded the Year 10 contract for the ASDOE E-Rate program, which will begin on July 1, 2007.

The increase in equipment sales and service revenue is attributable to the growth in the number of customers for our wireless services, but especially to the growing customer base in our IT products, software and services through Datec American Samoa.

The increase in long distance reverse toll fees is attributed to the increase in traffic sent across our network from our carriers. We expect a continued and steady increase in this revenue stream throughout the rest of the year.

Since November 2006, we have been receiving payments from the Universal Service Fund. This fund was created by the FCC to ensure that all Americans have access to high quality and affordable telecommunications, including low-income consumers, those living in rural areas that are costly to serve, and schools, libraries and rural health care providers. The Universal Service Fund is funded through contributions by interstate telecommunications carriers, which are generally passed through to their end-users. Since we have an ETC designation and because we provide service in rural areas, we are eligible to receive payments from the Universal Service Fund as of the date of our ETC designation.

Of the 44.4% increase in total revenue, 60.0% is attributable to the receipt of Universal Service Funds, which we began receiving during the fourth quarter of 2006.

 

     Six Months Ended June 30,  
     2007    2006    Change $     Change %  

Costs and Expenses:

          

Cost of revenue — wireless

   $ 1,565,012    $ 1,464,480    $ 100,532     6.9 %

Cost of revenue — equipment sales and service

     856,003      406,963      449,040     110.3 %

Operating expenses

     605,206      626,954      (21,748 )   (3.5 )%

General and administrative

     1,082,717      984,060      98,657     10.0 %

Depreciation

     535,638      477,931      57,707     12.7 %

Amortization — intangible assets

     214,028      175,709      38,319     21.8 %
                            

Total

   $ 4,858,604    $ 4,136,097    $ 722,507     17.5 %
                            

Cost of revenue for wireless services increased primarily due to the higher cost of long distance services due to the higher Carrier Access Billing System costs to the local exchange carrier for calls originating from our network and terminating on their network.

The increase in cost of revenue for equipment sales and services is attributable to the corresponding increase in revenue. Although, the total margin for the six months ended June 30, 2007 of $286,931 is $48,370 higher than the margin for the same period last year, the cost as a percentage of revenue increased to 75% for the six months ended June 30, 2007 from 63% for the six months ended June 30, 2006. This is due to the higher percentage of low margin products that were sold for the six months ended June 30, 2007 compared to last year. Management plans to continue its strategy of offering low margin and entry level products to attract new customers for the rest of the year.

Operating expenses decreased primarily due to the decrease in advertising expenses. Marketing has re-evaluated its advertising strategy and maintained in-house production of most advertising campaign designs.

General and administrative expenses increased for the six months ended June 30, 2007 from the six months ended June 30, 2006 due to increased legal fees associated with projects to expand our geographic reach and to resolve certain local competitive conflicts.

Depreciation expense increased as a result of upgrades, additions and expansion of our network. Amortization increased as a result of the fourth quarter 2006 revaluation of the intangible assets acquired in connection with the purchases of AST and Datec in the first quarter of 2006.

Receipt of funds from the Universal Service Fund, combined with partially offset by slightly higher expenses resulted in net income of $627,324 for the three months ended June 30, 2007 compared with a net loss of $(361,930) for the three months ended June 30, 2006.

 

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Performance Measures

In managing our operations and assessing our financial performance in American Samoa, management supplements the information provided by financial statement measures with several customer-focused performance metrics that are internally used to manage our business.

The following table contains the key operating data.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Average Revenue Per User

   $ 26.52     $ 27.58     $ 26.76     $ 29.53  

Minutes of Use

     10,094,951       9,486,255       20,386,166       19,482,442  

Churn

     3.0 %     7.9 %     3.3 %     4.6 %

Number of Customers at end of period

     19,050       14,362       19,050       14,362  

Revenue per employee

   $ 38,788     $ 28,503     $ 82,732     $ 56,872  

For the three and six months ended June 30, 2007, ARPU decreased by $1.06 or 3.9% and $2.77 or 9.4%, respectively from the three and six months ended June 30, 2006. This decline occurred despite an increase in the number of customers. We attribute the decline primarily to a reduction in international and local on-net rates, in an attempt to attract new customers and to promote customer loyalty and retention in the face of stiff competition. The resulting increase in customers effectively offset the decline in average revenue per user.

For the three and six months ended June 30, 2007, MOU’s increased by 608,696 or 6.4% and 903,724 or 4.6%, respectively from the three and six months ended June 30, 2006. We attribute this to an increase in the number of subscribers as well as the decrease in local and international rates, resulting in an increase in volume of calls and minutes. We expect that this trend will continue to increase as we work toward achieving more effective pricing for our local and long distance services.

For the three and six months ended June 30, 2007, churn decreased by 4.9% and 1.3%, respectively from the three and six months ended June 30, 2006. We attribute this decrease in churn, to our continued efforts in promoting and rewarding customer loyalty by increasing customer contact and offering various customer incentives.

The number of customers at June 30, 2007 increased 4,688 or 32.6% from the number of customers at June 30, 2006. We attribute this increase to the results of our marketing strategy of offering inexpensive entry-level handsets bundled with attractive activation packages that have resulted in increased new service activations.

Management also reviews the measure of revenue per employee to evaluate the efficiency of our operations. Revenue per employee is calculated by dividing total revenue, less revenue from reverse toll fees, by the weighted average headcount. The increases experienced for the three and six months ended June 30, 2007 over the same periods last year is mainly attributable to the revenue generated from the Universal Service Fund program.

Results of Operations—Central and South America

Our Central and South America segment includes all of the operations of Latin Node, in which we acquired an 80% interest on June 28, 2007. Latin Node is a provider of advanced telecommunications services to customers located in or communicating with Central and South America using voice over Internet protocol, or VoIP, technology. On February 16, 2007, we entered into a Preferred Stock Purchase Agreement with Latin Node, a wholly-owned subsidiary of Retail Americas VoIP, LLC, a Delaware limited liability company, pursuant to which we agreed to purchase 8,000,000 shares of Series A Preferred Stock of Latin Node for an aggregate price of $26,818,835. The Series A Preferred Stock shall be convertible into Latin Node common shares, in whole or in part at a conversion price of $2.50 per share which will ultimately represent 80% of the issued and outstanding shares of common stock of Latin Node. As holders of Series A Preferred Stock, we are entitled to elect two out of three directors of Latin Node.

Effective June 28, 2007, we acquired 8 million shares of Series A 10% Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”), of Latin Node. The Series A Preferred Stock is convertible, in whole or in part and at a conversion price of $2.50 per share, into shares of common stock of Latin Node representing 80% of the issued and then outstanding shares of common stock of Latin Node. The purchase price for the Series A Preferred Stock was $26,818,835 which was paid as follows:

 

  i) $24.5 million for the cancellation of a note receivable from Latin Node,

 

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  ii) $1,563,750 for the fair value of 375,000 shares of eLandia common stock (fair value of $4.17 per share), and

 

  iii) $716,677 of direct acquisition costs paid in cash.

The acquisition of Latin Node was accounted for using the purchase method of accounting. Accordingly, the unaudited interim consolidated condensed financial statements include the results of operations of Latin Node for the two days from June 29, 2007 through June 30, 2007. Those results are shown in the table below:

 

     Dollars     % of Revenue  

Revenue

   $ 730,049     100.0 %

Cost of Revenue

     602,151     82.5 %

Expenses

     138,608     19.0 %

Amortization

     —       0 %