UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D. C. 20549





FORM
10-Q


VERSION
05




xQuarterly report under
Section 13 or 15(d) of the Securities Exchange Act of 1934




For the
quarterly period ended March
31,2010





oTransition report under
Section 13 or 15(d) of the Securities Exchange Act of 1934




For the
transition period from ______ to ______





000-30061


( Commission file
No.)





ELEPHANT
TALK COMMUNICATIONS, INC.


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




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




19103
Centre Rose Boulevard


Lutz,
FL 33558


United
States


(Address
of principal executive offices)




+
1 813 926 8920


(Issuer's
telephone number, including area code)




Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.


Yes xNo o.





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 oAccelerated filer oNon-Accelerated
filer oSmaller 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 oNo x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes oNo o




As of May14, 2010,
there were 64,395,437 shares of the Company’s common stock
outstanding.










ELEPHANT
TALK COMMUNICATIONS, INC.
 TABLE OF
CONTENTS
 FORM
10-Q
 March 31,
2010
 PART
      I - FINANCIAL INFORMATION
              
              3Item
      1. Consolidated Financial Statements
              
              3Consolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2009
              
              3Unaudited
      Consolidated Statements of Operations for the three months periods ended
      March 31, 2010 and 2009
              
              4Unaudited
      Consolidated Statements of Cash Flows for the three months periods ended
      March 31, 2010 and 2009
              
              5Notes
      to the Consolidated Financial Statements (Unaudited)
              
              6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
              
              21Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              27Item
      4T. Controls and Procedures
              
              27PART
      II - OTHER INFORMATION
              
              28Item
      1. Legal Proceedings
              
              28Item
      1a. Risk Factors
              
              29Item
      2. Unregistered Sales of Equity Securities and Use of Proceeds
              
              29Item
      3. Defaults upon Senior Securities
              
              29Item
      4. Submission of Matters to a Vote of Security
Holders
              
              29Item
      5. Other Information
              
              29Item
      6. Exhibits
              
              29SIGNATURES
              
              30Exhibit
      31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
              
              X-1Exhibit
      31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
              
              X-2Exhibit
      32.1 Certification of Chief Executive Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
              
              X-3Exhibit
      32.2 Certification of Chief Financial Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
              
              X-4


2




PART
I - FINANCIAL INFORMATION




Item 1. Consolidated Financial
Statements





ELEPHANT TALK COMMUNICATIONS, INC. AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET




March
      31,
              
              
              December
      31,2010
              
              
              2009unauditedASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              792,247
              
              
              $
              1,457,900Restricted
      cash
              
              
              190,720
              
              
              
              192,116Accounts
      receivable, net of an allowance for doubtful accounts of $628,659 and
      $764,302 at March 31, 2010 and December 31, 2009
      respectively
              
              
              5,846,710
              
              
              
              5,071,293Prepaid
      expenses and other current assets
              
              
              3,550,218
              
              
              
              2,657,019Total
      Current Assets
              
              
              10,379,895
              
              
              
              9,378,328LONG
      TERM DEPOSITS
              
              
              309,506
              
              
              
              330,946DEFERRED
      FINANCING COSTS
              
              
              2,710,756
              
              
              
              3,033,277PROPERTY
      AND EQUIPMENT, NET
              
              
              7,104,735
              
              
              
              7,773,862INTANGIBLE
      ASSETS, NET
              
              
              3,526,323
              
              
              
              3,910,363LONG
      TERM ASSET
              
              
              21,379,514
              
              
              
              —TOTAL
      ASSETS
              
              $
              45,410,729
              
              
              $
              24,426,776LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
              
              $
              354,093
              
              
              $
              351,589Accounts
      payable and customer deposits
              
              
              6,633,260
              
              
              
              6,475,074Deferred
      revenue
              
              
              —
              
              
              
              132,205Accrued
      expenses and other payables
              
              
              3,476,079
              
              
              
              2,738,998Shares
      to be issued
              
              
              18,000
              
              
              
              —Convertible
      14% loan – related party (net of discount of
      $2,489,175)
              
              
              130,307
              
              
              
              13,287Loans
      payable
              
              
              879,447
              
              
              
              880,536Total
      Current Liabilities
              
              
              11,491,186
              
              
              
              10,591,689LONG
      TERM LIABILITIESLoan
      from related party
              
              
              441,546
              
              
              
              437,161Convertible
      12% secured note (net of discount of $ 12,333,020 and $0,
      respectively)
              
              
              15,255
              
              
              
              —Warrant
      liabilities
              
              
              32,510,197
              
              
              
              16,626,126Conversion
      feature
              
              
              3,204,151
              
              
              
              2,899,801Total
      Long term Liabilities
              
              
              36,171,149
              
              
              
              19,963,088Total
      Liabilities
              
              
              47,662,335
              
              
              
              30,554,777STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 64,014,536 issued
      and outstanding as of March 31, 2010 compared to 53,695,984 shares
      issued and outstanding as of December 31, 2009
              
              
              71,625,727
              
              
              
              54,880,778Accumulated
      other comprehensive income
              
              
              615,111
              
              
              
              1,136,897Accumulated
      deficit
              
              
              (74,673,270
              )
              
              
              (62,335,076
              )Elephant
      Talk Comunications, Inc. Stockholders' Equity
              
              
              (2,432,432
              )
              
              
              (6,317,401
              )NON-CONTROLLING
      INTEREST
              
              
              180,826
              
              
              
              189,400Total
      Stockholders' Equity
              
              
              (2,251,606
              )
              
              
              (6,128,001
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              45,410,729
              
              
              $
              24,426,776




The
accompanying notes are an integral part of the unaudited consolidated financial
statements
  3
 
 ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
 (UNAUDITED)


for
      the three months period ended,March
      31,
              
              
              March
      31,2010
              
              
              2009REVENUES
              
              $
              9,943,765
              
              
              $
              9,428,884COST
      AND OPERATING EXPENSESCost
      of service
              
              
              9,373,888
              
              
              
              9,147,797Selling,
      general and administrative expenses
              
              
              1,905,350
              
              
              
              1,463,148Non
      cash compensation to officers, directors and employees
              
              
              540,913
              
              
              
              269,460Depreciation
      and amortization of intangibles assets
              
              
              844,694
              
              
              
              630,182Total
      cost and operating expenses
              
              
              12,664,845
              
              
              
              11,510,587LOSS
      FROM OPERATIONS
              
              
              (2,721,080
              )
              
              
              (2,081,703
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              32,599
              
              
              
              10,070Interest
      expense
              
              
              (446,540
              )
              
              
              (71,785
              )Interest
      expense related to amortization of debt discount on promissory
      notes
              
              
              (1,326,919
              )
              
              
              —Change
      in fair value of warrant liabilities
              
              
              (7,347,911
              )
              
              
              —Amoritization
      of deferred financing costs
              
              
              (527,846
              )
              
              
              —Total
      other income (expense)
              
              
              (9,616,617
              )
              
              
              (61,715
              )LOSS
      BEFORE PROVISION FOR INCOME TAXES
              
              
              (12,337,697
              )
              
              
              (2,143,418
              )Provision
      for income taxes
              
              
              (800
              )
              
              
              (800
              )NET
      LOSS BEFORE NONCONTROLLING INTEREST
              
              
              (12,338,497
              )
              
              
              (2,144,218
              )Net
      (loss) income attributable to noncontrolling interest
              
              
              (498
              )
              
              
              (103
              )NET
      LOSS
              
              
              (12,338,995
              )
              
              
              (2,144,321
              )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation gain (loss)
              
              
              (521,786
              )
              
              
              (667,792
              )(521,786
              )
              
              
              (667,792
              )COMPREHENSIVE
      LOSS
              
              $
              (12,860,781
              )
              
              $
              (2,812,113
              )Net
      loss per common share and equivalents - basic and diluted
              
              $
              (0.22
              )
              
              $
              (0.04
              )Weighted
      average shares outstanding during the period - basic and
      diluted
              
              
              55,667,424
              
              
              
              51,509,345




The
accompanying notes are an integral part of the unaudited consolidated financial
statements
  4
  ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)




for
      the three months period ended,March
      31,
              
              
              March
      31,2010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (12,338,995
              )
              
              $
              (2,144,321
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              844,694
              
              
              
              630,182Provision
      for doubtful accounts
              
              
              (67,556
              )
              
              
              8,833Stock
      based compensation
              
              
              500,287
              
              
              
              228,835Noncontrolling
      interest
              
              
              498
              
              
              
              103Amortization
      of Shares issued for Consultancy
              
              
              40,626
              
              
              
              40,625Issuance
      of stock
              
              
              53,126
              
              
              
              --Excercise
      of warrants (cash less)
              
              
              37,069Change
      in fair value of warrant liabilities
              
              
              7,725,827
              
              
              
              --Amortization
      of deferred financing costs
              
              
              527,846Interest
      expense relating to debt discount and conversion feature
              
              
              949,003
              
              
              
              --Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              (1,050,267
              )
              
              
              (810,410
              )Decrease
      (Increase)  in prepaid expenses, deposits and other
      assets
              
              
              (380,873
              )
              
              
              (378,916
              )Increase
      (decrease) in accounts payable, proceeds from related parties and customer
      deposits
              
              
              535,691
              
              
              
              946,844Increase
      (decrease) in deferred revenue
              
              
              (131,996
              )
              
              
              496Increase
      (decrease) in accrued expenses and other payables
              
              
              830,188
              
              
              
              (333,739
              )Net
      cash used in operating activities
              
              
              (1,924,832
              )
              
              
              (1,811,468
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (396,094
              )
              
              
              (731,634
              )Restricted
      cash
              
              
              10
              
              
              
              9Loan
      to third party
              
              
              (594,682
              )
              
              
              --Net cash used in investing activities
              
              
              (990,766
              )
              
              
              (731,625
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
              
              
              9,104
              
              
              
              6,259Deferred
      financing costs
              
              
              (205,326
              )
              
              
              --Loan
      from related party
              
              
              2,489,175
              
              
              
              2,698,702Net cash provided by financing activities
              
              
              2,292,953
              
              
              
              2,704,961EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
              
              
              (43,009
              )
              
              
              (102,350
              )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (665,653
              )
              
              
              59,517CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
              
              
              1,457,900
              
              
              
              1,656,546CASH
      AND CASH EQUIVALENTS, END OF THE PERIOD
              
              $
              792,247
              
              
              $
              1,716,063SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
              
              $
              384,092
              
              
              $
              10,070
  
  March
      31,
              
              
              March
      31,2010
              
              
              2009SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING & FINANCING
    ACTIVITIES:Shares
      issued to convert the notes payable to related parties and accrued
      interest
              
              $
              --
              
              
              $
              532,583Cash
      paid during the period for income taxes
              
              
              --
              
              
              
              800Warrants
      and derivative liabilities for issuance of 14% Promissory Notes are
      considered as discount of the Promissory Notes
              
              
              2,513,195
              
              
              
