UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q/A
 (Mark One)
 
 þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 For the quarter ended March 31, 2010
 
 OR
 
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ______ to ______
 
 Commission file number: 000-53668
 
 NET TALK.COM, INC.
 (Exact name of Registrant as specified in its charter)
  Florida

20-4830633(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)1100 NW 163 Drive, Miami, FL

33169(Address of principal executive offices)

(Zip code)
 
 Registrant's telephone number, including area code:  (305) 621-1200
 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during  the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
 Indicate by check mark whether the registrant is a large 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  o       Accelerated Filer  o       Non-accelerated filer  o       Smaller reporting company  þ
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
 The Registrant had 9,719,800 shares of Common Stock, par value $0.001 per share, outstanding as of May 12, 2010.


1








Net Talk.com, Inc








INDEX








Part I
Financial Information
Page No.Item 1
Financial StatementsBalance Sheets at March 31, 2010 (Unaudited) and September 30, 2009
3Statement of Operations for the Three and Six Months Ended
4March 31, 2010 and 2009 (Unaudited)Statements of Cash Flows for the Six Months Ended March 31, 2010 and
52009 (Unaudited)Notes to Financial Statements
6Item 2
Management’s Discussion and Analysis of Financial Conditions and
22Results of OperationsItem 3
Quantitative and Qualitative Disclosures About Market Risks
39Item 4
Controls and Procedures
39Part II
Other InformationItem 1
Legal Proceedings
40Item 1A
Risk Factors
40Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
40Item 3
Defaults Upon Senior Securities
40Item 4
Submission of Matters to a Vote of Security Holders
40Item 5
Other information
40Item 6
Exhibits
41Signatures

42







2




Part IItem 1.   Financial statementsNet Talk.com, Inc.Balance SheetsMarch 31,


September 30,2010


2009(unaudited)AssetsCurrent assets:Cash and cash equivalents


$
3,003,403


$
1,007,366Restricted cash



2,021,206



3,332Accounts receivables, net of allowance for bad debts of $11,273 and $1,042


39,075



37,315Inventory



139,159



117,712Prepaid expenses



740



5,008Total current assets


5,203,583



1,170,733Telecommunication equipment and other property, net


610,317



665,315Intangible assets, net



485,321



604,987Deferred financing costs and other assets


14,000



298,266Total assets


$
6,313,221


$
2,739,301Liabilities and Stockholders' Deficit:Accounts payable


$
434,139


$
264,912Due to officer



28,525



56,300Accrued dividends



35,000



168,774Accrued expenses



39,786



49,320Current portion of senior secured convertible debentures


-



1,509,880($0 and $1,500,000 face value)Current portion of derivative liabilities


-



382,200Total current liabilities



537,450



2,431,386Senior secured convertible debentures ($4,998,773 and $2,700,000 face value)


4,998,773



1,136,875Derivative liabilities



12,698,551



945,072Total liabilities



18,234,774



4,513,333Redeemable preferred stock $.001 par value, 10,000,000 sharesauthorized, 300 issued and outstanding


40,006



-Stockholders' equity (Deficit):Common stock, $.001 par value, 300,000,000 sharesauthorized, 9,719,800 issued and outstanding, as of


9,720



9,720March 31, 2010 and September 30, 2009, respectivelyPreferred stock to be issued at future date(s)


2,000,000



-Additional paid in surplus



3,574,871



3,458,825Accumulated deficit



(17,546,150
)


(5,242,577
)Total stockholders' deficit



(11,961,559
)


(1,774,032
)Total liabilities, redeemable preferred stock and stockholders' deficit

$
6,313,221


$
2,739,301The accompanying notes are an integral part of the financial statements


3





Net Talk.com, Inc.Statements of OperationsThree Months Ended


Six Months EndedMarch 31,


March 31,2010


2009


2010


2009(unaudited)


(unaudited)


(unaudited)


(unaudited)Revenues


$
245,636


$
-


$
429,829


$
-Cost of sales



326,467



-



658,783



-Gross margin



(80,831
)


-



(228,954
)


-Advertising



91,108



-



164,038



-Compensation and benefits



91,771



167,599



193,834



256,599Professional fees



91,495



20,058



141,604



136,425Depreciation and amortization



90,618



66,835



181,208



133,559Research and development



78,179



23,870



124,464



111,997General and administrative expenses


128,838



82,025



253,490



146,716Total operating expenses



572,009



360,387



1,058,638



785,296Loss from operations



(652,840
)


(360,387
)


(1,287,592
)


(785,296
)Other income (expenses):Interest expense



(858,172
)


(118,423
)


(1,184,363
)


(165,618
)Derivative income (expense)



(4,163,525
)


103,714



(5,347,297
)


164,914Debt extinguished



(3,617,983
)


-



(3,617,983
)


-Interest income



2,406



3,430



5,981



5,755(8,637,274
)


(11,279
)


(10,143,662
)


5,051Net loss



(9,290,114
)


(371,666
)


(11,431,254
)


(780,245
)Reconciliation of net (loss) to (loss) applicable to common stockholders:Preferred stock dividends in arrears


(35,000
)


-



(35,000
)


-Accretion of preferred stock



(40,006
)


-



(40,006
)


-Loss applicable to common stockholders


$
(9,365,120
)

$
(371,666
)

$
(11,506,260
)

$
(780,245
)Loss per common shares:Basic and diluted


$
(0.96
)

$
(0.04
)

$
(1.18
)

$
(0.09
)Weighted average shares, basic and diluted


9,719,800



8,749,800



9,719,800



8,749,800The accompanying notes are an integral part of the financial statements


4





Net Talk.com, Inc.Statements of Cash FlowsSix Months Ended March 31,2010


2009(unaudited)


(unaudited)Cash flow from operating activities:Net income (loss)


$
(11,431,254
)

$
(780,245
)Adjustments to reconcile net loss to cash used in operations:Depreciation



61,542



58,545Amortization



119,666



75,014Amortization of finance costs



72,341



19,439Amortization of debt discount



479,404



29,781Bad debt expense



10,232



-Warrant liability



2,538



-Derivative fair value adjustments



(975,503
)


(164,914
)Day one derivative losses



6,322,800Extinguishment



3,617,983Changes in assets and liabilities:Accounts receivables



(11,992
)


-Prepaid expenses and other assets



4,267



(121,501
)Inventories



(21,447
)


-Accounts payables



169,227



80,155Accrued expenses



617,929



-Net cash used in operating activities



(962,267
)


(803,726
)Cash flow used in investing activities:Restricted cash



(2,021,206
)


-Acquisition of fixed assets



(6,544
)


(4,644
)Decrease in deposits



10,497



-Net cash used in investing activities



(2,017,253
)


(4,644
)Cash flow used in financing activities:Issuance of Senior Debenture



-



951,150Issuance of preferred stock and warrants


5,000,000



-Loans from officers



(27,775
)


-Net cash used in investing activities



4,972,225



951,150Net increase in cash



1,992,705



142,780Cash and equivalents, beginning



1,010,698



342,793Cash and equivalents, ending


$
3,003,403


$
485,573Supplemtal disclosures:Non - cash changes:Cash paid for interest


$
-


$
55,000Cash paid for income taxes


$
-


$
-The accompanying notes are an integral part of the financial statements


5


NET TALK.COM, INC.


Notes to Unaudited Financial Statements





Note 1 – Nature of operations and basis of presentation





Basis of presentation:










Nature of operations:





Net Talk.com, Inc. (“Nettalk” or the “Company”) was incorporated on May 1, 2006 under the laws of the State of Florida. We are a telephone company, who provides, sells and supplies commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. Our main product is the TK 6000, an analog telephone adapter that provides connectivity for analog telephones and faxes to home, home office or corporate local area networks (“LAN”). Our TK 6000 and its related services is a cost effective solution for individuals, small businesses and telecommuters connecting to any analog telephone, fax or private branch exchange (“PBX”).  The TK 6000 provides one USB port, one Ethernet port and one analog telephone port. A full suite of internet protocol features is available to maximize universal connectivity. In addition, analog telephones attached to the TK 6000 are able to use advanced calling features such as call forwarding, caller ID, 3-way calling, call holding, call retrieval and call transfer.





Note 2 - Summary of Significant Accounting Policies:





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Significant estimates inherent in the preparation of our financial statements include developing fair value measurements upon which to base our accounting for acquisitions of intangible assets and issuances of financial instruments, including our common stock. Our estimates also include developing useful lives for our tangible and intangible assets and cash flow projections upon which we determine the existence of, or the measurements for, impairments. In all instances, estimates are made by competent employees and consultants under the supervision of management, based upon the current circumstances and the best information available. However, actual results could differ from those estimates.





Risk and Uncertainties





Our future results of operations and financial condition will be impacted by the following factors, among others: dependence on the worldwide telecommunication markets characterized by intense competition and rapidly changing technology, on third-party manufacturers and subcontractors, on third-party distributors in certain markets, and on the successful development and marketing of new products in new and existing markets. Generally, we are unable to predict the future status of these areas of risk and uncertainty.




6




Revenue recognition




Operating revenue consist of customer equipment sales of our main product TK6000, telecommunication service revenues, and shipping and handling revenues.




Most all of our operating revenues are generated from the sale of customer equipment of our main product the TK6000.  We also derive service revenues from per minute fees for international calls. Our operating revenue is fully recognized at the time of our customer equipment sale which includes credit card acceptance date and shipment date.  The device provides for life time service (over the life of the device/equipment).  Our equipment is able to operate within our network/platform or over any other network/platform.  There is no need for income allocation between our device and life time service provided.  The full intrinsic value of the sale is allocated to the device.  Therefore, we recognized 100% of revenue at time of customer equipment sale and do not allocate any income to the life time service provided. Shipping and handling is also recognized at time of sale.  International calls are billed as earned from our customers.  International calls are prepaid and customers account is debited as minutes are used and earned.




Cash and Cash Equivalents





We consider all highly liquid cash balances and debt instruments with an original maturity of three months or less to be cash equivalents. We maintain cash balances only in domestic bank accounts, which at times, may exceed federally insured limits.


Inventory

March 31, 2010


September 30, 2009Productive material, work in process and supplies

$
64,278


$
43,538Finished products


74,881



74,174Total

$
139,159


$
117,712


Inventories are recorded at cost or market , whichever is lower.





During the six months ended March 31, 2010, in accordance with our lower of cost or market analyses we did not record lower of cost or market adjustments to our finished goods inventories.





Telecommunications Equipment and Other Property




Property, equipment and telecommunication equipment includes acquired assets which consist of network equipment, computer hardware, furniture and software, more fully described in Notes 4 and 5. All of our equipment is stated at cost with depreciation calculated using the straight line method over the estimated useful lives of related assets, which ranges from three to five years. The cost associated with  major improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses.




Intangible Assets





Our intangible assets were acquired in connection with the asset acquisition, more fully described in Notes 3 and 5. The intangible assets were recorded at our acquisition cost, which encompassed estimates of their relative fair values, as well as estimates of the fair value of consideration that we issued. We amortize our intangible assets using the straight-line method over lives that are predicated on contractual terms or over periods we believe the assets will have utility.





Impairments and Disposals





We evaluate our tangible and definite-lived intangible assets for impairmentannually or more frequently in the presence of circumstances or trends that may be indicators of impairment. Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event  that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates for intangible assets.





7




Research and Development and Software Costs





We expense research and development costs, as these costs are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer software product and are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. At this time our main product TK6000 is being sold in the market place.  Therefore, research and development cost reported in our financial statements relates to pre – marketing costs and are expensed accordingly.  Our components of Research and Development cost for three and six months ended March 31, 2010 and 2009, are as follows:





Three months ended


Six months endedMarch 31,


March 31,Components of Research and Development:

2010


2009


2010



2009Product development and engineering

$
23,069


$
15,090


$
25,495



$
66,929Payroll and benefits


55,110



8,780



98,969




45,068Total

$
78,179


$
23,870


$
124,464



$
111,997








Reclassification





Certain reclassifications have been made to prior years financial statements in order to conform to the current year’s presentation.   The reclassification had no impact on net earnings previously reported.





Share based payment arrangements




In June 2008, the FASB issued authoritative guidance on the treatment of participating securities in the calculation of earnings per shares (“EPS”). This guidance addresses whether instruments granted in share based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two - class method. This guidance was effective for fiscal years beginning on or after December 15, 2008.  Adoption of this guidance did not have a material impact on our results of operations and financial position, or on basic or diluted EPS.





We apply the grant date fair value method to our share based payment arrangements with employees and consultants. Share based compensation cost to employees is measured at the grant date fair value based on the value of the award and is recognized over the service period.  Share based payments to non – employees are recorded at fair value on the measurement date and reflected in expense over the service period.




Financial Instruments





Financial instruments, as defined in the Accounting Standards Codification (“ASC”) 825 Financial Instruments, consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, secured convertible debentures, preferred stock and derivative financial instruments.





We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs since their respective estimated fair values approximate carrying values due to their current nature. We also carry convertible debentures and redeemable preferred stock at historical cost. However, the fair values of debt and akin-to-debt financial instruments are estimated for disclosure purposes. As of March 31, 2010, estimated fair values and respective carrying values of our Secured Convertible Debentures and Series A Convertible Preferred Stock are as follows:




Financial Instrument

Note


Fair

Value


Carrying

Value$ 3,146,000 12% Secured Convertible  Debenture


6


$
5,403,545


$
3,146,000$ 587,166 12% Secured Convertible  Debenture


6



1,025,893



587,166$ 1,265,607 12% Secured Convertible  Debenture


6



2,263,321



1,265,607$ 3,000,000 stated value, 12% Series A Convertible

Preferred Stock


7



5,212,777



40,006Total





$
13,905,535


$
5,038,779




8




The fair values of the Secured Convertible Debentures and Series A Convertible Preferred Stock was determined based upon their respective discounted cash flow, using observable market rates (Level 2 inputs), plus the fair value of the embedded conversion options (Level 3 inputs). Observable market rates ranged from 7.91% for one-year to 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours.





Derivative financial instruments, as defined in ASC 815-10-15-83 Derivatives and Hedging (“ASC 815”), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.





We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled  by the counterparty. As required by ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements. See Note 8 for additional information about derivative financial instruments.





Redeemable Preferred Stock





Redeemable preferred stock (and other redeemable financial instrument we may enter into) is initially evaluated for possible classification as liabilities under Statements of Financial Accounting Standards No. 150 Financial Instruments with Characteristics of Both Liabilities and Equity. Redeemable preferred stock classified as liabilities is recorded and carried at fair value. Redeemable preferred stock that does not, in its entirety, require liability classification is evaluated for embedded features that may require bifurcation and separate classification as derivative liabilities under Statement 133. In all instances, the classification of the redeemable preferred stock host contract that does not require liability classification is evaluated for equity classification or mezzanine classification based upon the nature of the redemption features. Generally, any feature that could require cash redemption for matters not within our control, irrespective of probability of the event occurring, requires classification outside of stockholders’ equity. See Note 7 for further disclosures about our redeemable preferred stock.





Loss per common share





Basic loss per common share represents our loss applicable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method or, in the case of liability classified warrants, the reverse treasury stock method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti-dilutive are excluded.





Accounting Changes





Effective on October 1, 2009, we adopted Emerging Issues Task Force Consensus No. 07-05 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-05”). EITF 07-05 amended previous guidance related to the determination of whether equity-linked contracts, such as our convertible debentures, meet the exclusion to bifurcation and derivative classification of the respective embedded conversion feature. Under EITF 07-05, the embedded conversion option was no longer exempt from bifurcation and derivative classification because the conversion option was subject to adjustments that are not allowable under the new standard. We have accounted for the change as a change in accounting principle where the cumulative effect, which amounted to $872,320, was charged to our opening accumulated deficit on October 1, 2009.





Income Taxes





We record our income taxes using the asset and liability method. Under this method, the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis are reflected as tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences reverse. Changes in these deferred tax assets and liabilities are reflected in the provision for income taxes. However, we are required to evaluate the recoverability of net deferred tax assets. If it is more likely than not that some portion of a net deferred tax asset will not be realized, a valuation allowance is recognized with a charge to the provision for income taxes.




Our net loss reflects permanent tax differences which are not deductible for income tax purposes. Therefore, our tax net operating loss would be reduced accordingly. Our major tax permanent differences for the period ended March 31, 2010 are, as follows:
  Permanent tax differences

Three Months Ended


Six Months EndedDerivative loss

$
4,163,525


$
5,347,297Debt extinguished


3,617,983



3,617,983Total

$
7,781,508


$
8,965,280


9




Recent accounting pronouncements




In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, which establishes FASB Accounting Standards Codification (“the Codification”) as the official single source of authoritative U. S, GAAP.  All existing accounting standards are superseded.  All other accounting guidance not included in the Codification will be considered non – authoritative.  The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification.




In December 2007, the FASB revised the authoritative guidance for business combinations. This guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed  and any non – controlling interest in the acquiree. This guidance changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, pre - acquisition contingencies, transaction costs and restructuring costs. In addition , under the new guidance, changes in the acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This guidance was effective for fiscal year beginning on or after December 15, 2008 and requires the immediate expensing of acquisition related costs associated with acquisitions completed after December 31, 2008.  Adoption of this guidance on October 1, 2009 had no impact on our results of operations, and financial position.  However, we expect this guidance will affect acquisitions made thereafter, though the impact will depend upon the size and nature of the acquisition.





Note 3 - Interlink Asset Group Acquisition:





On September 10, 2008, we acquired certain tangible and intangible assets, formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset Group”) directly from Interlink’s creditor who had seized the assets pursuant to a Security and Collateral Agreement. Our purpose in acquiring these assets, which included employment rights to the executive management team of Interlink, was to advance the TK6000 VoIP Technology Program, which Interlink launched in July 2008. Accordingly, these assets substantially comprise our current business assets and the infrastructure for our operations. Contemporaneously with this purchase, we executed an assignment and intellectual property agreement with Interlink that served to perfect our ownership rights to the assets.





Consideration for the acquisition consisted of a face value $1,000,000 convertible debenture, plus warrants to purchase 4,000,000 shares of our common stock. On the date of the Interlink Asset Group acquisition, we also entered into a financing agreement with the creditor that provided for the issuance of a face value $500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of our common stock for net cash consideration of $448,300. These financial instruments, and our accounting therefore, are further addressed in Note 6.





The transfer of the Interlink Asset Group required us to determine whether the group of assets constituted a business, or whether the group of assets did not constitute a business.





We accounted for the acquisition of the assets of Interlink Asset Group as an acquisition of productive assets and not as a business. In addition to our analysis that gave rise to the conclusion that the Interlink Asset Group did not constitute a business, we considered whether the two aforementioned financing arrangements should be combined for purposes of accounting for the acquisition. In reaching a conclusions that they should be combined we considered and gave substantial weight to the facts that (i) they were entered into contemporaneously and in contemplation of one another, (ii) they were executed with the same counterparty and the terms and conditions of the financial instruments and underlying contracts are substantially the same and (iii) there is otherwise no economic need nor substantive business purpose for structuring the transactions separately. Accordingly, for purposes of accounting for the Interlink Asset Group acquisition we have combined the financing arrangements associated with both the asset purchase and the cash financing arrangement. Accounting for the financial instruments arising from these arrangements is further discussed in Note 6.





Notwithstanding our conclusion that the Interlink Asset Group did not constitute a business, our measurement principles provide that, when consideration is not in the form of cash, measurement is based upon the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly and closely evident and, thus more reliably measureable. We have concluded that the value of the consideration given representing the financial instruments, is more clearly evident and reliable for this purpose because    (i) the exchange resulted from exhaustive negotiations with the creditor, (ii) fair value measurements of our financial instruments are in part based upon market indicators and assumptions derived for active markets, and (iii) while ultimately reasonable, our fair value measurements of the significant tangible and intangible asset relies heavily on subjective estimates and prospective financial information. The following table reflects the components of the consideration paid to effect the acquisition:




10





Financial Instrument or Cost:

AmountConvertible debentures:$1,000,000 face value, 12% convertible debentures

$
1,014,002$500,000 face value, 12% convertible debentures


507,000Class B warrants, indexed to 6,000,000 shares of common stock


555,600Direct costs


39,200$
2,115,802





We have evaluated the substance of the exchange for purposes of identifying all assets acquired. The recognition of goodwill is not contemplated in an exchange that is not a business or accounted for as a business combination.





The following table reflects the acquisition date fair values and the final allocation of the consideration to the assets acquired. The allocation was performed under the assumption that an excess in consideration over the fair values of the assets acquired is allocated to the assets subject to depreciation and amortization, based upon their relative fair values, and not to those assets with indefinite lives. A difference in the recognized basis in the value of the consideration between book and income tax gives rise to the deferred income taxes. Our analysis did not result in impairment, but we are required to continue to perform this analysis as provided in our impairments and disposals policy (see Note 2).




Asset or Account


Fair Value




AllocationCash

$
487,500



$
487,500Deferred finance costs


24,398




24,398Telecommunications equipment and other property


411,203




756,171Intangible assets:Knowhow of specialized employees


212,254




212,254Trademarks


180,925




332,708Employment arrangements


122,400




225,084Workforce


54,000




54,000Telephony license


5,000




9,195Domain names


4,200




7,723Deferred income taxes


--




(8,033
)Interest expense (finance costs allocated to warrants)


14,802




14,802Total

$
1,516,682



$
2,115,802





In connection with the above allocation, we evaluated the presence of in-process research and development that may require recognition (and immediate write-off). We concluded that in-process research and development was de minimus since development is planned to be outsourced subsequent to the acquisition and, in fact, no substantive effort and/or costs were found in the records of Interlink.  Research and development will be expensed as it is incurred.





Note 4 - Telecommunications Equipment and Other Property:





Telecommunications equipment and other property consist of the following:





March 31,


September 30,Life


2010


2009Telecommunication equipment


7


$
656,580


$
650,804Computer equipment


5



106,832



106,577Office equipment and furnishing


7



23,759



23,760Purchased software


3



10,554



10,041Sub – total






797,725



791,182Less: accumulated depreciation






(187,408
)


(125,867
)Total





$
610,317


$
665,315




11




Our telecommunications equipment is deployed in our Network Operations Center (“NOC”) as is most of the computer equipment. Other computer and office equipment and furnishings are deployed at our corporate offices, which we lease under an operating lease.





Depreciation of the above assets was as follows:


Three Months Ended


Six Months EndedMarch 31,


March, 31,2010


2009


2010


2009Depreciation expense

$
30,785


$
29,328


$
61,542


$
58,545




Note 5 - Intangible Assets:





Intangible assets consist of following:





Life


March 31, 2010


September 30, 2009Trademarks National and International

5


$
332,708


$
332,708Employment agreements

3



225,084



225,084Knowhow and specialty skills

3



212,254



212,254Workforce

3



54,000



54,000Telephony licenses

2



9,195



9,195Patents

20



11,024



11,024Domain names

2



7,723



7,723851,988



851,988Less accumulated amortization





(366,667
)


(247,001
)$
485,321


$
604,987




Amortization of the above assets was as follows:


Three months ended


Six months endedMarch 31,


March, 31,2010


2009


2010


2009Amortization expense

$
59,833


$
37,507


$
119,666


$
75,014


The weighted average amortization period for the amortizable intangible assets is 2.4 years.




Estimated future amortization of intangible assets is as follows:





March, 31,2010


$
127,1672011



225,9102012



70,2382013



62,006Total


$
485,321





12




Note 6 - Secured Convertible Debentures and Warrant Financing Arrangements:





The carrying values of our 12% secured convertible debentures consist of the following:





March 31,

2010


September 30,

2009$3,146,000 face value convertible debenture, due June 30, 2011

$
3,146,000$587,166 face value convertible debenture, due July 20, 2011


587,166$1,265,607 face value convertible debenture, due September 25, 2011


1,265,607$1,000,000 face value convertible debenture, due September 10, 2010


--


$
1,006,588$500,000 face value convertible debenture, due September 10, 2010


--



503,293$600,000 face value convertible debenture, due January 30, 2011


--



293,726$500,000 face value convertible debenture, due January 30, 2011


--



271,741$500,000 face value convertible debenture, due July 20, 2011


--



179,778$1,100,000 face value convertible debenture, due September 25, 2011


--



391,6304,998,773



2,646,756Current portion of convertible debentures


-



1,509,881Long term portion of convertible debentures

$
4,998,773


$
1,136,756





Our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, with maturities listed in the table above, and included the capitalization of $798,773 of accrued interest. The newly issued convertible debentures bear interest at 12%, which is payable at the earlier of the maturity date or the date that the debentures are converted, if ever. Such interest is payable at the Company’s option in cash or common stock at $0.25 per common share. The principal amount of the debentures is convertible into common stock at $0.25. Accordingly, the convertible debentures are indexed to 19,995,092 shares of our common stock. Each of the principal and debt conversion rates are subject to adjustment for recapitalization events or sales of equity or equity-linked contracts with a price or conversion price less than the contractual conversion price. The convertible debentures are secured by substantially all of our assets and are either callable or subject to a default interest rate, at the creditor’s option, if we default on the debentures. The significant events that could trigger a default include our failure to service the debentures, bankruptcy and the filing of significant judgments against us. The debentures also preclude merger and similar transactions, incurring additional debt, our payment of dividends on our equity securities and limit the compensation that we may pay to our officers.