              --




The
accompanying notes are an integral part of the unaudited consolidated financial
statements
  5
  ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
 
 Note 1.Organization and Nature of
Operations
 
 The
Company
 
 Elephant
Talk Communications, Inc., is an international provider of business software and
services to the telecommunications and financial services industry. The company
enables both mobile carriers (“MNO’s”) and virtual operators (“MVNO’s”) to offer
a full suite of products, delivery platforms, support services, superior
industry expertise and high quality customer service without substantial upfront
investments from clients. Elephant Talk provides global telecommunication
companies, mobile network operators, banks, supermarkets, consumer product
companies, media firms, and other businesses a full suite of products and
services that enables them to fully provide telecom services as part of their
business offerings. The company offers various dynamic products that include
remote health care, credit card fraud prevention, mobile internet ID security,
multi-country discounted phone services, loyalty management services, and a
whole range of other emerging customized mobile services.
  The
Company is a niche player in the converged telecommunications market, providing
traffic and network services as a licensed operator, and specializing in carrier
grade mobile enabling platforms to provide outsourced solutions to the various
players in the telecommunications’ value chain, including Mobile Network
Operators (“MNO’s”), Mobile Virtual Network Operators (“MVNO’s”) and
non-operator companies in need of both mobile as well as specialized land-line
telecommunication services. In this chain we position ourselves as a Full Mobile
Virtual Network Enabler (“Full MVNE”), including also customized mobile services
such as our network integrated ValidSoft security and fraud prevention
solutions.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements for March 31, 2010 and December
31, 2009 include the accounts of Elephant Talk Communications, Inc., its
wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned
subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiaries
Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V.,
Elephant Talk Communication Austria GmbH, Elephant Talk Telekom GmbH (formerly
Vocalis Austria GmbH), Elephant Talk Communications Italy S.R.L., ET-Stream
GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk
Communication (Europe) GmbH, Elephant Talk Communication Schweiz GmbH, Moba
Consulting Partners B.V., Elephant Talk Communications France S.A.S.,its
majority owned (51%) subsidiary Elephant Talk Communications Premium Rate
Services Netherlands B.V., its majority owned (51%) subsidiary Elephant Talk
Communications PRS U.K. Limited, its wholly-owned subsidiary Elephant Talk
Communications Luxembourg SA, its wholly-owned subsidiary Elephant Talk Global
Holding B.V., its wholly-owned subsidiary Elephant Talk Business Services
W.L.L., its wholly-owned subsidiary Guangzhou Elephant Talk Information
Technology Limited., its wholly-owned Elephant Talk Caribbean B.V., its majority
owned (51%) subsidiary ET-UTS N.V., its wholly-owned subsidiary Elephant Talk
Limited, its majority owned (60%) subsidiary Elephant Talk Middle East &
Africa (Holding) W.L.L., its majority owned (51%) subsidiary Elephant Talk
Middle East & Africa (Holding) Jordan L.L.C., its majority owned (99%)
subsidiary Elephant Talk Middle East & Africa Bahrain W.L.L and its majority
owned (50.54%) subsidiary Elephant Talk Middle East & Africa
FZ-LLC.
 
 Interim Financial
Information
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and related notes as
included in the Company's 2009 Form 10-K. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements on Form 10-K. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and contain all adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation of the Company’s financial position, results of operations and
cash flows as of and for the periods presented.
 
 The
results of operations for the three months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the entire
year.
  6
 
 Note2.Financial Condition and
Going Concern
 
 The
Company has an accumulated deficit of ($74,673,270) as of March 31,
2010. Historically the Company has relied on a combination of debt and
equity financings to fund ongoing cash requirements. In the first quarter of
2010 the Company received a total $2.5 million as a loan from a related party
QAT II Investments SA (“QAT II”). We recently concluded on the terms and
conditions of an interim financing arrangement to accredited investors where we
have sold up to 16 May 2010 for the amount of $ 2.2 million in common stock,
bringing the total raised in 2010 to $ 4.7 million.
 
 The cash
balance at March 31, 2010 and the additional funds raised have provided
sufficient funds through the second quarter of 2010.
 
 Given the need to raise additional funds, in the short term, we
have been actively engaged in discussions with potential financing sources in
addition to QAT’s funding and the abovementioned interim financing in order to
fund the expected cash requirements generated by future operations, capital
expenditures and potential acquisitions. In addition to further funds we expect
to come in from the interim financing mentioned above we expect to conclude
shortly on the final terms and conditions of a larger private placement to
provide sufficient funds for the longer term.
 
 Although
the Company has previously been able to raise capital as needed, such capital
may not continue to be available at all, or if available, that the terms of such
financing may be dilutive to existing shareholders or otherwise on terms not
favorable to the Company or existing shareholders. Further, the current global
financial situation may offer additional challenges to raising the required
capital. If we are unable to secure additional capital, as circumstances
require, we may not be able to continue operations. As of March 31, 2010, these
conditions raised substantial doubt from our auditors as to our ability to
continue as a going concern.
 
 Note3.Significant Accounting
Policies
 
 Foreign Currency
Translation
 
 The
functional currency was Euros for the Company’s wholly-owned subsidiary Elephant
Talk Europe Holding B.V. and subsidiaries, and Euros for its wholly-owned
subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its
wholly-owned subsidiary Elephant Talk Limited. The financial statements of the
Company were translated to USD using period-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses, and capital
accounts were translated at their historical exchange rates when the capital
transaction occurred. In accordance with Accounting Standard Codification
(“ASC”) 830, Foreign Currency Matters, (formerly known as Statement of Financial
Accounting Standards (“SFAS”) No. 52), net gains and losses resulting from
translation of foreign currency financial statements are included in the
statements of shareholder’s equity as other comprehensive income (loss). Foreign
currency transaction gains and losses are included in consolidated income
(loss). The accumulated other comprehensive income as of March 31, 2010 and
December 31, 2009 was $615,111 and $1,136,897, respectively. The foreign
currency translation gain/(loss) for the quarter ended March 31, 2010 and 2009
was ($521,786) and ($667,792), respectively.
 
 Use of
Estimates
 
 The
preparation of the accompanying financial statements conforms with accounting
principles generally accepted in the United States of America and requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ materially from those estimates and assumptions.
 
 Cash and Cash
Equivalents
 
 For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.
 
 Restricted
Cash
 
 Restricted
cash represents cash deposited as bank guarantee for interconnects.
  7
 
 Accounts Receivables,
net
 
 The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains an allowance for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these allowances. Allowances are recorded primarily on
a specific identification basis. As of March 31, 2010 and December 31, 2009
the allowance for doubtful accounts was $628,659 and $764,302,
respectively.
 
 Revenue Recognition and
Deferred Revenue
 
 The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”), (formerly, Staff Accounting Bulletin (“SAB 104”).
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured. The Company derives
revenue from activities as a landline and mobile services provider with its
network and its own switching technology. Revenue represents amounts earned for
telecommunication services provided to customers (net of value added tax and
inter-company revenue). The Company recognizes revenue from prepaid calling
cards as the services are provided. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as deferred
revenue. Deferred revenue represents amounts received from the customers against
future sales of services since the Company recognizes revenue upon performing
the services. Deferred revenue was $0 and $132,205 as of March 31, 2010 and
December 31, 2009, respectively.
 
 Cost of
service
 
 Cost of service includes origination, termination, network and
billing charges from telecommunications operators, out payment costs to content
and information providers, network costs, data center costs, facility costs of
hosting network and equipment, and costs of providing resale arrangements with
long distance service providers, costs of leasing transmission facilities and
international gateway switches for voice and data transmission
services.
 
 Reporting
Segments
 
 ASC 820,
Segment Reporting, (Formerly SFAS No.131), defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances. The
Company allocates its resources and assesses the performance of its sales
activities based upon geographic locations of its subsidiaries.
 
 Stock-based
Compensation
 
 Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation” (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective
approach. As a result, we recognize stock-based compensation expense for only
those awards that are granted subsequent to December 31, 2005 and any previously
existing awards that are subject to variable accounting, including certain stock
options that were exercised with promissory notes in 2003, until the awards are
exercised, forfeited, or contractually expire in accordance with the prospective
method and the transition rules of ASC 718. Under ASC 718, stock-based awards
granted after December 31, 2005, are recorded at fair value as of the grant date
and recognized as expense over the employee’s requisite service period (the
vesting period, generally three years), which we have elected to amortize on a
straight-line basis.
 
 Income
Taxes
 
 The
Company accounts for income taxes under ASC 740, “Accounting for Income Taxes”
(“ASC 740”) (formerly SFAS No. 109). This statement requires the recognition of
deferred tax assets and liabilities for the future consequences of events that
have been recognized in the Company’s financial statements or tax returns. The
measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and the tax
bases of the Company’s assets and liabilities result in a deferred tax asset,
ASC 740 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or the entire deferred tax asset will not be realized. As part of the process of
preparing our consolidated financial statements, we are required to estimate our
income tax expense in each of the jurisdictions in which we operate. In the
ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of revenue sharing and reimbursement
arrangements among related entities, the process of identifying items of revenue
and expenses that qualify for preferential tax treatment and segregation of
foreign and domestic income and expense to avoid double taxation. We also assess
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting differences. These differences result
in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We may record a valuation allowance to reduce our
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. Although we believe that our estimates are reasonable and
that we have considered future taxable income and ongoing prudent and feasible
tax strategies in estimating our tax outcome and in assessing the need for the
valuation allowance, there is no assurance that the final tax outcome and the
valuation allowance will not be different than those that are reflected in our
historical income tax provisions and accruals.
  8
 
 ASC 740
prescribes a recognition threshold and measurement methodology to recognize and
measure an income tax position taken, or expected to be taken, in a tax return.
The evaluation of a tax position is based on a two-step approach. The first step
requires an entity to evaluate whether the tax position would “more likely than
not” be sustained upon examination by the appropriate taxing authority. The
second step requires the tax position be measured at the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. In addition, previously recognized benefits from tax positions that
no longer meet the new criteria would be derecognized.
 
 The
Company has filed or is in the process of filing tax returns that are subject to
audit by the respective tax authorities. Although the ultimate outcome would be
unknown, we believe that any adjustments that may result from tax return audits
are not likely to have a material, adverse effect on our consolidated results of
operations, financial position or cash flows.
 
 Comprehensive
Income/(Loss)
 
 Comprehensive
income (loss) includes all changes in equity during a period from non-owner
sources. Other comprehensive income refers to gains and losses that under
accounting principles generally accepted in the United States are recorded as an
element of shareholders’ equity but are excluded from net income. For the first
quarter of 2010 and 2009 the Company’s comprehensive income/(loss) consisted of
its net loss and foreign currency translation adjustments.
 