Our accounting for the aforementioned exchange transaction required us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either cash flows or the fair value of the embedded conversion feature, wherein substantial is generally defined as a change greater than 10%. In all instances our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments and reestablish the new convertible debentures, at fair value, with the change reflected in our expenses. The following table reflects the components of our extinguishment calculations on February 24, 2010:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30,

2011


TotalFair value of new debenture

$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808Carrying value of old debentures:Debentures


1,713,124



152,755



267,000



2,132,879Accrued Interest


546,000



87,166



165,607



798,773Compound embedded derivative


3,723,200



750,000



1,632,400



6,105,600Deferred finance costs


(85,372
)


(23,933
)


(92,122
)


(201,427
)5,896,952



965,988



1,972,885



8,835,824Extinguishment loss

$
1,870,499


$
524,268


$
1,223,217


$
3,617,984




13




The fair values of the Secured Convertible Debentures were determined based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion options. Observable market rates ranged from 7.91% for one-year to 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our compound embedded derivatives were determined using the Monte Carlo Simulations model. See Note 8. The compound embedded derivatives were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our derivative income (expense).





The fair value of the new convertible debentures was allocated to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because the allocation resulted in premiums which, under accounting principles, are considered equity components. The following table summarizes the allocation on the exchange date:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30

2011


TotalConvertible debentures

$
3,146,000


$
587,166


$
1,265,607


$
4,998,773Compound embedded derivative


4,505,072



880,749



1,878,982



7,263,982Paid-in capital


116,378



22,341



52,334



191,053$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808





Our accounting for the original debenture financings is as follows:





2008 Convertible Debenture Financing





On September 10, 2008, we issued a $1,000,000 face value, 12% secured convertible debenture (T-1), due September 10, 2010 and Series B warrants indexed to 4,000,000 shares of our common stock in exchange for the Interlink Asset Group, discussed in Note 3. Also on September 30, 2008, we issued a $500,000 face value 12% secured convertible debenture (T-2), due September 10, 2010 and Series B warrants indexed to 2,000,000 shares of our common stock for net cash proceeds of $472,800. The warrants have a term of five years. These financial instruments were issued to the same creditor under contracts that are substantially similar, unless otherwise mentioned in the following discussion.





The principal amount of the debentures is payable on September 10, 2010 and the interest is payable quarterly, on a calendar quarter basis. While the debenture is outstanding, the investor has the option to convert the principal balance, and not the interest, into shares of our common stock at a conversion price of $0.25 per common share.  The terms of the conversion option provide for anti-dilution protections for traditional restructurings of our equity, such as stock-splits and reorganizations, if any, and for sales of our common stock, or issuances of common-indexed financial instruments, at amounts below the otherwise fixed conversion price. Further, the terms of the convertible debenture provide for certain redemption features. If, in the event of certain defaults on the terms of the debentures, some of which are indexed to equity risks, we are required at the investors option to pay the higher of (i) 110% of the principal balance, plus accrued interest or (ii) the if-converted value of the underlying common stock, using the 110% default amount, plus accrued interest. If this default redemption is not exercised by the investor, we would incur a default interest rate of 18% and the investor would have rights to our assets under the related Security Agreement. We may redeem the convertible debentures at anytime at 110% of the principal amount, plus accrued interest.





Because the two hybrid debt contracts were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes, the accounting resulted in no beneficial conversion feature.





2009 Convertible Debenture Financings





We entered into several Securities Purchase Agreements with Debt Opportunity Fund, LLP (“DOF”) during the year ended  September 30, 2009.





On January 30, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $600,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,400,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $507,900. The warrants have a term of five years.





On February 6, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $443,250. The warrants have a term of five years. On July 20, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $446,250.  The warrants have a term of five years.




14




On September 25, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $1,100,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 4,400,000 shares of our common stock at an exercise price of $0.25 for net cash proceeds of $1,000,000.  The warrants have a term of five years.





Each debenture bears interest at a rate of 12% per annum from the date of issuance until paid in full. Interest is calculated on the basis of a 360-day year and paid for the actual number of days elapsed, and accrues and is payable quarterly or upon conversion (as to the principal amount then being converted). The debentures convert into shares of our common stock at the option of the holder at $0.25 per share (which conversion price is subject to adjustment under certain circumstances). The debentures are secured by a lien in all of the assets of the Company. Further, the terms of the convertible debentures provide for default redemption features similar to those described above.





Midtown Partners & Co., LLC (“Midtown Partners”), an NASD registered broker dealer, acted as the placement agent for the Company in connection with the January 30, July 20, and September 25, 2009 Convertible Debt Offerings (“2009 Convertible Debt Offerings”). We paid Midtown Partners cash commissions equal to $198,000 and we issued Series BD Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to purchase 1,720,000 shares of the Company’s common stock at an initial exercise price of $0.50 per share and 440,000 shares of the Company’s common stock at an initial exercise price $0.25 per share. Since the Series BD warrants offered full ratchet anti-dilution protection, any previously issued and outstanding warrants with a conversion price greater than $0.25 automatically had their conversion price ratchet down to $0.25 as subsequent issuances were made with a conversion price of $0.25.





On September 22, 2009 we voided and reissued warrants in connection with our financing transactions. The cancellation and reissuance of warrants was treated as a modification under ASC 470-50 Modifications and Extinguishments although the change in cash flow was <10% so extinguishment accounting was not applicable.




Cancelled and re-issued warrants were as follows:




Original Warrants

Indexed

Shares


Strike

Price

Reissued

Warrants

Indexed

Shares


Strike

PriceC-1 warrants


2,400,000


$
0.50

C-3 warrants


2,400,000


$
0.50C-2 warrants


2,000,000


$
0.50

C-4 warrants


2,000,000


$
0.50BD-1 warrants


480,000


$
0.50

BD-4 warrants


240,000


$
0.25BD-5 warrants


240,000


$
0.50BD-2 warrants


400,000


$
0.50

BD-6 warrants


200,000


$
0.25BD-7 warrants


200,000


$
0.50BD-3 warrants


200,000


$
0.50

BD-8 warrants


200,000


$
0.25BD-4 warrants


200,000


$
0.50

BD-9 warrants


200,000


$
0.50





Accounting for the Financing Arrangements:





Previously, we had evaluated the terms and conditions of the secured convertible debentures under the guidance of ASC 815, Derivatives and Hedging. We had also determined that, while the anti-dilution protections preclude treatment of the embedded conversion option as conventional, the conversion option is exempt from classification as a derivative because it otherwise achieves the conditions for equity classification (if freestanding) provided in ASC 815. We have further determined that the default redemption features described above are not exempt for treatment as derivative financial instruments, because they are not clearly and closely related in terms of risk to the host debt agreement. On the inception date of the arrangements through March 31, 2010, we determined that the fair value of these compound derivatives is de minus. However, we are required to re-evaluate this value at each reporting date and record changes in its fair value, if any, in income. For purposes of determining the fair value of the compound derivative, we have evaluated multiple, probability-weighted cash flow scenarios. These cash flow scenarios include, and will continue to include fair value information about our common stock. Accordingly, fluctuations in our common stock value will significantly influence the future outcomes from applying this technique.





15




As discussed above, the embedded conversion options previously did not required treatment as derivative financial instruments; however, we were required to evaluate the feature as embodying a beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options. A beneficial conversion feature (“BCF”) is present when the fair value of the underlying common share exceeds the effective conversion price of the conversion option. The effective conversion price is calculated as the basis in the financing arrangement allocated to the hybrid convertible debt agreement, divided by the number of shares into which the instrument is indexed.  Because the two hybrid debt contracts dated September 10, 2008 were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes and the accounting resulted in no beneficial conversion feature. The financings issued in 2009 were found to have a BCF which gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion price of each issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding, the BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly, the BCF allocated to paid-in capital from the 2009 financings amounted to $872,320 for the year ended September 30, 2009.





We evaluated the terms and conditions of the Series B, Series C and Series BD warrants under the guidance of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). The warrants embody a fundamental change-in-control redemption privilege wherein the holder may redeem the warrants in the event of a change in control for a share of assets or consideration received in such a contingent event. This redemption feature places the warrants within the scope of ASC 480-10, as put warrants and, accordingly, they are classified in liabilities and measured at inception and on an ongoing basis at fair value. Fair value of the warrants was measured using the Black-Scholes-Merton valuation technique and in applying this technique we were required to develop certain subjective assumptions which are listed in more detail below.





Premiums on the secured convertible debentures arose from initial recognition at fair value, which is higher than face value. Discounts arose from initial recognition at fair value, which is lower than face value. Premiums and discounts are amortized through credits and debits to interest expense over the term of the debt agreement..





Direct financing costs were allocated to the financial instruments issued (hybrid debt and warrants) based upon their relative fair values. Amounts related to the hybrid debt are recorded as deferred finance costs and amortized through charges to interest expense over the term of the arrangement using the effective interest method. Amounts related to the warrants were charged directly to income because the warrants were classified in liabilities, rather than equity, as described above. Direct financing costs are amortized through charges to interest expense over the term of the debt agreement.





On September 24, 2009, we obtained an extension of the interest payments due June 30, 2009 and September 30, 2009 to June 30, 2010 and September 30, 2010, respectively. The change in cash flow from this modification was analyzed to determine if it was greater than 10% which would give rise to extinguishment accounting. In each case, the change in cash flows was less than 10% so extinguishment accounting was not applicable.





On February 24, 2010, we exchanged the convertible debentures for newly issued convertible debentures as discussed in the beginning of this footnote.





Note 7 – Redeemable Preferred Stock





On February 24, 2010, we designated 500 shares of our authorized preferred stock as Series A Convertible Preferred Stock; par value $0.001 per share, stated value $10,000 per share (“Preferred Stock”). The Preferred Stock is redeemable for cash on June 30, 2011 at the stated value, plus accrued and unpaid dividends. Dividends accrue, whether or not declared, at a rate of 12% of the stated value. The Preferred Stock is convertible into common stock at the holder’s option at $0.25 based upon the stated value. Such conversion rate is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other equity-linked instruments below the conversion price. Holders of the Preferred Stock are entitled to a preference equal to the stated value, plus accrued and unpaid dividends. While the Preferred Stock is outstanding, holders vote the number of indexed common shares.





Also on February 24, 2010, pursuant to a Securities Purchase Agreement, we sold 300 shares of Preferred Stock (indexed to 12,000,000 common shares upon conversion) and warrants to purchase 12,000,000 shares of our common stock for proceeds of $3,000,000. In each instance, the warrants have a term of five years and may be exercised for $0.50 per common share. The warrant exercise price is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other equity-linked instruments below the exercise price.





16




Our accounting for the Preferred Stock and warrant financing transaction required us to evaluate the classification of the embedded conversion feature and the warrants. As a prerequisite to establishing the classification of the embedded conversion option, we were required to determine the nature of the hybrid Preferred Stock contract based upon its risks as either a debt-type or equity-type contract. The presence of the mandatory cash redemption and the requirement to accrue dividends were persuasive evidence that the Preferred Stock was more akin to a debt than an equity contract, with insufficient evidence to the contrary (e.g. voting privilege). Given that the embedded conversion feature, when evaluated as embodied in a debt-type contract, did not meet the definition for an instrument indexed to a company’s own stock, the embedded conversion feature required bifurcation and classification in liabilities,        at fair value. Similarly, the warrants did not meet the definition for an instrument indexed to a company’s own stock, resulting in their classification in liabilities, at fair value.





The following table reflects the allocation of the purchase price on the financing date:





Allocation:

AmountPreferred Stock

$
--Warrants


5,062,800Compound embedded derivative


4,260,000Derivative loss, included in derivative income (expense)


(6,322,800
)$
3,000,000





Warrants were valued using the Black-Scholes-Merton valuation technique. Significant assumptions were as follows: Market value of underlying, using the trading market of $0.58; expected term, using the contractual term of 5.0 years; market volatility, using a peer group of 90.20%; and, risk free rate, using the yield on zero coupon government instruments of 2.40%.





The compound embedded derivative was valued using the Monte Carlo Simulations (“MCS”) technique. The MSC technique is a generally accepted valuation technique for valuing embedded conversion features in hybrid convertible notes, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. However,  there may be other circumstances or considerations, other than those addressed herein, that relate to both internal and external factors that would be considered by market participants as it relates specifically to the


Company and the subject financial instruments.





Given its redeemable nature, we are required to classify our Preferred Stock outside of stockholders’ equity. Further, the inception date carrying value is subject to accretion to its ultimate redemption value over the term to redemption, using the effective interest method. During the period from its issuance to March 31, 2010, we accreted $40,006, which was reflected as a charge to paid-in capital in the absence of accumulated earnings. We also accrued $35,000 during the same period which amount represents the cumulative dividends that we are required to pay whether or not declared.