 Intangible
Assets
 
 In
accordance with ASC 350, “Accounting for Goodwill and other Intangible Assets”
(“ASC 350”) (formerly SFAS No. 142), intangible assets are carried at cost less
accumulated amortization and impairment charges. Intangible assets are amortized
on a straight-line basis over the expected useful lives of the assets, between
three and ten years. Other intangible assets are reviewed for impairment in
accordance with ASC 360, Property, Plant, and Equipment,” (formerly SFAS No.
144), annually, or whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Measurement of any
impairment loss for long-lived assets and identifiable intangible assets that
management expects to hold and use is based on the amount of the carrying value
that exceeds the fair value of the asset.
 
 Property and Equipment,
Internally Developed and third party Software
 
 Property
and equipment are initially recorded at cost. Additions and improvements
are capitalized, while expenditures that do not enhance the assets or extend the
useful life are charged to operating expenses as incurred. Included in
property and equipment are certain costs related to the development of the
Company’s internally developed software technology platform. The Company
has adopted the provisions of ASC 985, “Software”, (“ASC 985”) (formerly the
AICPA Statement of Position No. 98-1).
 
 The
Company has capitalized certain computer software development costs upon the
establishment of technological feasibility. Technological feasibility is
considered to have occurred upon completion of a detailed program design that
has been confirmed by documenting the product specifications, or to the extent
that a detailed program design is not pursued, upon completion of a working
model that has been confirmed by testing to be consistent with the product
design. Depreciation applied using the straight-line method over the estimated
useful lives of the assets once the assets are placed in service. Once a new
functionality or improvement is released for operational use, the asset is moved
from the property and equipment category “projects under construction” to a
property and equipment asset subject to depreciation in accordance with the
principle described in the previous sentence.
  9
 
 Fair Value
Measurements
 
 Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. The fair value
hierarchy distinguishes between (1) market participant assumptions developed
based on market data obtained from independent sources (observable inputs) and
(2) an entity’s own assumptions about market participant assumptions developed
based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). The three levels of the fair value hierarchy are described
below:
 
 Level
      Input:
              Input
      Definition:Level
      I
              Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement
date.
 Level
      II
              Inputs,
      other than quoted prices included in Level I, that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.
 Level
      III
              Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.
 
 The
following table summarizes fair value measurements by level at March 31, 2010
for financial assets and liabilities measured at fair value on a recurring
basis:
 
 Level
      I
              
              
              Level
      II
              
              
              Level
      III
              
              
              TotalWarrant
      liabilities
              
              $
              —
              
              
              $
              32,510,197
              
              
              $
              —
              
              
              $
              32,510,197Conversion
      feature
              
              $
              3,204,151
              
              
              $
              —
              
              
              
              —
              
              
              $
              3,204,151Total
      liabilities
              
              $
              3,204,151
              
              
              $
              32,510,197
              
              
              $
              —
              
              
              $
              35,714,348
 
 The
carrying value of the Company’s financial assets and liabilities, including cash
and cash equivalents, accounts payable and accrued liabilities, are carried at
historical cost basis and approximate fair value because of the short-term
nature of these instruments. The carrying value of the Company’s notes payable
approximates fair value based on management’s best estimate of the interest
rates that would be available for similar debt obligations having similar terms
at the balance sheet date.
 
 Recently Issued Accounting
Pronouncements
 
 In
December 2007, the FASB issued guidance which is now part of ASC 810-10,
“Noncontrolling Interests in Consolidated Financial Statements”, an Amendment of
Accounting Research Bulletin No. 51 “ (formerly Statement of Financial
Accounting Standards (SFAS) 160.This guidance establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, changes in a parent’s ownership of a noncontrolling
interest, calculation and disclosure of the consolidated net income attributable
to the parent and the noncontrolling interest, changes in a parent’s ownership
interest while the parent retains its controlling financial interest and fair
value measurement of any retained noncontrolling equity investment. The new
guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company adopted this guidance on January 1, 2009,
the beginning of its 2009 fiscal year, which resulted in certain
reclassifications related to the noncontrolling interest in the consolidated
financial statements.
 
 In April
2008, the FASB issued revised guidance on determining the useful life of
intangible assets. The revised guidance, which is now part of ASC 350-30 General
Intangibles Other than Goodwill (previously Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets), amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The guidance is
effective for fiscal years beginning after December 15, 2008 and applies
prospectively to intangible assets acquired after the effective date. Early
adoption is not permitted. The adoption of SFAS No. ASC 350-30 did not have a
material impact on the Company’s consolidated financial statements.
  10
 
 In April
2009, the FASB issued guidance, which is now part of ASC 825, “Interim
Disclosures about Fair Value of Financial Instruments” (“ASC 825”), (formerly
Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1). ASC 825 amends FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
ASC 825 did not have an impact on the Company’s consolidated financial
statements.
 
 In May
2009, the FASB issued new guidance for accounting for subsequent
events. The new guidance, which is now part of ASC 855-10, “Subsequent
Events” (“ASC 855-10”) (formerly, SFAS No. 165) is consistent with existing
auditing standards in defining subsequent events as events or transactions that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued, but it also requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The new guidance defines two types of subsequent events: “recognized
subsequent events” and “non-recognized subsequent events.” Recognized subsequent
events provide additional evidence about conditions that existed at the balance
sheet date and must be reflected in the company’s financial
statements. Non-recognized subsequent events provide evidence about
conditions that arose after the balance sheet date and are not reflected in the
financial statements of a company. Certain non-recognized subsequent events
may require disclosure to prevent the financial statements from being
misleading. The new guidance was effective on a prospective basis for
interim or annual periods ending after June 15, 2009. We adopted the
provisions of ASC 855-10 as required.
 
 In June
2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (ASC 105-10) (formerly Statement of Financial Accounting
Standards No. 168), establishes the FASB Accounting Standards Codification
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles. ASC
105-10 is effective for interim and annual periods ending after September 15,
2009. The adoption of ASC 105-10 did not have a material impact on the Company’s
consolidated financial statements.
 
 Note4.Long term
deposit
 
 Long term
deposits to various telecom carriers during the course of its operations amount
to $309,506 as at March 31, 2010 compared with $330,946 as of December 31,
2009. The deposits are refundable at the termination of the business
relationship with the carriers.
 
 Note 5.Prepaid expenses and other
current assets
 
 Prepaid
expenses and other current assets recorded as $3,550,218 as of March 31, 2010,
compared with $2,657,019 as of December 31, 2009.
 
 The
amount at reporting date consists primarily of the loans that the company
provided to ValidSoft Limited of $2,303,089. As of 1 April 2010 the
financials of Validsoft will be consolidated in our financials which means these
loans will be eliminated for consolidation purposes. For further details on
Validsoft see other parts of the report. The remaining amounts comprise prepaid
Value Added Tax (“VAT”), unvested stock related compensation for consultants and
other SG&A.
 
 Note6. Deferred Financing
Costs
 Deferred
financing costs consist of commissions, warrants issued to placement agents,
associated expenses and legal fees for the 2009 private placement and for the
2010 QAT convertible loans. At March 31, 2010 and December 31, 2009 deferred
financing costs were $2,710,756 and $3,033,277 respectively, and are amortized
over the terms of each of the Notes and the 2010 QAT convertible loans,
respectively.
  11
 
 Note7.Property &
Equipment
 
 The
Company has evaluated the nature of its systems engineering and software
programming activities and relevance to its business activities and has
concluded that the reclassification of these investments from Intangibles to
Property and Equipment more accurately reflects the nature and financial
reporting of the Company. Typically these investments pertain to the
Company’s:
 
 ·
              Intelligent
      Network (IN) platform·
              CRM
      software
 
 ·
              Mediation,
      Rating & Pricing engine·
              Operations
      and Business Support software
 
 ·
              Network
      management tools
 
 Property
and equipment at March 31, 2010 and December 31, 2009 consist of:




Average
      Estimated Useful Lives
              
              
              March
      31,
                2010
              
              
              December
      31,
                2009Furniture
      and fixtures
              
              
              5
              
              
              
              210,579
              
              
              
              219,469Computer,
      communication and network equipment
              
              
              3 -
      10
              
              
              
              7,803,325
              
              
              
              8,071,138Software
              
              
              5
              
              
              
              4,252,235
              
              
              
              4,410,714Automobiles
              
              
              5
              
              
              
              127,145
              
              
              
              135,455Construction
      in progress
              
              
              
              
              
              
              1,125,456
              
              
              
              1,009,96913,518,740
              
              
              
              13,846,745Less:
      accumulated depreciation
              
              
              
              
              
              
              (6,414,005
              )
              
              
              (6,072,883
              )$
              7,104,735
              
              
              $
              7,773,862




Total
depreciation expense for the three months ended March 31, 2010 and 2009 was
$653,724 and $443,330 respectively.
 
 Note8.Intangible Assets - Customer
Contracts, Licenses and Interconnects
 
 Intangible
assets include customer contracts, telecommunication licenses and integrated,
multi-country, centrally managed switch-based interconnects.
   Average
      Estimated Useful Lives
              
              
              March
      31,
                2010
              
              
              December
      31,
                2009Customer
      Contracts, Licenses & Interconnect
              
              
              5 -
      10
              
              
              $
              11,739,969
              
              
              $
              12,282,126Less:
      Accumulated Amortization and impairment charges
              
              
              
              
              
              
              (8,213,646
              )
              
              
              (8,371,763
              )Impairment
      of intangible assets
              
              
              
              
              
              
              
              
              
              
              —$
              3,526,323
              
              
              $
              3,910,363


Intangible
asset amortization expense for the three months ended March 31, 2010 and 2009
was $190,970 and $186,852 respectively.
  12
 
 Note 9 Long Term
Asset
 
 On March
17, 2010 we issued 10,235,739 shares and 3,829,487 warrants as purchase price
consideration following the completion of the acquisition of Validsoft Ltd.
("Validsoft") which were valued at $ 16,172,468 for the shares and $ 5,207,046
for the warrants.
 
 Valuations
of Validsoft are still ongoing as of May 17, 2010 following which we will
allocate the above purchase price to the identifiable assets and liabilities of
Validsoft.
 
 Validsoft
will be consolidated into our financial statements as of April 1,
2010.
  Note 10.Overdraft
 
 In 2004,
Elephant Talk Ltd. executed a credit facility with a bank in Hong Kong pursuant
to which Elephant Talk Ltd. has borrowed funds from the bank. As of March 31,
2010 the overdraft balance included accrued interest amounted to $256,704
compared to $250,023 as of December 31, 2009. The interest rate and default
payment interest rate were charged at 2% and 6% per annum above the Lender’s
Hong Kong Dollar Prime Rate quoted by the Lender from time to time. The Company
has not guaranteed the credit facility or is otherwise obligated to pay funds
drawn upon it on behalf of Elephant Talk Ltd. As of March 31, 2010 Moba
Consulting Partners B.V. had an overdraft of $97,389 compared to $101,566 as of
December 31, 2009 on one of the company’s bank accounts.
 
 Note 11.Accrued
Expenses
 
 As of
March 31, 2010 and December 31, 2009, the accrued expenses comprised of the
following:
 
 March 31,
              
              
              December 31,2010
              
              
              2009Accrued
      Selling, General & Administrative expenses
              
              $
              892,798
              
              
              $
              589,630Placement
      fees
              
              
              —
              
              
              
              —Accrued
      cost of sales and network
              
              
              305,588
              
              
              
              307,172Accrued
      taxes
              
              
              1,326,990
              
              
              
              855,370Accrued
      interest payable
              
              
              495,292
              
              
              
              552,393Other
              
              
              455,411
              
              
              
              434,432Total
      accrued expenses
              
              $
              3,476,079
              
              
              $
              2,738,998
  Note 12.Convertible 14% loan –
related party
 The
Company received interest bearing loans at 14% per annum from QAT II Investments
SA, an entity related to certain directors of the company. The loans are due to
be repaid 180 days after the date the loans were made available to the
Company or in the event another person or entity consummates an equity
or debt securities financing with the Company in the amount of at least
$5,000,000, upon notice to the Company.
 
 These
loans may also be converted into equity under certain conditions. Please see
Note 25: Related Party Transactions, for more information.
 
 The
principal convertible 14% loan amount to Euro 1,850,000 and is subject to
re-valuation on monthly basis, the current outstanding amount is $2,489,175 as
of March 31, 2010.
  Breakdown
      of Convertible 14% Note
                  
                  Principal
                  
                  
                  Discount
                  
                  
                  Net
      LiabilityConvertible
      14% note - related party
                  
                  $
                  2,489,175
                  
                  
                  $
                  (2,358,868
                  )
                  
                  $
                  130,307Totals
                  
                  $
                  2,489,175
                  
                  
                  $
                  (2,358,868
                  )
                  
                  $
                  130,307
  13
 
 Note13.Loans
Payable
 
 Loans
payable at March 31, 2010 and December 31, 2009 are summarized as
follows:
 
 March 31,
                2010
              
              
              December 31,
                2009Installment loan payable
      due December 24, 2006, secured by personalguarantees
      of two shareholders, a former director, and a third party
              
              $
              319,943
              
              
              $
              320,339Installment
      loan payable, bank, monthly principal and interest payments of $2,798
      including interest at bank's prime rate plus 1.5% per annum, 8.25% at
      November 30, 2008, due December 24, 2011, secured by personal guarantees
      of three shareholders and a former director
              
              
              191,170
              
              
              
              191,407Installment
      loan payable, bank, monthly principal and interest payments of $1,729
      including interest at bank's prime rate plus 1.5% per annum, 8.25% at
      November 24, 2008, due June 28, 2009, secured by personal guarantees of
      three shareholders and a former director
              
              
              85,001
              
              
              
              85,106Term
      loan payable, bank, monthly payments of interest at bank's prime rate,
      7.0% at March 31, 2010
              
              
              283,333
              
              
              
              283,684Total
              
              $
              879,447
              
              
              $
              880,536
 
 Elephant
Talk Ltd. has executed a credit facility with a bank in Hong Kong since June 29,
2004 under which Elephant Talk Ltd has borrowed funds from the bank under three
installment loans and a term loan arrangement. Elephant Talk Ltd is in default
of making loan payments on all the loans and has recorded an accrued interest
amounting to $567,115 as of March 31, 2010. As a result of the default, the
entire loan balance outstanding at March 31, 2010 is due and payable to the
bank. Furthermore, Elephant Talk Ltd is obligated to pay a default interest rate
at the rate of 4.25% per annum in addition to the prescribed interest rate of
the installment loans and term loan. Elephant Talk Ltd has recorded $3,067 and
$1,581 in interest expense and default interest expense, respectively, on loans
payable as of March 31, 2010 and March 31, 2009 and $11,655 and $2,728 in
interest expense as of March 31, 2010 and March 31, 2009, respectively. The
Company has not guaranteed the credit facility or is otherwise obligated to pay
funds drawn upon it on behalf of Elephant Talk Ltd.
 
 Note 14.Long term
debt
 
 The
Company’s 51% owned subsidiary ET-UTS N.V. has received $441,546 in interest
bearing (8% per annum) unsecured loans from United Telecommunication Services
N.V., the 49% shareholder in the subsidiary. No maturity has been
fixed.
 
 Note 15. 12% Secured ConvertiblePromissoryNotes
 On July
31, August 18, September 3, September 30 and October 30, 2009, the Company
consummated closings of its private placement offerings of Units (“2009 private
placement”) comprised of 12% secured convertible promissory notes (the “Notes”)
and warrants (the “Warrants”) to purchase shares of no par value common stock to
accredited investors (collectively, “the Securities”). The Securities were
offered and sold pursuant to an exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"). The Company
sold an aggregate of $12,333,020 principal amount of Notes and delivered
Warrants to purchase an aggregate of 12,333,020 shares of the Company’s no par
value common stock at a purchase price of $1.00 per share. The Company used
the net proceeds from the 2009 private placement primarily for working
capital.
  The issue
of the Warrants to the investors of the 2009 private placement have been
capitalized and off set against the liability for the Notes. This resulted in a
debt discount of $12,333,020 incurred in connection with the private
placement. The debt discount will be amortized over the term of the Notes using
the effective interest method.
  Breakdown
      of Convertible 12% Secured Note
                  
                  Principal
                  
                  
                  Discount
                  
                  
                  Net
      LiabilityConvertible
      12% secured note - third party
                  
                  $
                  7,000,637
                  
                  
                  $
                  (6,993,249
                  )
                  
                  $
                  7,388Convertible
      12% secured note - related party
                  
                  $
                  5,332,383
                  
                  
                  $
                  (5,324,516
                  )
                  
                  $
                  7,867Totals
                  
                  $
                  12,333,020
                  
                  
                  $
                  (12,317,765
                  )
                  
                  $
                  15,255
  The Notes
are convertible at the option of the holder into no par value common stock of
the Company at a conversion price equal to $1.35.
 Note 16. Warrant
liabilities
 
 We have
issued the Warrants in connection with the 2009 private placement. The Warrants
include conversion provisions that require us to record them at fair value as a
liability in accordance with ASC 815 (formerly EITF 00-19), with subsequent
changes in fair value recorded as a non-operating gain or loss in our statement
of operations. The fair value of the warrants is determined using a
Black-Scholes option pricing model, and is affected by changes in inputs to that
model including our stock price, expected stock price volatility, interest rates
and expected term. The fair value of the Warrants issued to investors and
placement agents in connection with the 2009 private placement were $16,569,721
upon issuance and are valued at $22,281,909 as of March 31, 2010.
  14
 
 During
2010 warrants have been issued as an incentive to QAT II Investments SA for
their continuous financing of the Company and other warrants were granted as
part of the purchase price of the acquisition of ValidSoft to the former
Shareholders of ValidSoft. The aggregate fair value of the warrants issued in
2010 can be valued at $8,249,663 upon issuance and are valued at $10,228,287 as
of March 31, 2010. The warrants issued to placement agents were capitalized as
deferred financing costs (see note 6) and were valued using the Black-Scholes
model and the inputs in accordance with ASC 505.




Outstanding
      warrants consisted of the following as of March 31, 2010:
              
              Initial
      Fair Value
              
              
              Fair
      Mark-to- Market Value asper
                31.03.2010Warrants
      - Related to 2009 private placement
              
              $
              14.284.242
              
              
              $
              19.162.986Placement
      Agent Warrants - Related to the 2009 private placement
              
              $
              2.285.479
              
              
              $
              3.118.9232010
      QAT II Loan Warrants
              
              $
              3.042.617
              
              
              $
              3.420.533Warrants
      issued for the Acquisition of ValidSoft
              
              $
              5.207.046
              
              
              $
              6.807.754$
              24.819.384
              
              
              $
              32.510.197




Note 17. Conversion
feature
 
 A
conversion feature (holders of the 2009 private placement notes will receive a
discount of 15% when converting the principal into shares instead of cash
repayment) was recognized at fair value on the respective issuance dates of the
Notes as a discount and will be amortized using the effective interest rate
method from issuance to the maturity date of the respective Notes. The
conversion feature has been marked to market each previous reporting dates with
subsequent changes in fair value which have been recorded as non-operating gains
or losses in our statement of operations. No additional conversion features were
issued during the first quarter. The aggregate fair value of the existing
conversion feature is $2,916,759 as of March 31, 2010. This value will not be
subject to further changes as the terms in the Note agreement have determined
that: ”the conversion price shall be equal to eighty-five percent (85%) of the
twenty (20) day average closing price of the Common Stock for the twenty (20)
trading days prior to March 31, 2010. These variables have resulted in a
calculation of a conversion price of $1.35 which may be converted into shares of
common stock in full or in part at any time before the maturity
date.
 
 During
2010 the company received some additional loans from QAT II Investments SA for a
total amount of EUR 1,850,000 with a current book value of $2,449,215 which
included the right for the lender to “convert the principal and accrued interest
outstanding as of the date of the consummation of the Placement into the same
type of equity or debt securities issued by the Borrower under the Placement and
pursuant to the same Placement terms and conditions offered to such other person
or company” in case of a successful placement of an equity or debt securities
financing with the borrower.




Outstanding
      Conversion Feature Liability consisted of the following as of March 31,
      2010:
              
              Initial
      Fair Value
              
              
              Fair
      Mark-to- Market Value as per
                March
      31, 2010Conversion
      Feature - Related to 15% discount on 2009 Prom Note issue
              
              $
              2,418,819
              
              
              $
              2,916,759Conversion
      Feature - Related to conversion right 2010 QAT II Loans
              
              $
              250,000
              
              
              $
              287,392$
              2,668,819
              
              
              $
              3,204,151




Note 18.Stockholders’
Equity
 
 (A)
Common Stock
 
 The
Company is presently authorized to issue 250,000,000 shares of no par value
Common Stock. The Company had 64,014,536 common shares issued and outstanding as
of March 31, 2010, an
increase of 10,318,552 shares since December 31, 2009, largely due to the
10,235,739 shares issued in connection with the Validsoft
acquisition. The shares issued and outstanding as of May 14, 2010
per the stock transfer agent’s records are 64,395,437, which includes 245,900
shares which were cancelled by the Company prior to 2006. These 245,400 shares
were not returned to our stock transfer agent and never cancelled on records.
These shares have been blocked for trading by our Transfer Agent.
  15
  Note 19.Basic and Diluted Net Loss
Per Share
 
 Net loss
per share is calculated in accordance with ASC 260“Earnings per Share” (formerly
SFAS No.128). Basic net loss per share is based upon the weighted average number
of common shares outstanding. Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period. Weighted average number of shares used
to compute basic and diluted loss per share is the same since the effect of
dilutive securities is anti-dilutive.
 