17




Note 8 – Derivative Financial Instruments





The components of our derivative liabilities consisted of the following at:





March 31, 2010Derivative Financial Instrument

Indexed

Shares


Fair

Value


September 30,

2009Compound Derivative Financial Instruments:February 24, 2010 Secured Convertible

Debentures


19,995,092


$
3,456,615


$
--February 24, 2010 Series A Convertible Preferred

Stock


12,000,000



2,076,000



--Warrants (dates correspond to financing):February 24, 2010 Series D warrants, issued

with the preferred financing (Note 7)


12,000,000


$
2,760,000



--February 24, 2010 Series D warrants, issued

with the exchange (Note 8)


16,800,000



3,864,000



--September 10, 2008 Series B warrants


--



--



382,200January 30, 2009 Series C warrants


--



--



167,040February 6, 2009 Series C warrants


--



--



139,400July 20, 2009 Series C warrants


--



--



146,600September 25, 2009 Series C warrants


--



--



335,720Financing warrants issued to brokers


2,160,000



541,936



156,31262,955,092



12,698,551



1,327,272Current portion of derivative liabilities






-



382,200Long term portion of derivative liabilities






12,698,551



945,072





The following table reflects the activity in our derivative liability balances from September 30, 2009 to March 31, 2010:





Derivative Type

(Level in Fair Value Hierarchy)

Compound

(Level 3)


Warrants

(Level 2)


TotalBalances at September 30, 2009

$
--


$
1,327,272


$
1,327,272Change in accounting (1)


1,865,600



--



1,865,600Effect of the exchange transaction (2)


1,158,382



--



1,158,382Issued in the Preferred Stock and Warrant

financing Transaction (Note 7)


4,260,000



5,062,800



9,322,800Unrealized derivative (gains) losses


(1,751,367
)


775,864



(975,503
)Balances at March 31, 2010 (3)

$
5,532,615


$
7,165,936


$
12,698,551





1)
Effective on October 1, 2009, we adopted Emerging Issues Task Force Consensus No. 07-05 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-05”). EITF 07-05 amended previous guidance related to the determination of whether equity-linked contracts, such as our convertible debentures, meet the exclusion to bifurcation and derivative classification of the respective embedded conversion feature. Under EITF 07-05, the embedded conversion option was no longer exempt from bifurcation and derivative classification because the conversion option was subject to adjustments that are not allowable under the new standard. We have accounted for the change as a change in accounting principle where the derivative liability in the amount of $1,865,600 was established and the cumulative effect, which amounted to $872,319, was charged to our opening accumulated deficit on October 1, 2009.




18




2)
As more fully discussed in Note 6, on February 24, 2010, we exchanged our convertible debentures for newly issued convertible debentures. This amount represents the change in the fair value of the compound embedded derivatives between the old and new debentures, which in part arose from the capitalization of accrued interest and in part arose from other changes to the debentures. As further noted in Note 6, the exchange transaction gave rise to the extinguishment of the old debentures, and therefore the compound derivative, due to the substantive nature of these changes. Since an extinguishment is recorded by replacing the carrying value of the old debentures with the fair value of the new debentures, with a charge to expense for the difference, this amount is included in the extinguishment loss that we recorded in connection with the exchange.





3)
There were no transfers between valuation input levels during the periods presented. The following tables summarize the effects on our income (loss) associated with changes in the fair values of our derivative financial instruments:





The following tables summarize the effects on our loss (income) associated with changes in the fair values of our derivative financial instrument:





Three months endedMarch 31,

2010


March 31,

2009Compound Derivative Financial Instruments:February 24, 2010 Secured Convertible

Debentures

$
(3,807,367
)

$
--Pre-exchange Secured Convertible Debentures (amount through

the exchange date of February 24, 2010)


4,240,000



--February 24, 2010 Series A Convertible Preferred

Stock


(2,184,000
)


--Warrants (dates correspond to financing):February 24, 2010 Series B warrants, issued

with the preferred financing (Note 7)


(2,302,800
)


--February 24, 2010 Series D warrants, issued

with the exchange (Note 8)


1,650,720



--Other warrants


244,172



(103,714
)Total fair value adjustments


(2,159,725
)


(103,714
)Day-one derivative expense, resulting from the

Series A Preferred Stock Financing (Note 7)


6,322,800



--Derivative expense (income)

$
4,163,525


$
(103,714
)


Six months endedMarch 31,

2010


March 31,

2009Compound Derivative Financial Instruments:February 24, 2010 Secured Convertible

Debentures

$
(3,807,367
)

$
--Pre-exchange Secured Convertible Debentures (amount through

the exchange date of February 24, 2010)


4,240,000



--February 24, 2010 Series A Convertible Preferred

Stock


(2,184,000
)


--Warrants (dates correspond to financing):February 24, 2010 Series B warrants, issued

with the preferred financing (Note 7)


(2,302,800
)


--February 24, 2010 Series D warrants, issued

with the exchange (Note 8)


1,650,720



--Other warrants


1,427,944



(164,914
)Total fair value adjustments


(975,503
)


(164,914
)Day-one derivative expense, resulting from the

Series A Preferred Stock Financing (Note 7)


6,322,800



--Derivative expenses (income)

$
5,347,297


$
(164,914
)
  19


Fair Value Considerations





We adopted the provisions of ASC 820 Fair Value Measurements and Disclosures(“ASC 820”) with respect to our financial instruments. Under this standard, fair value is 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. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input (among three levels) that is significant to their fair value measurement. Level 1 inputs are defined as quoted market prices in active markets. Our common stock is publicly traded in an active market. Level 2 inputs are observable market quotations or other assumptions, such as interest rates, for similar assets and liabilities. Level 3 inputs are unobservable inputs, including our own internal estimates and assumptions. The Monte Carlo Simulation (“MCS”) technique was used to determine the fair value of our compound embedded derivatives. The MSC technique is a generally accepted valuation technique for valuing embedded conversion features in hybrid convertible debt instruments, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. These inputs include our market price and a trading volatility assumption, but also include credit risk, interest risk, and redemptions. While the MCS technique embodies many observable inputs, such as our trading market price, it requires our development of internally developed assumptions and is, therefore, a Level 3 technique.





Valuation of warrants at March 31, 2010 – assumptions:





The warrants are valued using the Black-Scholes-Merton (“BSM”) valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions were as follows as of March 31, 2010: Market value of underlying, using the trading market of $0.34; expected term, using the contractual term of 3.84 to 4.9 years; market volatility, using a peer group of 92.40% to 98.86%; and, risk free rate, using the yield on zero coupon government instruments of 2.40% to 2.55%. Assumptions at September 30, 2009 related to warrants by class were as follows:





September 30, 2009

Series

B

Warrants


Series

C-3

Warrants


Series

C-4

Warrants


Series

C-5

Warrants


Series

C-6

Warrants


Series

BD

WarrantsAdjusted Strike price

$
0.25


$
0.25


$
0.25


$
0.25


$
0.25


$
0.25Volatility


93
%


92
%


92
%


89
%


89
%


89%-93
%Expected term (years)


3.95



4.34



4.36



4.81



5.00



3.95-5.00Risk-free rate


2.31
%


2.31
%


2.31
%


2.31
%


2.31
%


2.31
%Dividends


--



--



--



--



--



--





We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.





The effect of changes in our trading market price on the fair values of our derivative liabilities is significant because all techniques that we employ consider the intrinsic values of the equity-linked contracts. Accordingly, increases in our trading market price will have the effect of increasing the derivative value and decreases will have the effect of decreasing the derivative value. However, the techniques embody other assumptions that may have an incremental or an offsetting effect. Since changes in the fair value of derivative financial instruments are recorded in income, our operations will reflect the expense or income over all periods that the contracts are outstanding. These effects could be material.





Note 9 - Commitment and Contingencies:





Leases





We lease our principal office space under an arrangement that is an operating lease. Rent and associated occupancy expenses for the three and six months ended March 31, 2010 and 2009 were as follows:




Three months ended


Six months endedMarch 31,


March, 31,2010


2009


2010


2009Occupancy expense

$
43,234


$
41,260


$
86,390


$
82,520


Minimum non-cancellable future lease payments as of March 31, 2010, were as follows: 2010 - $44,875.




20





Employment arrangements





We have entered into an employment agreement with our Chief Executive Officer, Anastasios Kyriakides and in  consideration of his services to us, we have agreed to pay him a base salary of $150,000 plus certain bonuses and awards if the Company achieves certain profitability levels and adopts certain incentive compensation plans. As of March 31, 2010, none of these incentive arrangements and plans had been realized. The agreement is effective through September 30, 2013.





Note 10 - Related Parties:




At March 31, 2010, we had $28,525 amount due to officers.  The amount due to officers is due in less than one year and is non – interest bearing.




21




Item 2 – Management Discussion and Analysis of Financial Conditions and Results of Operations




Our Management’s Discussion and Analysis should be read in conjunction with our financial statements included in this report.




Forward Looking Statements




Certain statements contained in this report on Form 10-Q and other written material and oral statements made from time to time by us do not relate to historical or current facts.  As such, they are referred to as “forward-looking statements,” which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “ seek, ” “ anticipate, ” “ believe, ” “ estimate, ” “ expect, ” “ intend, ” “ plan, ” “ budget, ” “ project, ” “ may be, ” “ may continue, ” “ may likely result, ” and similar expressions. When reading any forward looking statement, you should remain mindful that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, such as those relating to:




·
whether or not a market for our products and services develop and, if a market develops, the pace at which it develops;


·
our ability to successfully sell our products and services if a market develops;


·
our ability to attract the qualified personnel to implement our growth strategies;


·
our ability to develop sales and marketing capabilities;


·
the accuracy of our estimates and projections;


·
our ability to fund our short-term and long-term financing needs;


·
changes in our business plan and corporate strategies; and other risks and uncertainties discussed in greater detail in the sections of this prospectus, including the section captioned “Plan of Operation”.




Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our Company and our business made elsewhere in this prospectus, as well as other public reports filed with the SEC. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.




Background




Company and Business




We are a telephone company, who provides, sells and supplies commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. Our main product is the TK 6000, an analog telephone adapter that provides connectivity for analog telephones and faxes to home, home office or corporate local area networks (“LAN”).




Our TK 6000 and its related services is a cost effective solution for individuals, small businesses and telecommuters connecting to any analog telephone, fax or private branch exchange (“PBX”).  The TK 6000 provides one USB port, one Ethernet port and one analog telephone port. A full suite of internet protocol features is available to maximize universal connectivity. In addition, analog telephones attached to the TK 6000 are able to use advanced calling features such as call forwarding, caller ID, 3-way calling, call holding, call retrieval and call transfer.








History and Overview




We are a Florida corporation, incorporated on May 1, 2006 under the name Discover Screens, Inc. (“Discover Screens”).




Prior to September 10, 2008, we were known as Discover Screens, a development-stage company, dedicated to providing advertising through interactive, audiovisual, information and advertising portals located in high-traffic indoor venues. Our name and business operations changed in a series of transactions beginning in December of 2007. Pursuant to an asset purchase agreement dated December 30, 2007, we sold all of the assets associated with the advertising business as a going concern to Robert H. Blank, who was then our President and Chief Operating Officer. Following that transaction, we ceased all existing operations, and from December 30, 2007 to September 9, 2008, we owned nominal assets and generated no revenue. In February of 2008, Mr. Blank resigned  as officer and director.




22




On September 9, 2008, Robin C. Hoover, our sole remaining officer and director, appointed four new members to the Board of Directors, Anastasios Kyriakides, Kenneth Hosfeld, Guillermo Rodriguez and Leo Manzewitsch. Mr. Hoover then resigned as an officer and director. Mr. Richard Diamond was appointed by the Board of Directors to fill the vacancy left by Mr. Hoover’s resignation.  Mr. Diamond resigned as a director of the Company, effective November 23, 2009.




On September 10, 2008, we changed our name from Discover Screens, Inc. to Net Talk.com, Inc. On September 10, 2008, we entered into a Contribution Agreement with Vicis Capital Master Fund (“Vicis”) by which Vicis contributed certain operating assets to the Company in exchange for (a) a 12% Senior Secured Convertible Debenture in the principal amount of $1,000,000; and (b) a Series B Warrant to purchase 4,000,000 shares of common stock of the Company. Also on September 10, 2008, the Company entered into a Securities Purchase Agreement with Debt Opportunity Fund, LLP (“DOF”) by which DOF purchased (a) a 12% Senior Secured Convertible Debenture in the principal amount of $500,000; and (b) a Series B Warrant to purchase 2,000,000 shares of Common Stock of the Company.




On September 10, 2008, we acquired certain tangible and intangible assets, formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset Group”) directly from Interlink’s creditor who had seized the assets pursuant to a Security and Collateral Agreement. Our purpose in acquiring these assets, which included employment rights to the executive management team of Interlink who now currently serve as our officers, was to advance the TK 6000 VoIP Technology Program, which Interlink launched in July 2008. Accordingly, these assets substantially comprise our current business assets and the infrastructure for our future operations. Contemporaneously with this purchase, we executed an assignment and intellectual property agreement with Interlink that served to perfect our ownership rights to the assets.