 Note20.Employee Benefit Plan and
Non-Qualified Stock Option and Compensation Plan
 
 2000
Employee Benefit Plan
 
 The
Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
options to acquire the Company’s common stock, no par value, from time to time
to employees of the Company or its subsidiaries. In addition, at the discretion
of the Board of Directors, shares may be granted under this Plan to other
individuals, including consultants or advisors, who contribute to the success of
the Company or its subsidiaries, provided that bona fide services shall be
rendered by consultants and advisors and such services must not be in
conjunction with the offer or sale of securities in a capital raising
transaction. No stock may be issued or options granted under the Plan to
consultants, advisors or other persons who directly or indirectly promote or
maintain a market for the Company’s securities. The Plan is intended to aid the
Company in maintaining and developing a management team, attracting qualified
officers and employees capable of assuring the future success of the Company,
and rewarding those individuals who have contributed to the success of the
Company. The Plan is administrated under the direction of the Board of
Directors. A total of 160,000 common shares and 160,000 stock options to acquire
common shares may be subject to, or issued pursuant to, benefits granted under
the Plan. At any time any stock option is granted under the terms of this Plan,
the Company will reserve for issuance the number of shares of Stock subject to
such option until it is exercised or expired. The Plan Administrator shall
determine from time to time the terms, conditions and price of the options
granted. Options shall not be construed to be stock and cannot be exercised
after the expiration of its term. Under the Plan, 12,000 shares of common stock
and 160,000 stock options remain available for grant at March 31,
2010.
 
 2006
Non-Qualified Stock and Option Compensation Plan
 
 Under
this plan there are, as of March 31, 2010, 344,342 stock options outstanding.
There are remaining 600,000 shares and 55,658 stock options available for
grant.
 
 Options
granted generally vest over a 3 year period. Options generally expire 2 years
from the date of vesting.
 
 Common
stock purchase options and warrants consisted of the following as of March 31,
2010:
 
 Number
      of
                shares
              
              
              Exercise
                Price
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2009
              
              
              344,342
              
              
              $
              2.25
              
              
              $
              427,046Granted
      in 2010
              
              
              —
              
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Cancelled/Forfeited
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      as of March 31, 2010
              
              
              344,342
              
              
              $
              2.25
              
              
              $
              427,046
 
 16
  The
options were granted with an exercise price of $2.25, the share closing price as
of September 26, 2007. The options have generally vested on December 31, 2009,
or if there is a change of control in the Company for the options which have not
yet reached the vesting-date.
 
 No
options have been issued or granted under this plan in 2010.
 
 Following
is a summary of the status of options outstanding under the 2006 plan at March
31, 2010:
 
 Options
      outstanding
              
              Options
      exercisableRange
      of Exercise Prices
              
              Total
                Options
                Outstanding
              
              Weighted
                Average
                Remaining
                Life
                (Years)
              
              Weighted
                Average
                Exercise
                Price
              
              Options
                Exercisable
              
              Weighted
                Average
                Exercise
                Price$2.25
              
              344,342
              
              2.11
              
              $2.25
              
              262,142
              
              $2.25
 
 At March
31, 2010, the total compensation cost related to unvested stock-based awards
granted to employees under the provisions of ASC 718 and the Company’s 2006
stock award plan, but not yet recognized was approximately $31,830.
 
 2008
Long-Term Incentive Plan
 
 The 2008
Long-Term incentive plan was adopted on January 15, 2008, and approved by our
shareholders on the same date at our annual meeting. The 2008 Long-Term
incentive authorizes awards of up to 5,000,000 shares of common stock, in the
form of incentive and non-qualified stock options, stock appreciation rights,
performance units, restricted stock awards and performance bonuses. The amount
of common stock underlying the awards to be granted remained the same after the
25 to one reverse stock-split that was effectuated on June 11, 2008. As of March
31, 2010, a total of 3,742,000 stock options and 507,300 shares had been granted
under this plan. Options granted generally begin vesting over a three (3) year
period after grant date although already Options have been granted with a
shorter period than three (3) years. Options generally expired two (2) years
from the date of vesting but the latest issued options remain exercisable for
ten (10) years from the date of vesting. It is expected that future options will
be awarded with the ten (10) year exercise period after vesting.
 
 Common
stock purchase options and warrants consisted of the following as of March 31,
2010:
 
 Number
      of
                shares
              
              
              Average
                ExercisePrice
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2009
              
              
              976,000
              
              
              $
              0.89
              
              
              $
              646,772Granted
      in 2010
              
              
              2,774,000
              
              
              $
              1.39
              
              
              $
              3,176,287Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Cancelled/Forfeited
              
              
              8,000
              
              
              $
              0.82
              
              
              $
              4,828Outstanding
      as of March 31, 2010
              
              
              3,742,000
              
              
              $
              1.26
              
              
              $
              3,818,231
 
 The
options granted pursuant to this plan in 2010 were granted with an average
exercise price of $1.39. The initial fair market value of the options granted
using the Black-Sholes options model for these options has been valued at
$3,176,287 at their initial grant-dates.
  17
 
 Following
is a summary of the status of options outstanding under the 2008 Long-Term
Incentive Plan at March 31, 2010:
 
 Options
      outstanding
              
              Options
      exercisableRange
      of Exercise Price
              
              Total
                Options
                Outstanding
              
              Weighted
                Average
                Remaining
                Life
                (Years)
              
              Weighted
                Average
                Exercise
                Price
              
              Options
                Exercisable
              
              Weighted
                Average
                Exercise
                Price$0.60-1.57
              
              3,742,000
              
              8,5
      years
              
              $1.26
              
              145,834
              
              $1.09
 
 The
weighted average assumptions used so far for the options granted in 2010 using
the Black-Scholes options model are: volatility of 145%, term of 10.00 years and
a Risk Free Interest Rate assumption of 3.814%. The expected dividend yield is
zero.
 
 At March
31, 2010 the total compensation cost related to unvested stock-based awards
granted to employees under the provisions of ASC 718 and the Company’s 2008
stock award plan, but not yet recognized in the profit and loss was
approximately $3,064,097
 
 Note21.Commitments
 
 As of
March 31, 2010 commitments of the Company relating to leases, co-location,
interconnect and office rents,
  December
      31, 2010
              
              $
              1,730,129December
      31, 2011
              
              
              2,789,759December
      31, 2012
              
              
              2,186,049December
      31, 2013
              
              
              1,816,301December
      31, 2014
              
              
              82,846Total
              
              $
              8,605,084
  Note
22.Minority
interests in subsidiaries
 
 The
Company had minority interests in several of its subsidiaries. The balance of
the minority interests as of March 31, 2010 and December 31, 2009 were as
follows:


Noncontrolling
      interestBalance
      atSubsidiary
              
              Noncontrolling
      Interest %
              
              
              March
      31,
                2010
              
              
              December
      31,
                2009ETC
      PRS UK
              
              
              49
              %
              
              $
              9,871
              
              
              $
              10,516ETC
      PRS Netherlands
              
              
              49
              %
              
              
              131,844
              
              
              
              140,462ET
      ME&A Holding WLL
              
              
              40
              %
              
              
              —
              
              
              
              —ET
      Bahrain WLL
              
              
              1
              %
              
              
              3,672
              
              
              
              3,180ET
      ME&A FZ LLC
              
              
              49.46
              %
              
              
              35,241
              
              
              
              35,242ET
      UTS Curacao
              
              
              49
              %
              
              
              —
              
              
              
              —Total
              
              
              
              
              
              $
              180,628
              
              
              $
              189,400




Note 23.Litigation
 
 (a)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.
  As
previously described in our 2004 Annual Report we and New Times Navigation
Limited mutually agreed to terminate this purchase agreement. We returned the
received shares of New Times Navigation Limited to the concerned shareholders
and received back 90,100 of our common stock out of the 204,000 issued by us for
the purchase. In addition we issued 37 unsecured convertible promissory notes
for a total amount of $3,600,000. On our request 21 notes were returned
with a total value of $2,040,000.
 
 We are
presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return a
total of 113,900 common shares (valued at $381,565) and also to have them return
the remaining 18 unsecured convertible promissory notes representing a total
amount of $1,740,000 and rescind the purchase agreement. The case is currently
pending.
  18
 
 (b)
Manu Ohri Litigation
  On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court,
Orange County, in a matter entitled Manu Ohri v. Elephant Talk
Communications, Inc., Case No. 30-20009-00120609. Ohri alleges breach
of a written contract, breach of an oral contract, and a common count for
services rendered. Ohri claims, among other things, $427,816 in unpaid
severance payments, $56,951 owed under an oral consulting agreement, and stock
options payable under the oral consulting agreement with a net value of
$622,000. The Company denies all material allegations of Ohri’s complaint
and asserts various affirmative defenses. The Company also filed and served
a cross-complaint against Ohri, who then filed and served an answer, denying the
material allegations of our cross-complaint.
 
 The
parties are continuing with pretrial discovery, and a jury trial is scheduled to
start August 6, 2010.
 
 (c)
Bruce Barren Litigation
  On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled
Bruce Barren v. Elephant Talk Communications, Inc., Case No.
BC429032. Barren alleges causes of action for breach of a restricted stock
agreement, breach of the implied covenant of good faith and fair dealing, breach
of an oral employment agreement, and common counts for services rendered—despite
entering into a settlement agreement and full release of any claims against the
Company shortly after his resignation in May 2009.
 
 The
Company believes that all of Mr. Barren’s such claims are without merit and has
answered his complaint, denying all material allegations and asserting various
affirmative defenses. We intend to continue to vigorously defend ourselves
against these claims.
 
 (d)
Chong Hing Bank Litigation
  On
December 15, 2009, an action was commenced against the Company by Chong Hing
Bank Limited, fka Liu Chong Hing Bank Limited, a publicly listed Hong Kong
company (the “Bank”), in the California Superior Court, Orange County, in a
mater entitled Chong Hing Bank Limited v. Elephant Talk Communications, Inc.,
Case No. 30-2009-00328467. The Bank alleges that it entered into various
installment loan agreements and an overdraft account with Elephant Talk Limited
(“ETL”), a Hong Kong subsidiary of the Company. The Bank alleges that ETL
is in default on the loans and overdraft account, and that $1,536,792.28 plus
interest was due on the date of commencing the action. The Bank
alleges that the Company is liable to repay the loans and overdraft
account. The Bank is suing the Company for breach of contract and common
counts. At this time the Company intends to vigorously challenge the Bank’s
claims.
 
 Note 24.Segment
Information




Year
      ended March 31, 2010EUROPENetherlands
                
                
                Spain
                
                
                Switzerland
                
                
                Others
                
                
                Total
                
                
                Far
      East
                  Hong
      Kong /
                
                
                Middle
      East
                
                
                The
      Americas
                
                
                TOTALRevenues
      from unaffiliated customers:
                
                $
                7,536,044
                
                
                
                462,271
                
                
                
                1,653,982
                
                
                
                15,752
                
                
                $
                9,668,049
                
                
                $
                —
                
                
                $
                264,786
                
                
                $
                10,930
                
                
                $
                9,943,765Operating
      income (loss)
                
                $
                (375,684
                )
                
                $
                (83,949
                )
                
                $
                (1,162,041
                )
                
                $
                (78,827
                )
                
                $
                (1,700,501
                )
                
                $
                44,914
                
                
                $
                102,019
                
                
                $
                (1,167,512
                )
                
                $
                (2,721,080
                )Net
      income (loss):
                
                $
                (366,543
                )
                
                $
                (83,949
                )
                
                $
                (1,159,911
                )
                
                $
                (78,347
                )
                
                $
                (1,688,750
                )
                
                $
                (175,938
                )
                
                $
                102,019
                
                
                $
                (10,576,326
                )
                
                $
                (12,338,995
                )Identifiable
      assets
                
                $
                5,017,168
                
                
                $
                1,294,420
                
                
                $
                9,175,604
                
                
                $
                488,093
                
                
                $
                15,975,284
                
                
                $
                549,442
                
                
                $
                503,743
                
                
                $
                28,382,260
                
                
                $
                45,410,729Depreciation
      and amortization
                
                $
                (26,006
                )
                
                $
                (56,423
                )
                
                $
                (552,366
                )
                
                $
                (11,337
                )
                
                $
                (646,133
                )
                
                $
                (13,807
                )
                
                $
                (10,379
                )
                
                $
                (174,376
                )
                
                $
                (844,694
                )Capital
      expenditure
                
                $
                673
                
                
                $
                —
                
                
                $
                489,896
                
                
                $
                0
                
                
                $
                490,569
                
                
                $
                (105,604
                )
                
                $
                —
                
                
                $
                11,130
                
                
                $
                396,094




19




Year
      ended March 31, 2009EUROPENetherlands
              
              
              Spain
              
              
              Switzerland
              
              
              Others
              
              
              Total
              
              
              Far
      East Hong Kong /
              
              
              Middle
      East
              
              
              The
      Americas
              
              
              TOTALRevenues
      from unaffiliated customers:
              
              $
              7,167,378
              
              
              $
              479,596
              
              
              $
              1,326,979
              
              
              $
              160,466
              
              
              $
              9,134,419
              
              
              $
              4,878
              
              
              $
              289,587
              
              
              $
              —
              
              
              $
              9,428,884Operating
      income (loss)
              
              $
              (258,790
              )
              
              $
              8,924
              
              
              $
              (850,525
              )
              
              $
              (88,490
              )
              
              $
              (1,188,881
              )
              
              $
              (133,370
              )
              
              $
              (29,527
              )
              
              $
              (729,925
              )
              
              $
              (2,081,703
              )Net
      income (loss):
              
              $
              (258,648
              )
              
              $
              8,924
              
              
              $
              (850,475
              )
              
              $
              (88,523
              )
              
              $
              (1,188,722
              )
              
              $
              (366,493
              )
              
              $
              (29,425
              )
              
              $
              (559,681
              )
              
              $
              (2,144,321
              )Identifiable
      assets
              
              $
              4,737,281
              
              
              $
              1,506,734
              
              
              $
              10,301,027
              
              
              $
              559,813
              
              
              $
              17,104,855
              
              
              $
              259,104
              
              
              $
              850,286
              
              
              $
              2,059,342
              
              
              $
              20,273,586Depreciation
      and amortization
              
              $
              (24,364
              )
              
              $
              (44,529
              )
              
              $
              (383,758
              )
              
              $
              3,849
              
              
              $
              (448,802
              )
              
              $
              (11,916
              )
              
              $
              (10,360
              )
              
              $
              (159,104
              )
              
              $
              (630,182
              )Capital
      expenditure
              
              $
              23,152
              
              
              $
              1,184
              
              
              $
              549,232
              
              
              $
              —
              
              
              $
              573,568
              
              
              $
              2,826
              
              
              $
              —
              
              
              $
              155,240
              
              
              $
              731,634




Note 25.Related Party
Transactions
 
 Loan
agreements
  On
February 2, 2010, we entered into a loan agreement with QAT II Investments SA.
Pursuant to this loan agreement, QAT II Investments agreed to lend to us
the sum of €350,000 ($488,775 based on the February 2, 2010 exchange rate
published in the Wall Street Journal). The proceeds were made available to
the Company on February 2, 2010.
 
 On
February 24, 2010, we entered into a loan agreement with QAT II Investments
SA. Pursuant to this loan agreement, QAT II Investments agreed to lend
us the sum of €850,000 ($1,150,390 based on the February 24, 2010 exchange rate
published in the Wall Street Journal). The proceeds of the loan agreement
were made available to the Company on February 24, 2010.
 
 On March
22, 2010, we entered into a loan agreement with QAT II Investments SA. Pursuant
to this loan agreement, QAT II Investments agreed to lend us the sum of
€150,000 ($203,280 based on the March 22, 2010 exchange rate published in the
Wall Street Journal). The proceeds of the loan agreement were made
available to the Company on March 22, 2010
 
 On March
30, 2010, we entered into a loan agreement with QAT II Investments SA. Pursuant
to the loan agreement, QAT II Investments agreed to lend us the sum of €500,000
($670,750 based on March 30, 2010 exchange rate published in the Wall Street
Journal). The proceeds of the loan agreement were made available to the
Company on March 31, 2010.
 
 Each of
the above mentioned loan agreement provides that the Company will pay QAT II
Investments interest at a rate of fourteen percent (14%) per annum on the
outstanding balance and provides the principal and interest shall be due and
payable on the earlier of: (i) within 180 days or (ii) in the event the Company
consummates an equity or debt financing of at least $5,000,000 (a “Placement”);
provided, however, QAT II Investments has the ability to convert the principal
and accrued interest outstanding as of the date of the Placement into the same
type of equity or debt securities issued by the Company and on the same terms
and conditions offered to other investors in the Placement. The outstanding
principal and interest shall become immediately due and payable in the event the
Registrant fails to make required payments of principal and interest, or
otherwise breaches the loan agreement and fails to cure such breach upon twenty
(20) days notice, or if it disposes of its properties or assets without QAT II
Investments’ prior consent, or if it files a petition for bankruptcy or
otherwise resolves to wind up its affairs.
  20
 
 On the
loan date, the Company shall issue to QAT II Investments warrants to purchase
common stock of the Company in the amount equal to one warrant per each United
States dollar loaned hereunder to the Company (using the Euro-United States
dollar conversion rate published by the Wall Street Journal at the close of
business of the loan date). The foregoing warrants shall be for a term of 3
years and shall have an exercise price equal to the OTCBB closing price of the
Borrower’s common stock as of the Loan Date.
 
 Note 26.Subsequent
Events
 
 On 16 May
2010 we sold 2,160,000of units
at a purchase price of $1.00 per unit, with each unit consisting of one share of
our restricted common stock and two warrants to accredited, United States
and foreign investors (including affiliates of the Company) in transactions
exempt from registration under the Securities Act pursuant to Section 4(2),
Regulation D and Regulation S (the “Sales”). In connection with the Sales,
the purchasers received (i) warrants to purchase up to2,160,000 of shares of our common stock, at an exercise
price of $1.25 per share and (ii) warrants to purchase up to 2,160,000 of shares
of our common stock, at an exercise price of $2.00 per share. None of the
warrants contain cashless exercise provisions. Each warrant contains
standard anti-dilution protection and may be cancelled upon the occurrence of
the following: (i) with respect to the $1.25 warrant, in the event that the
average of the last closing sale price of the common stock on the OTC Bulletin
Board, or a national securities exchange, trading market or inter-dealer
electronic quotation system, exceeds $3.00 for twenty (20) consecutive trading
days and the holder fails to exercise within fifteen (15) days of receipt of
notice this target was met, the warrants will expire worthless and (ii) with
respect to the $2.00 warrant, in the event that the average of the last closing
sale price of the common stock on the OTC Bulletin Board, or a national
securities exchange, trading market or inter-dealer electronic quotation system,
exceeds $4.00 for twenty (20) consecutive trading days and the holder fails to
exercise within fifteen (15) days of receipt of notice this target was met, the
warrants will expire worthless.
 
 Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
 
 Forward-Looking
Statements
  Any
forward looking statements made herein are based on current expectations of the
Company, involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. The factors that could cause
actual results to differ materially include: interruptions or cancellation of
existing contracts, inability to integrate acquisitions, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks, changes in governmental regulations,
and changing economic conditions in developing countries and an inability to
arrange additional debt or equity financing. More information about factors that
potentially could affect the Company's financial results is included in the
Company's filings with the Securities and Exchange Commission, including its
Annual Report on Form 10-K for the year ended December 31, 2009.
  The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this
document.
 
 Overview
 
 The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this
document.
 
 Full-MVNE/MVNO
Mobile Services – wholesale services and managed services
  As of
2007, we positioned ourselves in as an MVNE to MNO’s and MVNO’s offering a wide
range of Mobile Enabling/Enhancing services through sophisticated, proprietary
technology supported by multi-country operations with a focus on B-B,
outsourcing /partnering strategy. Important milestones in this respect
are:
 
 1.
September 11, 2008. Letter of Intent signed by Vodafone España S.A.U. and
Elephant Talk, confirming the award by Vodafone España to Elephant Talk
of the project of implementation and operation of a new MVNE platform for the
Spanish market. Upon signi ng of the intended Hosting Agreement between the
parties, Elephant Talk will become the exclusive MVNE for Vizzavi Spain (part of
the Vodafone Group).
  21
 
 2.
September 17, 2008. Hosting Agreement signed between T-Mobile Netherlands BV and
Elephant Talk Holding AG, a 100% affiliate of Elephant Talk Europe Holding BV.
T-Mobile is one of the 3 Mobile Network Operators in the Netherlands. Elephant
Talk will, as exclusive MVNE for T-Mobile, connect MVNO in the Netherlands to
its platform, making use of the mobile network of T-Mobile.
 
 3.
Following the start of our Mobile (MVNE) services in the Netherlands in the
fourth quarter of 2008, we have entered into numerous Heads of Agreements with
MVNO’s for wholesale services in the Netherlands and have started servicing
these companies while currently implementing additional ones. In Spain we
provide since June 2009 managed services to Vizzavi (part of the Vodafone Group)
and are in the process of preparing and implementing new ones.
 
 Customized
Mobile Solutions – integrated fraud and security solutions
  In line
with our strategy to develop and market customized mobile solutions, we acquired
ValidSoft Ltd. on March 17, 2010. ValidSoft provides strong authentication and
transaction verification capabilities that allow organizations to quickly
implement solutions that protect against certain of the latest forms of credit
and debit card fraud, and on-line transaction and identity theft. By correlating
the relative location of a person’s credit card with the location of their
mobile phone, this service can tell a bank in less than half a second if the
transaction is likely genuine or fraudulent. We anticipate generating revenues
on a per transaction verification fee from banks. This acquisition combines
ValidSoft’s best in class proprietary software with our superior
telecommunication platform to create what we believe is the best electronic
fraud prevention total solution available.
 
 Landline
network outsourcing services
  Through
our fixed line telecom infrastructure and our centrally operated and managed
IN-CRM-Billing platform, we also provide traditional telecom services like
Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate
Services to the business market.
 