Consideration for the acquisition consisted of a face value $1,000,000 convertible debenture, plus warrants to purchase 4,000,000 shares of our common stock. On the date of the Interlink Asset Group acquisition, we also entered into a financing agreement with DOF (as described above) that provided for the issuance of a face value $500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of our common stock for net cash consideration of $448,300.  In connection with this acquisition, we issued 6,000,000 shares of common stock to our new management team in connection with the Interlink Asset Group acquisition.




We continue to improve and enhance the following factors in building and expanding our customer base:




·
Deployment and distribution of our main product TK 6000 device.




·
Attractive and innovative value proposition.  We offer our customers an attractive and innovative value proposition: a portable telephone replacement with multiple and unique features that differentiates our services from the competition.




·
Innovative, high technology and low cost technology platform.  We believe our innovative software and network technology platform provides us with a competitive advantage over our competition and allows us to maintain a low cost infrastructure relative to our competitors.





On our Form 10 Q at December 31, 2009, we reported that “we have succeeded in securing financing anticipated to close on or about February 17, 2010. The financing will provide working capital in the amount of $5,000,000”.





Effective February 24, 2010 we closed said transaction, as follows:




On February 23, 2010, we filed with the Florida Department of State, Fourth Amendment to the Articles of Incorporation of Net Talk.com, Inc., a Florida corporation, approving the issuance of Series A Convertible Preferred Stock.




On February 24, 2010, we executed a $5,000,000 security agreement with an accredited institutional investor. Pursuant to the agreement, we did issued Series A Convertible Preferred Stock and warrants exercisable for shares of our common stock.




In addition to the issuance of Series A Convertible Preferred Stock, the agreement provided for amending existing Debentures, as follows:




12% SENIOR SECURED CONVERTIBLE DEBENTURE DUE June 30, 2011







Original Issue Dates: September 10, 2008, September 10, 2008, January 30, 2009 and February 6, 2009 (as amended and restated February 24, 2010)




Original Conversion Price (subject to adjustment herein): $0.25




Principal amount: $3,146,000.





23


The note amends, restates and replaces those certain Senior Secured Convertible notes dated September 10, 2008, September 10, 2008,January 30, 2009 and February 6, 2009, in the principal amounts of $500,000, $1,000,000, $600,000, and $500,000, respectively, executed by Net talk.com, inc. and is an extension, continuation and renewal of the indebtedness represented by such notes. The indebtedness evidenced by such notes has not been paid or extinguished by this Note, and this Note does not constitute a novation of such indebtedness or notes.




12% SENIOR SECURED CONVERTIBLE DEBENTURE DUE July 20, 2011





Original Issue Date: July 20, 2009 (as amended and restated February 24, 2010)




Original Conversion Price (subject to adjustment herein): $0.25




Principal amount: $587,166.





The note amends, restates and replaces that certain senior Secured Convertible Promissory Note dated July 20, 2009, in the principal amount of $500,000, executed by Net Talk.com, Inc. and is an extension, continuation and renewal of the indebtedness represented by such note. The indebtedness evidenced by such note has not been paid or extinguished by this Note, and this Note does not constitute a novation of such indebtedness or note.




12% SENIOR SECURED CONVERTIBLE DEBENTURE DUE September 25, 2011





Original Issue Date: September 25, 2009 (as amended and restated February 24, 2010)




Original Conversion Price (subject to adjustment herein): $0.25




Principal amount: $1,265,607.





The note amends, restates and replaces that certain senior Secured Convertible Promissory Note dated September 25, 2009, in the principal amount of $1,100,000, executed by Net Talk.com, Inc. and is an extension, continuation and renewal of the indebtedness represented by such note. The indebtedness evidenced by such note has not been paid or extinguished by this Note, and this Note does not constitute a novation of such indebtedness or note.





SERIES D COMMON STOCK PURCHASE WARRANT


Warrant No.: D – 1 to Purchase 6,000,000 Shares of Common Stock of NetTalk.com. Inc.




The SERIES D – 1 COMMON STOCK PURCHASE WARRANT certifies that, for value received, Vicis Capital Master  Fund, is entitled to subscribe for and purchase from NetTalk.com, Inc., up to 6,000,000 shares (“Warrant Shares”) of Common Stock, par value $.001 per share, of the Company.





Warrant No.: D – 2 to Purchase 10,800,000 Shares of Common Stock of NetTalk.com. Inc.





The SERIES D - 2 COMMON STOCK PURCHASE WARRANT certifies that, for value received, Vicis Capital Master Fund, is entitled to subscribe for and purchase from NetTalk.com, Inc., up to 10,800,000 shares (“Warrant Shares”) of Common Stock, par value $.001 per share, of the Company.





Purchase and Sale of the Securities.  We did issue and sold to the Purchaser, Series A Preferred Stock shares and Warrants for $5,000,000 in cash.





Warrant No.: D – 3 to Purchase 12,000,000 Shares of Common Stock of NetTalk.com. Inc.





The SERIES D - 3 COMMON STOCK PURCHASE WARRANT certifies that, for value received, Vicis Capital Master Fund, is entitled to subscribe for and purchase from NetTalk.com, Inc., up to 12,000,000 shares (Warrant Shares”) of Common Stock, par value $.001 per share, of the Company.




Plan of Operation




We provide, sell and supply commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. We are developing our business infrastructure and new products and services.




24




Our Product




At this time, our main product is the “TK 6000”. The TK 6000 is designed to provide specifications unique to each customer’s existing equipment. It allows the customer full mobile flexibility by being able to take internet interface anywhere the customer has    an internet connection. The TK 6000 has the following features:





A Universal Serial Bus (“USB”) connection allowing the interconnection of the TK 6000 to any computer. The USB connection results in shared power between the TK 6000 and the host computer.In addition to the USB power source option, the TK 6000 will also have an external power supply allowing the phone to independently power itself when not connected to a host computer;Unlike most VoIP telephone systems, the TK 6000 has a standalone feature allowing it to be plugged directly into a standard internet connection.





The TK 6000 is a compact, space-efficient product.




The TK 6000 has an interface component so that the customer can purchase multiple units that can communicate with each other allowing simultaneous ringing from multiple locations.




Our product is portable and allows our customers to make and receive phone calls with a telephone anywhere broadband internet connection is available.  We transmit the calls using Voice over Internet Protocol “VOIP” technology, which converts voice signals into digital data transmissions over the internet.








Our Services




Our business is to provide products and services that utilize Voice Over Internet Protocol, which we refer to as “VoIP.” VoIP is a technology that allows the consumer to make telephone calls over a broadband internet connection instead of using a regular (or analog) telephone line. VoIP works by converting the user’s voice into a digital signal that travels over the internet until it reaches its destination. If the user is calling a regular telephone line number, the signal is converted back into a voice signal once it reaches the end user. Our business model is to develop and commercialize software technology solutions for cost effective, real-time communications over the internet and related services.




Results of Operations




Three months ended March 31, 2010 compared to three months ended March 31, 2009




Revenues: Our revenues amounted to $245,636 and $0 for the three months ended March 31, 2010, and 2009, respectively.  The increase in revenues relates to establishing our operating architecture and commencing revenue producing activities.




Cost of sales: Our cost of sales amounted to $326,467 and $0 for the three months ended March 31, 2010, and 2009, respectively.  The increase in cost of sales relates to establishing our operating architectural and commencing revenue producing activities.




Gross margin:Our gross margin and new allocations amounted to $(80,831) and $0 for the three months ended March 31, 2010 and 2009, respectively. This is due to allocating additional expenses to technical support and telecommunication expenses.




Advertising:Our advertising expenses amounted to $91,108 and $0 for the three months ended March 31, 2010 and 2009, respectively.  The breakdown of our advertising expense is as follows:




March 31,2010


2009Infomercial/production time

$
-



-Media and others


91,108


$
-Total

$
91,108


$
-




Compensation and Benefits: Our compensation and benefits expense amounted to $91,771 and $167,599 for the three months ended March 31, 2010 and 2009, respectively. This amount represents normal salaries and wages paid to management members and employees including marketing and administrative functions.  The decrease in expenses is due to allocation of compensations and benefits to cost of sales.




25




Professional Fees: Our professional fees amounted to $91,495 and $20,058 for the three months ended March 31, 2010 and 2009, respectively. This amount includes normal payments and accruals for legal, accounting and other professional services.   Our costs associated with legal and accounting fees will remain higher than historical amounts because, as a reporting company, we are required to comply with the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). This involves the preparation and filing of the quarterly and annual reports required under the Exchange Act as well as other reporting requirements under the Exchange Act.




We will also incur additional expenses associated with the services provided by our transfer agent. In addition, to the work we are presently doing, we will need to focus our time and energy to complying with the Exchange Act. This will detract from our ability    and efforts to develop and market our products and services. We anticipate incurring these additional expenses related to being a public company without receiving a substantial increase in revenues associated with this undertaking.




Depreciation and Amortization: Depreciation and amortization amounted to $90,618 and $66,835 for the three months ended  March 31, 2010 and 2009, respectively. These amounts represent amortization of our long-lived tangible and intangible assets using straight-line methods and lives commensurate with the assets’ remaining utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently if circumstances so warrant. During the three months ended  March 31, 2010, we did not calculate or record impairment charges. However, negative trends in our business and our inability to meet our projected future results could give rise to impairment charges in future periods.




Research and Development and Software Costs





We expense research and development expenses, as these costs are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer software product and are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model.  At this time our main product TK6000 is being sold in the market place.  Therefore, research and development cost reported in our financial statements relates to  pre-marketing cost and are expensed accordingly.




Components of research and development:

March 31,2010


2009Product development and engineering

$
23,069


$
8,780Payroll and benefits


55,110



15,090Total

$
78,179


$
23,870


General and Administrative Expenses: General and administrative expenses amounted to $128,838 and $82,025for the three   months ended March 31, 2010 and 2009, respectively, and consisted of general corporate expenses and certain other start up expenses. General corporate expenses included $43,234 in occupancy costs for the three months ended March 31, 2010 and $41,260 for comparable period ended March 31, 2009.  Our increase costs are associated with our efforts of being a public company.




Our general and administrative expenses are made up of the following accounts:




March 31,2010


2009Bad debt expense

$
2,039



-Rent and occupancy


43,234



41,260Insurance


17,044



3,969Software


3,992



585Taxes and licenses


5,643



9,031Telephone


5,221



4,458Travel


26,180



3,442Other


25,485



19,280Total

$
128,868


$
82.025




26




Interest Expense: Interest expense amounted to $858,172 and $118,423 for the three months ended March 31, 2010 and 2009 respectively.  Such amount represented (i) stipulated interest under our aggregate $4,200,000 face value convertible debentures, (ii) the related amortization of premiums and discounts (iii) the amortization of deferred finance costs.  Aggregate premiums continue to be credited to interest expense over the term of the debentures using the effective interest method. During first and second quarter of 2009, we added $2,700,000 of new debentures at interest rate of 12%. This contributed to an increase of interest expense.




In addition, our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, and included the capitalization of $798,773 of accrued interest. The capitalization of accrued interest was to include interest up to December 31, 2010.  Therefore, we recorded additional interest expense in the amount of $378,000.




Derivative Income : Derivative income (expense) amounted to $(4,163,525) and $103,714 for the three months ended March 31, 2010 and 2009, respectively.  Such amount represents the change in fair value of liability-classified warrants. Derivative financial instruments are carried as liabilities, at fair value, in our financial statements with changes reflected in income.  In addition to the liability-classified warrants, we also have certain compound derivative financial instruments related to our $4,200,000 face value convertible debentures that had de minimus values. We are required to adjust our warrant and compound derivatives to fair value at each reporting period. The fair value of our warrant derivative is largely based upon fluctuations in the fair value of our common stock. The fair value of our compound derivative is largely based upon estimates of cash flow arising from the derivative and credit-risk adjusted interest rates. Accordingly, the volatility in these underlying valuation assumptions will have future effects on our earnings.




Our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, with maturities listed in the table above, and included the capitalization of $798,773 of accrued interest. The newly issued convertible debentures bear interest at 12%, which is payable at the earlier of the maturity date or the date that the debentures are converted, if ever. Such interest is payable at the Company’s option in cash or common stock at $0.25 per common share. The principal amount of the debentures is convertible into common stock at $0.25. Accordingly, the convertible debentures are indexed to 18,679,092 shares of our common stock. Each of the principal and debt conversion rates are subject to adjustment for recapitalization events or sales of equity or equity-linked contracts with a price or conversion price less than the contractual conversion price. The convertible debentures are secured by substantially all of our assets and are either callable or subject to a default interest rate, at the creditor’s option, if we default on the debentures. The significant events that could trigger a default include our failure to service the debentures, bankruptcy and the filing of significant judgments against us. The debentures also preclude merger and similar transactions, incurring additional debt, our payment of dividends on our equity securities and limit the compensation that we may pay to our officers.