 Telecom
infrastructure & network
  We
currently operate a switch-based telecom network with national licenses and
direct fixed line interconnects with the Incumbents/National Telecom Operators
in seven (7) European countries, one (1) in the Middle East (Bahrain), and
partnerships with telecom operators in Scandinavia, Poland and Germany, and
France. To this we have added mobile access coverage in order to cater for our
mobile services and solutions. Our first mobile partners are T-Mobile in the
Netherlands and Vizzavi (a Vodafone company) in Spain.
 
 Business
Support and Operational Support System (“ET BOSS”) and Intelligent Network – IN
– (“ Infitel”)
  Through
our European and Chinese development centers, we develop in-house telecom and
media related systems and software, centered around two of the companies’
proprietary platforms ET BOSS and Infitel.
 
 Results of
Operations
 
 Our
results of operations for the quarter ended March 31, 2010, consisted of the
operations of Elephant Talk Communications, Inc., its wholly-owned subsidiaries
Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and
its subsidiaries, Elephant Talk Global Holding BV and its
subsidiaries.
 
 Although
the vast majority of our business activities are carried out in Euro’s, we
report our financial statements in US dollars (“USD”), The conversion of
Euros to USD leads to period-to-period fluctuations in our reported USD results
arising from changes in the exchange rate between the USD and the
Euro. Generally, when the USD strengthens relative to the Euro, it has an
unfavorable impact on our reported revenue and income and a favorable impact on
our reported expenses. Conversely, when the USD weakens relative to the
Euro, it produces a favorable impact on our reported revenue and income, and an
unfavorable impact on our reported expenses. The above fluctuations in the
USD/Euro exchange rate therefore result in currency translation effects (not to
be confused with real currency exchange effects), which impact our reported USD
results and may make it difficult to determine actual increases and decreases in
our revenue and expenses which are attributable to our actual operating
activities. In addition to reporting changes in our financial statements in
USD’s as per the requirements of United States generally accepted accounting
principles (“US GAAP”), we also highlight the impact of any material currency
translation effect by providing a comparison between periods on a constant
currency basis, where the most recent USD/Euro exchange rate is applied to
previous periods. Management believes that this allows for greater insight
into the trends and changes in our business for the reported periods. Also,
since we carry out our business activities primarily in Euro’s we do not
currently engage in hedging activities.
  22
 
 Three
Month Periods Ended March 31, 2010 compared to the Three Month Periods Ended
March 31, 2009
 
 Revenue
  Revenue
for the quarter ended March 31, 2010 was $9,943,765, an increase of $514,881 or
(5.5%), compared to $9,428,884 for the quarter ended March 31, 2009. The
increase was the result of a favorable impact of a $545,184 currency translation
effect arising from a higher USD/Euro exchange rate, offset primarily by an
increase in our Mobile revenue.
 
 Revenue
- Constant currency
 
 The
decrease in the first quarter 2010 revenue of $30,303 over the first quarter of
2009, in constant currency, was attributable to an increase in our Mobile
revenue of $430,427 and a decline in our premium rate services (“PRS”) of
$427,023, other landline services ($8,366) and Middle East pre-paid calling
cards revenue of ($25,340) compared to the same period in 2009.


Revenue
              
              March
      31, 2010
              
              
              March
      31, 2009
                constant
      currency
              
              
              variance
                2010
      v 2009
                constant
      currencyPremium
      Rate Services
              
              $
              8,561,540
              
              
              $
              8,988,563
              
              
              $
              -427,023Mobile
      Services
              
              
              884,583
              
              
              
              454,156
              
              
              
              430,427Middle
      East Calling Cards
              
              
              264,786
              
              
              
              290,126
              
              
              
              -25,340Other
      revenue
              
              
              232,856
              
              
              
              241,222
              
              
              
              -8,366Total
      Revenue
              
              $
              9,943,765
              
              
              $
              9,974,068
              
              
              $
              -30,303




Cost
of service
  Cost of
service includes origination, termination, network and billing charges from
telecommunications operators, out payment costs to content and information
providers, network costs, data center costs, facility cost of hosting network
and equipment and cost in providing resale arrangements with long distance
service providers, cost of leasing transmission facilities, international
gateway switches for voice, and data transmission services.
 
 Cost of
service for the quarter ended March 31, 2010 was $9,373,888, an increase of
$226,091 (or 2.5%), compared to $9,147,797 for the quarter ended March 31, 2009.
The increase was primarily the result of the unfavorable impact of a $529,350
currency translation effect arising from a higher USD/Euro exchange
rate.
 
 Cost
of service – constant currency
 
 In
constant currency the cost of service decreased by $303,259 (or 3.1%) compared
to the same period in 2009, primarily as a result of lower levels of PRS revenue
on a constant currency basis.
 
 Cost of
service, as a percent of revenue, expressed in constant dollar terms was 94.3%
and 97.0% for the three-month periods ended March 31, 2010 and 2009,
respectively. Management expects cost of service will continue to decline as a
percent of revenue as a greater proportion of future revenue is comprised of our
Mobile services, which have a substantially lower cost of service than our
traditional PRS business.
 
 Selling,
general and administrative
 
 Selling,
general and administrative (“SG&A”) expense for the quarters ended March 31,
2010 and 2009 were $1,905,350 and $1,463,148, respectively. SG&A expenses
increased by $442,202, or 30.2%, in 2010 compared to the same period in 2009.
The increase in expenses was mainly attributable to an increase in legal advice
and accountancy costs and higher staffing levels.
  23
 
 
 Selling,
general and administrative – constant currency
 
 In
constant currency, SG&A increased by $382,449, or 25.1%, compared to the
same period in 2009.
 
 Non-cash
compensation to officers, directors, consultants and employees
 
 Non-cash
compensation for the quarters ended March 31, 2010 and 2009 was $540,913 and
$269,460, respectively. The increase is primarily attributable to higher
staffing levels and awards made to employees and long term contractors under the
2008 Incentive Plan. Non-cash compensation is comprised of:
  ·
              2008
      Long-Term Incentive Plan; and
 
 ·
              the
      expense related to shares issued to consultants for
    services.
 
 Since
non-cash compensation comprises United States Dollars denominated shares,
options and warrants, a constant currency analysis is not
applicable.
 
 Depreciation
and amortization
 
 Depreciation
and amortization for the quarters ended March 31, 2010 and 2009, was $844,694
and $630,182 respectively. Depreciation and amortization expenses increased by
$214,512 or 34.0% in 2010 compared to the same period in 2009.
 
 Depreciation
and amortization – constant currency
 
 In
constant currency the depreciation and amortization expenses increased by
$188,044 or 28.6% compared to the same period in 2009 due to higher levels of
PP&E.
 
 Other
Income and Expenses
 
 Interest
income was $32,599 and $10,070 for the quarters ended March 31, 2010 and 2009
respectively. Interest income was interest received on bank
balances.
 
 Interest
expense was $446,540 and $71,785 for the quarters ended March 31, 2010 and 2009
respectively. The increase in interest expenses of $374,755 compared to 2009 was
mainly related to interest expenses on the convertible 12% secured
note.
 
 In the
first quarter of 2010 the fair value expenses and amortizations related to the
Convertible Notes, associated Warrants and deferred financing costs were
$9,202,676 compared to $ 0 in 2009.
 
 Non-controlling
Interest
  Our
majority owned subsidiaries Elephant Talk Communications PRS U.K. Limited,
Elephant Talk Communications Premium Rate Services Netherlands B.V., Elephant
Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
W.L.L., Elephant Talk Middle East & Africa FZ-LLC and ET-UTS
NV.
 
 We
incurred a non-controlling interest charge attributable to minority
shareholders’ interest for the quarter ended March 31, 2010 of $498. For the
quarter ended March 31, 2009 we incurred a charge of $103.
 
 Comprehensive
Income (Loss)
  We record
foreign currency translation gains and losses as comprehensive income or loss.
Comprehensive Income (Loss) for the quarters ended March 31, 2010 and 2009 was
($521,786) and ($667,792) respectively. This change is primarily attributable to
the translation effect resulting from the substantial fluctuations in the
USD/Euro exchange rates.
  24
 
 Adjusted
EBITDA
  We employ
Adjusted EBITDA, defined as earnings before derivative accounting, such as
warrant liabilities and conversion feature expensing, income taxes, depreciation
and amortization and stock-based compensation, for several purposes, including
as a measure of our operating performance. We use Adjusted EBITDA because it
removes the impact of items not directly resulting from our core operations,
thus allowing us to better assess whether the elements of our growth strategy
are yielding positive results.
 
 A
reconciliation of Adjusted EBITDA to net income, the most directly comparable
measure under accounting principles generally accepted in the United States, for
each of the fiscal periods indicated, is as follows:


Three
      months endedMarch,
      312010
            
            
            2009
            
            
            2009
      in constant currency(unaudited)Net
      loss
            
            $
            (12,338,995
            )
            
            $
            (2,144,321
            )
            
            $
            (2,211,236
            )Provision
      for income taxes
            
            
            800
            
            
            
            800
            
            
            
            800Net
      loss attributable to noncontrolling interest
            
            
            498
            
            
            
            103
            
            
            
            103Depreciation
      and amortization
            
            
            844,694
            
            
            
            630,182
            
            
            
            656,650Stock-based
      compensation
            
            
            540,913
            
            
            
            269,460
            
            
            
            269,460Other
      expenses
            
            
            9,616,617
            
            
            
            61,715
            
            
            
            58,242Adjusted
      EBITDA
            
            $
            (1,335,473
            )
            
            $
            (1,182,061
            )
            
            $
            (1,225,981
            )




Liquidity
and Capital Resources
  We have
an accumulated deficit of $74,673,270 including a net loss of $12,338,995 for
the three months ended March 31, 2010. For the three months ended March 31, 2010
we received a total $2,489,175 from the related party QAT II as well as $
2,160,000 (until 16 May 2010) from accredited investors who purchased our common
stock. We believe that our cash balance at March 31, 2010, in combination with
the additional funding received so far and cash generated from operations, will
provide sufficient funds through the second quarter of 2010.
 
 In the
light of the need to raise additional funds in the immediate short term, we are
focused on capital raising activities, in addition to continuing to control
operating costs and aggressively managing working capital. We are actively
seeking to raise additional debt or equity financing in order to fund our cash
requirements generated by future operations, capital expenditures and potential
acquisitions.
 
 Given the
need to raise additional funds, in the short term, we have been actively engaged
in discussions with potential financing sources in addition to QAT’s funding and
the abovementioned interim financing in order to fund the expected cash
requirements generated by future operations, capital expenditures and potential
acquisitions. In addition to further funds we expect to come in from the interim
financing mentioned above we expect to conclude shortly on the final terms and
conditions of a larger private placement to provide sufficient funds for the
longer term.
 