Our accounting for the aforementioned exchange transaction required us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either cash flows or the fair value of the embedded conversion feature, wherein substantial is generally defined as a change greater than 10%. In all instances our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments and reestablish the new convertible debentures, at fair value, with the change reflected in our expenses. The following table reflects the components of our extinguishment calculations on  February 24, 2010:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30,

2011


TotalFair value of new debenture

$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808Carrying value of old debentures:Debentures


1,713,124



152,755



267,000



2,132,879Accrued Interest


546,000



87,166



165,607



798,773Compound embedded derivative


3,723,200



750,000



1,632,400



6,105,600Deferred finance costs


(85,372
)


(23,933
)


(92,122
)


(201,427
)5,896,952



965,988



1,972,885



8,835,824Extinguishment loss

$
1,870,499


$
524,268


$
1,223,217


$
3,617,984





The fair values of the Secured Convertible Debentures were determined based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion options. Observable market rates ranged from 7.91% for one-year and 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our compound embedded derivatives were determined using the Monte Carlo Simulations model. The compound embedded derivatives were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our derivative income (expense).




27





The fair value of the new convertible debentures was allocated to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because the allocation resulted in premiums which, under accounting principles, are considered equity components. The following table summarizes the allocation on the exchange date:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30

2011


TotalConvertible debentures

$
3,146,000


$
587,166


$
1,265,607


$
4,998,773Compound embedded derivative


4,505,072



880,749



1,878,982



7,263,982Paid-in capital


116,378



22,341



52,334



191,053$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808




Debt extinguished:Debt extinguished amount to $3,617,984 and $0 for the three months ended March 31, 2010 and 2009, respectively.  Such amount is related to the financing agreement executed on February 24, 2010, whereby, we received $5,000,000 additional working capital and our existing debentures were extended and renegotiated.




The following table reflects the components of our extinguishment calculations on February 24, 2010:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30,

2011


TotalFair value of new debenture

$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808Carrying value of old debentures:Debentures


1,713,124



152,755



267,000



2,132,879Accrued Interest


546,000



87,166



165,607



798,773Compound embedded derivative


3,723,200



750,000



1,632,400



6,105,600Deferred finance costs


(85,372
)


(23,933
)


(92,122
)


(201,427
)5,896,952



965,988



1,972,885



8,835,824Extinguishment loss

$
1,870,499


$
524,268


$
1,223,217


$
3,617,984




Net Loss: The net loss amounted to $9,290,114 and $371,666 for the three months ended March 31, 2010 and 2009, respectively.   The increase in net loss is due to start up expenses associated with new enterprise and compliance with regulatory requirements under the Exchange Act.  The net loss also included derivative expense associated with valuation of debentures and warrants, debt extinguished, negative gross margin and increase in travel expenses.




Net Loss Excluding Derivative Valuations: Net loss excluding Derivative expense and Debt extinguished amounted to $1,508,606.   Expenses relating to Derivative expense and Debt extinguished are “paper loss” and are not normal operating expenses.




Net Loss applicable to common stockholders: The net loss applicable to common stockholders amounted to $9,635,120 and $371,666 for the three months ended March 31, 2010 and 2009, respectively. The increase in net loss is primarily due to start up expenses associated with new enterprise and compliance with regulatory requirements under the Exchange Act.  The net loss also included derivative expense associated with valuation of debentures and warrants, debt extinguished, negative gross margin and increase in travel expenses.





Loss per common share





Basic loss per common share represents our loss applicable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities.  We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method or, in the case of liability classified warrants, the reverse treasury stock method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti-dilutive are excluded.




28





Results of Operations




Six months ended March 31, 2010 compared to six months ended March 31, 2009




Revenues: Our revenues amounted to $429,829 and $0 for the six months ended March 31, 2010, and 2009, respectively. The increase in revenues relates to establishing our operating architecture and commencing revenue producing activities.




Cost of sales: Our cost of sales amounted to $658,783 and $0 for the six months ended March 31, 2010, and 2009, respectively. The increase in cost of sales relates to establishing our operating architectural and commencing revenue producing activities.




Gross margin:Our gross margin and new allocations amounted to $(228,954) and $0 for the six three months ended March 31, 2010 and 2009, respectively. This is due to allocating additional expenses to technical support and telecommunication expenses.




Advertising:Our advertising expenses amounted to $164,038 and $0 for the six months ended March 31, 2010 and 2009, respectively. The breakdown of our advertising expense is as follows:




March 31,2010


2009Infomercial/production time

$
18,400


$
-Media and others


145,638



-Total

$
164,038


$
-




Compensation and Benefits: Our compensation and benefits expense amounted to $193,834 and $256,599 for the six months ended March 31, 2010 and 2009, respectively. This amount represents normal salaries and wages paid to management members and employees including marketing and administrative functions.  The decrease in expenses is due to allocation of compensations and benefits to Cost of sales.




Professional Fees: Our professional fees amounted to $141,604 and $136,425 for the six months ended March 31, 2010 and 2009, respectively. This amount includes normal payments and accruals for legal, accounting and other professional services.   Our costs associated with legal and accounting fees will remain higher than historical amounts because, as a reporting company, we are required to comply with the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). This involves the preparation and filing of the quarterly and annual reports required under the Exchange Act as well as other reporting requirements under the Exchange Act.




We will also incur additional expenses associated with the services provided by our transfer agent. In addition, to the work we are presently doing, we will need to focus our time and energy to complying with the Exchange Act. This will detract from our ability    and efforts to develop and market our products and services. We anticipate incurring these additional expenses related to being a public company without receiving a substantial increase in revenues associated with this undertaking.




Depreciation and Amortization: Depreciation and amortization amounted to $181,208 and $133,559 for the six months ended March 31, 2010 and 2009, respectively. These amounts represent amortization of our long-lived tangible and intangible assets using straight-line methods and lives commensurate with the assets’ remaining utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently if circumstances so warrant. During the six months ended March 31, 2010, we did not calculate or record impairment charges. However, negative trends in our business and our inability to meet our projected future results could give rise to impairment charges in future periods.




Research and Development and Software Costs





We expense research and development expenses, as these costs are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer software product and are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model.  At this time our main product TK6000 is being sold in the market place.  Therefore, research and development cost reported in our financial statements relates to  pre-marketing cost and  are expensed accordingly.





29





Components of research and development:

March 31,2010


2009Product development and engineering

$
25,495


$
66,929Payroll and benefits


98,969



45,068Total

$
124,464


$
111,997




General and Administrative Expenses: General and administrative expenses amounted to $253,490 and $146,716 for the six months ended March 31, 2010 and 2009, respectively, and consisted of general corporate expenses and certain other start up expenses. General corporate expenses included $86,390 in occupancy costs for the six months ended March 31, 2010 and $82,520 for comparable period ended March 31, 2009.  Our increase costs are associated with our efforts of being a public company.




Our general and administrative expenses are made up of the following items:




March 31,2010


2009Rent and occupancy

$
86,390


$
82,520Insurance


35,632



5,344Taxes and licenses


10,041



20,496Telephone


8,111



6,871Travel


54,719



5,186Bad debt expense


10,232



-Software


4,949



585Other


43,416



25,714Total

$
253,490


$
146,716




Interest Expense: Interest expense amounted to $1,184,363 and $165,618 for the six months ended March 31, 2010 and 2009respectively.  Such amount represented (i) stipulated interest under our aggregate $4,200,000 face value convertible debentures, (ii) the related amortization of premiums and discounts (iii) the amortization of deferred finance costs.  Aggregate premiums continue to be credited to interest expense over the term of the debentures using the effective interest method. During first and second quarter of 2009, we added $2,700,000 of new debentures at interest rate of 12%.  This contributed to an increase of interest expense.





In addition, our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, and included the capitalization of $798,773 of accrued interest.  The capitalization of accrued interest was to include interest up to December 31, 2010.  Therefore , we recorded additional interest expense in the amount of $378,000.




Derivative Income: Derivative income (expense) amounted to $(5,347,297) and $164,914 for the six months ended March 31, 2010 and 2009, respectively.  Such amount represents the change in fair value of liability-classified warrants. Derivative financial instruments are carried as liabilities, at fair value, in our financial statements with changes reflected in income.  In addition to the liability-classified warrants, we also have certain compound derivative financial instruments related to our $4,200,000 face value convertible debentures that had de minimus values. We are required to adjust our warrant and compound derivatives to fair value at each reporting period. The fair value of our warrant derivative is largely based upon fluctuations in the fair value of our common stock. The fair value of our compound derivative is largely based upon estimates of cash flow arising from the derivative and credit-risk adjusted interest rates. Accordingly, the volatility in these underlying valuation assumptions will have future effects on our earnings.




Our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, with maturities listed in the table above, and included the capitalization of $798,773 of accrued interest. The newly issued convertible debentures bear interest at 12%, which is payable at the earlier of the maturity date or the date that the debentures are converted, if ever. Such interest is payable at the Company’s option in cash or common stock at $0.25 per common share. The principal amount of the debentures is convertible into common stock at $0.25. Accordingly, the convertible debentures are indexed to 18,679,092 shares of our common stock. Each of the principal and debt conversion rates are subject to adjustment for recapitalization events or sales of equity or equity-linked contracts with a price or conversion price less than the contractual conversion price. The convertible debentures are secured by substantially all of our assets and are either callable or subject to a default interest rate, at the creditor’s option, if we default on the debentures. The significant events that could trigger a default include our failure to service the debentures, bankruptcy and the filing of significant judgments against us. The debentures also preclude merger and similar transactions, incurring additional debt, our payment of dividends on our equity securities and limit the compensation that we may pay to our officers.




30





Our accounting for the aforementioned exchange transaction required us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either cash flows or the fair value of the embedded conversion feature, wherein substantial is generally defined as a change greater than 10%. In all instances our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments and reestablish the new convertible debentures, at fair value, with the change reflected in our expenses. The following table reflects the components of our extinguishment calculations on February 24, 2010:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30,

2011


TotalFair value of new debenture

$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808Carrying value of old debentures:Debentures


1,713,124



152,755



267,000



2,132,879Accrued Interest


546,000



87,166



165,607



798,773Compound embedded derivative


3,723,200



750,000



1,632,400



6,105,600Deferred finance costs


(85,372
)


(23,933
)


(92,122
)


(201,427
)5,896,952



965,988



1,972,885



8,835,824Extinguishment loss

$
1,870,499


$
524,268


$
1,223,217


$
3,617,984





The fair values of the Secured Convertible Debentures were determined based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion options. Observable market rates ranged from 7.91% for one-year and 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our compound embedded derivatives were determined using the Monte Carlo Simulations model. The compound embedded derivatives were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our derivative income (expense).





The fair value of the new convertible debentures was allocated to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because the allocation resulted in premiums which, under accounting principles, are considered equity components. The following table summarizes the allocation on the exchange date:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30

2011


TotalConvertible debentures

$
3,146,000


$
587,166


$
1,265,607


$
4,998,773Compound embedded derivative


4,505,072



880,749



1,878,982



7,263,982Paid-in capital


116,378



22,341



52,334



191,053$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808




Debt extinguished:Debt extinguished amount to $3,617,983 and $0 for the three months ended March 31, 2010 and 2009, respectively.  Such amount is related to the financing agreement executed on February 24, 2010, whereby, we received $5,000,000 additional working capital and our existing debentures were extended and renegotiated.




31




The following table reflects the components of our extinguishment calculations on February 24, 2010:





Convertible Debenture dueJune 30,

2011


July 20,

2011


September 30,

2011


TotalFair value of new debenture

$
7,767,450


$
1,490,256


$
3,196,102


$
12,453,808Carrying value of old debentures:Debentures


1,713,124



152,755



267,000



2,132,879Accrued Interest


546,000



87,166



165,607



798,773Compound embedded derivative


3,723,200



750,000



1,632,400



6,105,600Deferred finance costs


(85,372
)


(23,933
)


(92,122
)


(201,427
)5,896,952



965,988



1,972,885



8,835,824Extinguishment loss

$
1,870,499


$
524,268


$
1,223,217


$
3,617,984




Net Loss: The net loss amounted to $11,431,254 and $780,245 for the six months ended March 31, 2010 and 2009, respectively. The increase in net loss is due to start up expenses associated with new enterprise and compliance with regulatory requirements under the Exchange Act.  The net loss also includes derivative expense associated with valuation of debentures and warrants, debt extinguished, negative gross margin and increase in travel expenses.