 Although
we have previously been able to raise capital as needed, there can be no
assurance that such capital will continue to be available at all, or if
available, that the terms of such financing would not be dilutive to existing
shareholders or otherwise on terms favorable to us. Further, the current global
financial situation may offer additional challenges to raising the capital we
require in the immediate short term. If we are unable to secure additional
capital, as circumstances require, we may not be able to continue our
operations. As of March 31, 2010, these conditions raised substantial doubt from
our auditors as to our ability to continue as a going concern.
 
 These
financial statements assume that we will continue as a going concern. If we are
unable to continue as a going concern, we may be unable to realize our assets
and discharge our liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or to the amounts and classification of
liabilities that may be necessary should we be unable to continue as a going
concern.
  25
 
 Operating
activities
  Net cash
used in operating activities for the three months ended March 31, 2010 was
$1,924,832 compared to $1,811,468 in the first quarter of 2009, an increase of
$113,364. This increase is mainly attributable to increased accounts receivable
and accrued expenses and other payables offset by a decrease in accounts
payable.
 
 Investment
activities
  Net cash used in investment activities
for the three months ended March 31, 2010 was $990,766an increase of $259,141(or35%)compared to $731,625inthe first quarter of 2009. The increase was primarily
attributable to the loans to ValidSoft.
 
 Financing
activities
  Net cash
received by financing activities for the three months ended March 31, 2010 was
$2,292,953. See footnote 25.
 
 As a
result of the above activities, the Company had a cash and cash equivalents
balance of $792,247 as of March 31, 2010, a net decrease in cash and cash
equivalents of $665,653, for the three months ended March 31, 2010.
 
 Application of Critical
Accounting Policies and Estimates
 
 Revenue
Recognition and Deferred Revenue
  The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”) (formerly, Staff Accounting Bulletin (SAB) 104). Revenue
is recognized only when the price is fixed or determinable, persuasive evidence
of arrangement exists, the service is performed and the collectability of the
resulting receivable is reasonably assured. The Company derives revenue
from activities as a fixed-line and mobile services provider with its network
and its own switching technology. Revenue represents amounts earned for
telecommunication services provided to customers (net of value added tax and
inter-company revenue). The Company recognizes revenue from prepaid calling
cards as the services are provided. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as deferred
revenue. Deferred revenue represents amounts received from the customers against
future sales of services since the Company recognizes revenue upon performing
the services.
 
 Stock-based
Compensation
  Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation”,” (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective
approach. As a result, we recognize stock-based compensation expense for only
those awards that are granted subsequent to December 31, 2005 and any previously
existing awards that are subject to variable accounting, including certain stock
options that were exercised with notes in 2003, until the awards are exercised,
forfeited, or contractually expire in accordance with the prospective method and
the transition rules of ASC 718. Under ASC 718, stock-based awards granted after
December 31, 2005, are recorded at fair value as of the grant date and
recognized as expense over the employee’s requisite service period (the vesting
period, generally three years), which we have elected to amortize on a
straight-line basis.
 
 Intangible
Assets and Impairment of long Lived Assets
  In
accordance with ASC 350 (formerly SFAS No. 142), intangible assets are carried
at cost less accumulated amortization and impairment charges. Intangible assets
are amortized on a straight-line basis over the expected useful lives of the
assets, between three and ten years. Other intangible assets are reviewed for
impairment in accordance with ASC 360, “Property, Plant, and Equipment”
(formerly SFAS No. 144), annually, or whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is based
on the amount of the carrying value that exceeds the fair value of the
asset.
 
 Impact of Accounting
Pronouncements
 
 In April 2009, the FASB issued guidance, which is now part
of ASC 825, “Interim Disclosures about Fair Value of Financial Instruments”
(“ASC 825”) (formerly Financial Staff Position SFAS 107-1 and Accounting
Principles Board (APB) Opinion No. 28-1). ASC 825 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
ASC 825 is effective for interim and annual reporting periods ending after June
15, 2009. The adoption of ASC 825 did not have an impact on the Company’s
consolidated financial statements.
  26
 
 In May
2009, the FASB issued new guidance for accounting for subsequent
events. The new guidance, which is now part of ASC 855-10, “Subsequent
Events” (“ASC 855-10”) (formerly, SFAS No. 165) is consistent with existing
auditing standards in defining subsequent events as events or transactions that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued, but it also requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The new guidance defines two types of subsequent events: “recognized
subsequent events” and “non-recognized subsequent events.” Recognized subsequent
events provide additional evidence about conditions that existed at the balance
sheet date and must be reflected in the company’s financial
statements. Non-recognized subsequent events provide evidence about
conditions that arose after the balance sheet date and are not reflected in the
financial statements of a company. Certain non-recognized subsequent events
may require disclosure to prevent the financial statements from being
misleading. The new guidance was effective on a prospective basis for
interim or annual periods ending after June 15, 2009. We adopted the
provisions of ASC 855-10 as required.
 
 In June
2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (ASC 105-10) (formerly Statement of Financial Accounting
Standards No. 168), which establishes the FASB Accounting Standards Codification
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles. ASC
105-10 is effective for interim and annual periods ending after September 15,
2009. The adoption of ASC 105-10 did not have a material impact on the Company’s
consolidated financial statements.
 
 Item
3. Quantitative and Qualitative Disclosure About Market Risks
 
 Not
applicable.
 
 Item 4T. Controls and
Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on the foregoing,
our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were not effective as of the end of the
period covered by this quarterly report due to the significant deficiencies
described below.
 
 Our
management has identified a material weakness in our disclosure controls and
procedures due to a lack of personnel and technological resources. This material
weakness restricts our ability to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is
accumulated and communicated to management and that information is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
 
 Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure.
  27
 
 Changes
in Internal Control over Financial Reporting
  There
have not been any other changes in the Corporation’s internal control over
financial reporting during the quarter ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 PART II - OTHER INFORMATION
 
 Item
1. Legal Proceedings
 
 (a)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.
  As
previously described in our 2004 Annual Report we and New Times Navigation
Limited mutually agreed to terminate this purchase agreement. We returned the
received shares of New Times Navigation Limited to the concerned shareholders
and received back 90,100 of our common stock out of the 204,000 issued by us for
the purchase. In addition we issued 37 unsecured convertible promissory notes
for a total amount of $3,600,000. On our request 21 notes were returned with a
total value of $2,040,000.
 
 We are
presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return a
total of 113,900 common shares (valued at $381,565) and also to have them return
the remaining 18 unsecured convertible promissory notes representing a total
amount of $1,740,000 and rescind the purchase agreement. The case is currently
pending.
 
 (b)
Manu Ohri Litigation
 
 On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court,
Orange County, in a matter entitled Manu Ohri v. Elephant Talk
Communications, Inc., Case No. 30-20009-00120609. Ohri alleges breach
of a written contract, breach of an oral contract, and a common count for
services rendered. Ohri claims, among other things, $427,816 in unpaid
severance payments, $56,951 owed under an oral consulting agreement, and stock
options payable under the oral consulting agreement with a net value of
$622,000. The Company denies all material allegations of Ohri’s complaint
and asserts various affirmative defenses. The Company also filed and served
a cross-complaint against Ohri, who then filed and served an answer, denying the
material allegations of our cross-complaint.
 
 The
parties are continuing with pretrial discovery, and a jury trial is scheduled to
start August 6, 2010.
 
 (c)
Bruce Barren Litigation
 
 On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled
Bruce Barren v. Elephant Talk Communications, Inc., Case No.
BC429032. Barren alleges causes of action for breach of a restricted stock
agreement, breach of the implied covenant of good faith and fair dealing, breach
of an oral employment agreement, and common counts for services rendered—despite
entering into a settlement agreement and full release of any claims against the
Company shortly after his resignation in May 2009.
 
 The
Company believes that all of Mr. Barren’s such claims are without merit and has
answered his complaint, denying all material allegations and asserting various
affirmative defenses. We intend to vigorously defend ourselves against these
claims.
 
 (d)
Chong Hing Bank Litigation
 
 On
December 15, 2009, an action was commenced against the Company by Chong Hing
Bank Limited, fka Liu Chong Hing Bank Limited, a publicly listed Hong Kong
company (the “Bank”), in the California Superior Court, Orange County, in a
mater entitled Chong Hing Bank Limited v. Elephant Talk Communications, Inc.,
Case No. 30-2009-00328467. The Bank alleges that it entered into various
installment loan agreements and an overdraft account with Elephant Talk Limited
(“ETL”), a Hong Kong subsidiary of the Company. The Bank alleges that ETL
is in default on the loans and overdraft account, and that $1,536,792plus
interest was due on the date of commencing the action. The Bank alleges
that the Company is liable to repay the loans and overdraft account. The
Bank is suing the Company for breach of contract and common counts.At this time
the Company intends to vigorously challenge the Bank’s claims.
  28
 
 Item 1a. Risk Factors
 
 In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the Risk Factors included in Part I, “Item
1A. — “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2009, and the additional, if any, Risk Factors set forth below.
These Risk Factors could materially impact our business, financial condition
and/or operating results. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
impact our business, financial condition and/or operating results.
 
 Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
  As of
March 17, 2010, we issued 10,235,739 shares of restricted common stock to the
stockholders of Validsoft in partial consideration for the exchange for 100% of
the capital stock of Validsoft. Please see the Exhibits to our Current
Report on Form 8-K filed March 17, 2010, for more detailed information regarding
this acquisition.
  In
addition to the above issuance, during the quarter ending March 31, 2010, we
issued an aggregate of 56,945 shares to various parties for (i) services
provided and (ii) with respect to contingent condition due pursuant to a
stock purchase agreement. We
received no proceeds from the issuance of these securities.
  The
above-referenced securities were offered and sold pursuant to exemptions from
registration provided by the Securities Act.
 
 Item 3. Defaults upon Senior
Securities.
  None.
 
 Item 4. Submission of Matters to a Vote of Security
Holders
  None.
 
 Item 5. Other Information
  None.
 
 
 Item 6. Exhibits
 
 (a)
Exhibits
  10.1
              Loan
      agreement dated March 22, 2010 by and between the Company and
      QAT II Investments SA10.2
              Loan
      agreement dated March 22, 2010 by and between the Company and
      QAT II Investments SA31.1
              Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
      X-1.31.2
              Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
      X-2.32.1
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 on page X-3.32.2
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 on page
X-4.
 
 29
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 ELEPHANT
      TALK COMMUNICATIONS, INC.May
      17, 2010
              By
              /s/ Steven
      van der VeldenSteven
      van der VeldenPresident
      and Chief Executive Officer
                (Principal
      Executive Officer)May
      17, 2010
              By
              /s/ Mark
      NijeMark
      NijeChief
      Financial Officer
                (Principal
      Financial and Accounting Officer)
 
 30
 
 Index to
Exhibits
  Number
              
              Exhibit
              
              Page10.1
              
              Loan
      agreement dated March 22, 2010 by and between the Company and
      QAT II Investments SA10.2
              
              Loan
      agreement dated March 22, 2010 by and between the Company and
      QAT II Investments SA31.1
              
              Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
              
              X-131.2
              
              Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
              
              X-232.1
              
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
              
              X-332.2
              
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
              
              X-4
 
 31