Net Loss Excluding Derivative Valuations: Net loss excluding Derivative expense and Debt extinguished amounted to $2,465,974.   Expenses relating to Derivative expense and Debt extinguished are “paper loss” and are not normal operating expenses.




Net Loss applicable to common stockholders: The net loss applicable to common stockholders amounted to $11,506,260 and $780,245for the six months ended March 31, 2010 and 2009, respectively. The increase in net loss is primarily due to start up expenses associated with new enterprise and compliance with regulatory requirements under the Exchange Act.  The net loss also included derivative expense associated with valuation of debentures and warrants, debt extinguished, negative gross margin and increase in travel expenses.




Loss per common share




Basic loss per common share represents our loss applicable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method or, in the case of liability classified warrants, the reverse treasury stock method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti-dilutive are excluded.




Liquidity and Capital Resources




On February 25, 2010, we filed Form 8 K reporting new security agreement and additional capital in the amount of $5,000,000.




Statement of cash flow data:

Six months ended March 31,2010


2009Net cash provided (used) in operating activities

$
(962,267
)

$
(803,726
)Net cash provided (used) in investing activities


(2,017,253
)


(4,644
)Net cash provided (used) in financing activities


4,972,225



951,150




Net cash provided (used) by operating activities of $(962,270) was primarily due to operating expenses.





Net cash provided by investing activities of $2,017,253 was due to incoming restricted cash in the amount of $2,000,000.





Net cash of $4,972,225 provided from financing activities was due to issuance of preferred stock of $5,000,000.





On March 31, 2010, we had cash on hand of $3,003,403 and restricted cash on hand of $2,021,206.




32




Our largest operating expenditures currently consist of the following items: $14,500 per month on leasing our corporate office space and network operational center (NOC) and includes our base rent and associated utility expenses and $62,000 per month on payroll. We do not anticipate that our leasing costs will change during the next 12 months.




Our current long term business plan contemplates acquiring the ongoing business of related companies, either through asset acquisitions, consolidations or mergers.




Secured Convertible Debentures and Warrant Financing Arrangements:




Our convertible debentures as of March 31, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, and included the capitalization of $798,773 of accrued interest. The newly issued convertible debentures bear interest at 12%, which is payable at the earlier of the maturity date or the date that the debentures are converted, if ever. Such interest is payable at the Company’s option in cash or common stock at $0.25 per common share. The principal amount of the debentures is convertible into common stock at $0.25. Accordingly, the convertible debentures are indexed to 19,995,092 shares of our common stock. Each of the principal and debt conversion rates are subject to adjustment for recapitalization events or sales of equity or equity-linked contracts with a price or conversion price less than the contractual conversion price. The convertible debentures are secured by substantially all of our assets and are either callable or subject to a default interest rate, at the creditor’s option, if we default on the debentures. The significant events that could trigger a default include our failure to service the debentures, bankruptcy and the filing of significant judgments against us. The debentures also preclude merger and similar transactions, incurring additional debt, our payment of dividends on our equity securities and limit the compensation that we may pay to our officers.





Our accounting for the aforementioned exchange transaction required us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either cash flows or the fair value of the embedded conversion feature, wherein substantial is generally defined as a change greater than 10%. In all instances our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments and reestablish the new convertible debentures, at fair value, with the change reflected in our expenses.




The fair values of the Secured Convertible Debentures were determined based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion options. Observable market rates ranged from 7.91% for one-year and 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our compound embedded derivatives were determined using the Monte Carlo Simulations model. See Note 8. The compound embedded derivatives were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our derivative income (expense).





The fair value of the new convertible debentures was allocated to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because the allocation resulted in premiums which, under accounting principles, are considered equity components.





Our accounting for the original debenture financings is as follows:





2008 Convertible Debenture Financing





On September 10, 2008, we issued a $1,000,000 face value, 12% secured convertible debenture (T-1), due September 10, 2010 and Series B warrants indexed to 4,000,000 shares of our common stock in exchange for the Interlink Asset Group, discussed in Note 3. Also on September 30, 2008, we issued a $500,000 face value 12% secured convertible debenture (T-2), due September 10, 2010 and Series B warrants indexed to 2,000,000 shares of our common stock for net cash proceeds of $472,800. The warrants have a term of five years. These financial instruments were issued to the same creditor under contracts that are substantially similar, unless otherwise mentioned in the following discussion.





The principal amount of the debentures is payable on September 10, 2010 and the interest is payable quarterly, on a calendar quarter basis. While the debenture is outstanding, the investor has the option to convert the principal balance, and not the interest, into shares of our common stock at a conversion price of $0.25 per common share. The terms of the conversion option provide for anti-dilution protections for traditional restructurings of our equity, such as stock-splits and reorganizations, if any, and for sales of our common stock, or issuances of common-indexed financial instruments, at amounts below the otherwise fixed conversion price. Further, the terms of the convertible debenture provide for certain redemption features. If, in the event of certain defaults on the terms of the debentures, some of which are indexed to equity risks, we are required at the investors option to pay the higher of (i) 110% of the principal balance, plus accrued interest or (ii) the if-converted value of the underlying common stock, using the 110% default amount, plus accrued interest. If this default redemption is not exercised by the investor, we would incur a default interest rate of 18% and the investor would have rights to our assets under the related Security Agreement. We may redeem the convertible debentures at anytime at 110% of the principal amount, plus accrued interest.




33





Because the two hybrid debt contracts were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes, the accounting resulted in no beneficial conversion feature.





2009 Convertible Debenture Financings





We entered into several Securities Purchase Agreements with Debt Opportunity Fund, LLP (“DOF”) during the year ended September 30, 2009.





-
On January 30, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $600,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,400,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $507,900. The warrants have a term of five years.





-
On February 6, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $443,250. The warrants have a term of five years.




-
On July 20, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $446,250.  The warrants have a term of five years.





-
On September 25, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $1,100,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 4,400,000 shares of our common stock at an exercise price of $0.25 for net cash proceeds of $1,000,000.  The warrants have a term of five years.





Each debenture bears interest at a rate of 12% per annum from the date of issuance until paid in full. Interest is calculated on the basis of a 360-day year and paid for the actual number of days elapsed, and accrues and is payable quarterly or upon conversion (as to the principal amount then being converted). The debentures convert into shares of our common stock at the option of the holder at $0.25 per share (which conversion price is subject to adjustment under certain circumstances). The debentures are secured by a lien in all of the assets of the Company. Further, the terms of the convertible debentures provide for default redemption features similar to those described above.





Midtown Partners & Co., LLC (“Midtown Partners”), an NASD registered broker dealer, acted as the placement agent for the Company in connection with the January 30, July 20, and September 25, 2009 Convertible Debt Offerings (“2009 Convertible Debt Offerings”). We paid Midtown Partners cash commissions equal to $198,000 and we issued Series BD Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to purchase 1,720,000 shares of the Company’s common stock at an initial exercise price of $0.50 per share and 440,000 shares of the Company’s common stock at an initial exercise price $0.25 per share. Since the Series BD warrants offered full ratchet anti-dilution protection, any previously issued and outstanding warrants with a conversion price greater than $0.25 automatically had their conversion price ratchet down to $0.25 as subsequent issuances were made with a conversion price of $0.25.





On September 22, 2009 we voided and reissued warrants in connection with our financing transactions. The cancellation and reissuance of warrants was treated as a modification under ASC 470-50 Modifications and Extinguishments although the change in cash flow was <10% so extinguishment accounting was not applicable.




Accounting for the Financing Arrangements:





Previously, we have evaluated the terms and conditions of the secured convertible debentures under the guidance of ASC 815, Derivatives and Hedging. We had also determined that, while the anti-dilution protections preclude treatment of the embedded conversion option as conventional, the conversion option is exempt from classification as a derivative because it otherwise achieves the conditions for equity classification (if freestanding) provided in ASC 815. We have further determined that the default redemption features described above are not exempt for treatment as derivative financial instruments, because they are not clearly and closely related in terms of risk to the host debt agreement. On the inception date of the arrangements through December 31, 2009, we determined that the fair value of these compound derivatives is de minus. However, we are required to re-evaluate this value at each reporting date and record changes in its fair value, if any, in income. For purposes of determining the fair value of the compound derivative, we have evaluated multiple, probability-weighted cash flow scenarios. These cash flow scenarios include, and will continue to include fair value information about our common stock. Accordingly, fluctuations in our common stock value will significantly influence the future outcomes from applying this technique.




34





As discussed above, the embedded conversion options previously did not require treatment as derivative financial instruments; however, we were required to evaluate the feature as embodying a beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options. A beneficial conversion feature (“BCF”) is present when the fair value of the underlying common share exceeds the effective conversion price of the conversion option. The effective conversion price is calculated as the basis in the financing arrangement allocated to the hybrid convertible debt agreement, divided by the number of shares into which the instrument is indexed.  Because the two hybrid debt contracts dated September 10, 2008 were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes and the accounting resulted in no beneficial conversion feature. The financings issued in 2009 were found to have a BCF which gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion price of each issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding, the BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly, the BCF allocated to paid-in capital from the 2009 financings amounted to $872,320 for the year ended September 30, 2009.





We evaluated the terms and conditions of the Series B, Series C and Series BD warrants under the guidance of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). The warrants embody a fundamental change-in-control redemption privilege wherein the holder may redeem the warrants in the event of a change in control for a share of assets or consideration received in such a contingent event. This redemption feature places the warrants within the scope of ASC 480-10, as put warrants and, accordingly, they are classified in liabilities and measured at inception and on an ongoing basis at fair value. Fair value of the warrants was measured using the Black-Scholes-Merton valuation technique and in applying this technique we were required to develop certain subjective assumptions which are listed in more detail below.





Premiums on the secured convertible debentures arose from initial recognition at fair value, which is higher than face value. Discounts arose from initial recognition at fair value, which is lower than face value. Premiums and discounts are amortized through credits and debits to interest expense over the term of the debt agreement. Amortization of debt (discount) premiums amounts to $(43,405) and $2,640 for the three months ended December 30, 2009 and 2008, respectively.





Direct financing costs were allocated to the financial instruments issued (hybrid debt and warrants) based upon their relative fair values. Amounts related to the hybrid debt are recorded as deferred finance costs and amortized through charges to interest expense over the term of the arrangement using the effective interest method. Amounts related to the warrants were charged directly to income because the warrants were classified in liabilities, rather than equity, as described above. Direct financing costs are amortized through charges to interest expense over the term of the debt agreement.





On September 24, 2009, we obtained an extension of the interest payments due June 30, 2009 and September 30, 2009 to June 30, 2010 and September 30, 2010, respectively. The change in cash flow from this modification was analyzed to determine if it was greater than 10% which would give rise to extinguishment accounting. In each case, the change in cash flows was less than 10% so extinguishment accounting was not applicable.





On February 24, 2010, we exchanged the convertible debentures for newly issued convertible debentures as discussed in the beginning of this footnote.





Redeemable Preferred Stock





On February 24, 2010, we designated 500 shares of our authorized preferred stock as Series A Convertible Preferred Stock; par value $0.001 per share, stated value $10,000 per share (“Preferred Stock”). The Preferred Stock is redeemable for cash on Jun 30, 2011 at the stated value, plus accrued and unpaid dividends. Dividends accrue, whether or not declared, at a rate of 12% of the stated value. The Preferred Stock is convertible into common stock at the holder’s option at $0.25 based upon the stated value. Such conversion rate is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other equity-linked instruments below the conversion price. Holders of the Preferred Stock are entitled to a preference equal to the stated value, plus accrued and unpaid dividends. While the Preferred Stock is outstanding, holders vote the number of indexed common shares.




35





Also on February 24, 2010, pursuant to a Securities Purchase Agreement, we sold 300 shares of Preferred Stock (indexed to 12,000,000 common shares upon conversion) and warrants to purchase 12,000,000 shares of our common stock  for proceeds of $3,000,000. In each instance, the warrants have a term of five years and may be exercised for $0.50 per common share. The warrant exercise price is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other equity-linked instruments below the exercise price.





Our accounting for the Preferred Stock and warrant financing transaction required us to evaluate the classification of the embedded conversion feature and the warrants. As a prerequisite to establishing the classification of the embedded conversion option, we were required to determine the nature of the hybrid Preferred Stock contract based upon its risks as either a debt-type or equity-type contract. The presence of the mandatory cash redemption and the requirement to accrue dividends were persuasive evidence that the Preferred Stock was more akin to a debt than an equity contract, with insufficient evidence to the contrary (e.g. voting privilege). Given that the embedded conversion feature, when evaluated as embodied in a debt-type contract, did not meet the definition for an instrument indexed to a company’s own stock, the embedded conversion feature required bifurcation and classification in liabilities,  at fair value. Similarly, the warrants did not meet the definition for an instrument indexed to a company’s own stock, resulting in their classification in liabilities, at fair value.





Warrants were valued using the Black-Scholes-Merton valuation technique. Significant assumptions were as follows: Market value of underlying, using the trading market of $0.58; expected term, using the contractual term of 5.0 years; market volatility, using a peer group of 90.20%; and, risk free rate, using the yield on zero coupon government instruments of 2.40%.





The compound embedded derivative was valued using the Monte Carlo Simulations (“MCS”) technique. The MSC technique is a generally accepted valuation technique for valuing embedded conversion features in hybrid convertible notes, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. However, there may be other circumstances or considerations, other than those addressed herein, that relate to both internal and external factors that would be considered by market participants as it relates specifically to the Company and the subject financial instruments.





Given its redeemable nature, we are required to classify our Preferred Stock outside of stockholders’ equity. Further, the inception date carrying value is subject to accretion to its ultimate redemption value over the term to redemption, using the effective method. During the period from its issuance to March 31, 2010, we accreted $40,006, which was reflected as a charge to paid-in capital in the absence of accumulated earnings. We also accrued $35,000 during the same period which amount represents the cumulative dividends that we are required to pay whether or not declared.





Effective on October 1, 2009, we adopted Emerging Issues Task Force Consensus No. 07-05 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-05”). EITF 07-05 amended previous guidance related to the determination of whether equity-linked contracts, such as our convertible debentures, meet the exclusion to bifurcation and derivative classification of the respective embedded conversion feature. Under EITF 07-05, the embedded conversion option was no longer exempt from bifurcation and derivative classification because the conversion option was subject to adjustments that are not allowable under the new standard. We have accounted for the change as a change in accounting principle where the derivative liability in the amount of $1,865,600 was established and the cumulative effect, which amounted to $872,320, was charged to our opening accumulated deficit on October 1, 2009.





As more fully discussed in Note 6, on February 24, 2010, we exchanged our convertible debentures for newly issued convertible debentures. This amount represents the change in the fair value of the compound embedded derivatives between the old and new debentures, which in part arose from the capitalization of accrued interest and in part arose from other changes to the debentures. As further noted in Note 6, the exchange transaction gave rise to the extinguishment of the old debentures, and therefore the compound derivative, due to the substantive nature of these changes. Since an extinguishment is recorded by replacing the carrying value of the old debentures with the fair value of the new debentures, with a charge to expense for the difference, this amount is included in the extinguishment loss that we recorded in connection with the exchange.





There were no transfers between valuation input levels during the periods presented.




36





Fair Value Considerations





We adopted the provisions of ASC 820 Fair Value Measurements and Disclosures(“ASC 820”) with respect to our financial instruments. Under this standard, fair value is 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. As required by of ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input (among three levels) that is significant to their fair value measurement. Level 1 inputs are defined as quoted market prices in active markets. Our common stock is publicly traded in an active market. Level 2 inputs are observable market quotations or other assumptions, such as interest rates, for similar assets and liabilities. Level 3 inputs are unobservable inputs, including our own internal estimates and assumptions.





The Monte Carlo Simulation (“MCS”) technique was used to determine the fair value of our compound embedded derivatives. The MSC technique is a generally accepted valuation technique for valuing embedded conversion features in hybrid convertible debt instruments, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. These inputs include our market price and a trading volatility assumption, but also include credit risk, interest risk, and redemptions. While the MCS technique embodies many observable inputs, such as our trading market price, it requires our development of internally developed assumptions and is, therefore, a Level 3 technique.





The warrants are valued using the Black-Scholes-Merton (“BSM”) valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions were as follows as of  March 31, 2010: Market value of underlying, using the trading market of $0.34; expected term, using the contractual term of 3.84 to 4.9 years; market volatility, using a peer group of 92.40% to 98.86%; and, risk free rate, using the yield on zero coupon government instruments of 2.40% to 2.55%.




We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.





The effect of changes in our trading market price on the fair values of our derivative liabilities is significant because all techniques that we employ consider the intrinsic values of the equity-linked contracts. Accordingly, increases in our trading market price will have the effect of increasing the derivative value and decreases will have the effect of decreasing the derivative value. However, the techniques embody other assumptions that may have an incremental or an offsetting effect. Since changes in the fair value of derivative financial instruments are recorded in income, our operations will reflect the expense or income over all periods that the contracts are outstanding. These effects could be material.




Off-Balance Sheet Arrangements - NONE




Critical Accounting Policies and estimates




Our accounting policies are discussed and summarized in Note 2 to our financial statements.  The following describes our critical accounting policies and estimates.




Critical Accounting Policies




The financial information contained in our comparative results of operations and liquidity disclosures has been derived from our financial statements. The preparation of those financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes.  The following significant estimates were made in the preparation of our financial statements and should be considered when reading our Management’s Discussion and Analysis:




·
Impairment of Long-lived Assets: Our telecommunications equipment, other property and intangible assets are material to our financial statements. Further, they are subject to the potential negative effects arising from technological obsolescence. We evaluate our tangible and definite-lived intangible assets for impairment annually or more frequently in the presence of circumstances or trends that may be indicators of impairment. Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values.  In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment.  For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets. These estimates are made by competent employees, using the best available information, under the direct supervision of our management.




37




·
Intangible assets: Our intangible assets require us to make subjective estimates about our future operations and cash flows so that we can evaluate the recoverability of such assets. These estimates consider available information and market indicators including our operational history, our expected contract performance, and changes in the industries that we serve.




·
Share-based payment arrangements: We currently intend to issue share-indexed payments in future periods to employees and non-employees. There are many valuation techniques, such as Black-Scholes-Merton valuation model that we may use to value share-indexed contracts, such as warrants and options.  All such techniques will require certain assumptions that require us to develop forward-looking information as well as historical trends. For purposes of historical trends, we may need to look to peer groups of companies and the selection of such groups of companies is highly subjective.




·
Common stock valuation: Estimating the fair value of our common stock is necessary in the preparation of computations related to acquisition, share-based payment and financing transactions.  We believe that the most appropriate and reliable basis for common stock value is trading market prices in an active market.




·
Derivative Financial Instruments: We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification,   (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. We are required to carried as derivative liabilities, at fair value, in our financial statements.  The fair value of share-indexed derivatives will be significantly influenced by the fair value of our common stock (see Common Stock Valuation, above). Certain other elements of forward-type derivatives are significantly influenced by credit-adjusted interest rates used in cash-flow analysis. Since we are required to carry derivative financial instruments at fair value and make adjustments through earnings, our future profitability will reflect the influences arising from changes in our stock price, changes in interest rates,  and changes in our credit standing.




Revenue recognition




Operating revenue consist of customer equipment sales of our main product TK6000, telecommunication service revenues, shipping and handling revenues.




Most all of our operating revenues are generated from the sale of customer equipment of our main product the TK6000. We also derive service revenues from per minute fees for international calls. Our operating revenue is fully recognized at the time of our customer equipment sale which includes credit card acceptance date and shipment date.  The device provides for life time service (over the life of the device/equipment).  Our equipment is able to operate within our network/platform or over any other network/platform.  There is no need for income allocation between our device and life time service provided.  The full intrinsic value of the sale is allocated to the device.  Therefore, we recognized 100%   of revenue at time of customer equipment sale and do not allocate any income to the life time service provided. Shipping and handling is also recognized at time of sale.  International calls are billed as earned from our customers.  International calls are prepaid and customers account is debited as minutes are used and earned.




Recent accounting pronouncements




In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, which establishes FASB Accounting Standards Codification (“the Codification”) as the official single source of authoritative U. S, GAAP.  All existing accounting standards are superseded.  All other accounting guidance not included in the Codification will be considered non – authoritative.  The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification.




In December 2007, the FASB revised the authoritative guidance for business combinations.  This guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed  and any non – controlling interest in the acquiree.  This guidance changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition , under the new guidance, changes in the acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense.  This guidance was effective for fiscal year beginning on or after December 15, 2008 and requires the immediate expensing of acquisition related costs associated with acquisitions completed after December 31, 2008.  Adoption of this guidance on October 1, 2009 had no impact on our results of operations, and financial position.  However, we expect this guidance will affect acquisitions made thereafter, though the impact will depend upon the size and nature of the acquisition.




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Item 3 Quantitative and Qualitative Disclosures About Market Risk





We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required   to provide the information under this item.




Item 4 Controls and Procedures




Disclosure controls




We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.





As of March 31, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2009:





·
Due to the Company’s limited resources, the Company has insufficient personnel resources and technical accounting and reporting expertise to properly address all of the accounting matters inherent in the Company’s financial transactions.  The Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board oversight role within the financial reporting process.





·
The Company’s small size and “one-person” office prohibits the segregation of duties and the timely review of accounts payable, expense reporting and inventory management and banking information.





Our Chief Executive Officer and Chief Financial Officer are in the process of determining how best to change our current system and implement a more effective system to insure that information required to be disclosed in our quarterly and annual reports has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem, and intends to develop procedures to address them to the extent possible given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.




Changes in Internal Controls.




During the three months ended March 31, 2010, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (f) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II                      OTHER INFORMATION





Item 1.  Legal Proceedings





None.





Item 1A. Risk Factors





We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required   to provide the information under this item.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





On our Form 10 Q at December 31, 2009, we reported that “we have succeeded in securing financing anticipated to close on or about February 17, 2010. The financing will provide working capital in the amount of $5,000,000”.




Effective February 24, 2010 we closed said transaction, as follows:




On February 23, 2010, we filed with the Florida Department of State, Fourth Amendment to the Articles of Incorporation of Net Talk.com, Inc., a Florida corporation, approving the issuance of Series A Convertible Preferred Stock.




On February 24, 2010, we executed a $5,000,000 security agreement with an accredited institutional investor. Pursuant to the agreement, we issue Series A Convertible Preferred Stock and warrants exercisable for shares of our common stock.




In addition to the issuance of Series A Convertible Preferred Stock, the agreement provided for amending existing Debentures.





Purchase and Sale of the Securities.  We issued and sold to the Purchaser, Series A Preferred Stock shares and Warrants for $5,000,000 in cash.





Item 3. Defaults Upon Senior Securities





None.





Item 4. Submission of Matters to a Vote of Security Holders





None.





Item 5. Other Information





On November 15, 2009, we filed Form 8 K reporting resignation of Mr. Richard Diamond as member of our Board of Directors.





On December 1, 2009, we filed Form 8 K reporting the adoption of our Employee Stock Option Plan.





On December 1, 2009, we filed Form 8 K reporting the adoption of our Code of Ethics.





On February 25, 2010 we filed Form 8 K reporting new security agreement and additional capital in the amount of $5,000,000.





On March 22, 2010 we filed Form 8 K reporting new executed manufacturing agreement with a large manufacturer located outside of the United States.  The Agreement  provides large scale manufacturing capabilities and provide continuous production of our product.




Refer to Exhibit 5.1 for copy of executed agreement.  We are requesting confidential treatment on critical parts of the agreement.





The complete agreement was filed with the Security and Exchange Commission requesting confidential treatment.




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Item 6Exhibit No.
Description31.1(1)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 30, 2010.31.2(1)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 30, 2010.32.1(1)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 30, 2010.32.1(1)
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 30, 2010.5.1(1)
Manufacturing agreement, dated March 22, 2010, executed with a large manufacturer located outside the United States.  The executed copy was filed with the Security and Exchange Commission. Confidential treatment has been requested for portions of this Exhibit.  The copy filed herewith mounts the information subject to the confidentiality request.  Omissions are designated as {XXXX}.  A complete version of this Exhibit has been filed separately with the Securities and Exchange Commission.10.1(2)
Securities Purchase Agreement dated February 24, 2010.10.2(2)
12% Senior Secured Convertible Debenture dated February 24, 2010, due June 30, 2011.10.3(2)
12% Senior Secured Convertible Debenture dated February 24, 2010, due July 20, 2011.10.4(2)
12% Senior Secured Convertible Debenture dated February 24, 2010, due Sept. 25, 2011.10.5(2)
Amended and Restated Security Agreement dated February 24, 2010.10.6(2)
Amended and Restated Registration Rights Agreement dated February 24, 2010.10.7(2)
Series D – 1 Common Stock Purchase Warrant.10.8(2)
Series D – 2 Common Stock Purchase Warrant.10.9(2)
Series D – 3 Common Stock Purchase Warrant.10.10(2)
Fourth Amendment to the Articles of Incorporation of Net Talk.com, Inc.99.1(2)
NetTalk.com, Inc. procures an additional $5,million; proceeds from the offering to be used for continuing  expansion.





(1) Filed herewith.
 (2) Previously filed.
  41





SIGNATURE





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.




NET TALK.COM, INC.Date:  November 19, 2010
By /s/ Anastasios KyriakidesAnastasios KyriakidesChief Executive Officer (Principal Executive Officer)Date:  November 19, 2010
By:/s/ Guillermo RodriguezGuillermo RodriguezChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)