UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
 
 [√]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarter ended December 31, 2009
 
 OR
 
 [
      ]
              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 [√]  No [  ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 [
 ]
 
 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  [  ]
                Accelerated
      Filer  [  ]
                Non-accelerated
      filer   [  ]
                Smaller
      reporting
company   [√]
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes [  ] No [√]
 
 The
Registrant had 9,719,800 shares of Common Stock, par value $0.001 per share,
outstanding as of February 12, 2010.
  1
 
 Net
Talk.com, Inc.
 
 INDEX
 PART I.
              Financial
      Information
              Page
      No.Item 1.
              Financial StatementsBalance Sheets at December 31, 2009 (Unaudited) and
      September 30, 2009
              3Statements of Operations for the Three Months
      Ended December 31, 2009 and 2008 (Unaudited)
              4Statements of Cash Flows for the Three Months Ended
      December 31, 2009 and 2008
    (Unaudited)
              5Notes to Financial Statements
              6Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
              20Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risks
              28Item 4.
              Controls and Procedures
              28PART II.
              Other InformationItem 1.
              Legal Proceedings
              29Item 1A.
              Risk FactorsItem 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              29Item 3.
              Defaults Upon Senior Securities
              29Item 4.
              Submission of Matters to a Vote of Security
      Holders
              29Item 5.
              Other Information
              29Item
      6.
              Exhibits
              29SIGNATURES
              30
 
 
 2
 
 
 Part IItem 1.   Financial
    statementsNet
      Talk.com, Inc.Balance SheetsDecember
      31,
                
                
                September
      30,2009
                
                
                2009AssetsCurrent
      assets:Cash
      and cash equivalents
                $
                377,931
                
                
                $
                1,007,366Restricted
      cash
                
                11,246
                
                
                
                3,332Accounts
      receivables, net of allowance bad debts $9,234 and $1,042
                
                29,862
                
                
                
                37,315Inventory
                
                196,161
                
                
                
                117,712Prepaid
      advertising
                
                1,542
                
                
                
                5,008Total
      current assets
                
                616,742
                
                
                
                1,170,733Telecommunication
      equipment and other property, net
                
                635,071
                
                
                
                665,315Intangible
      assets, net
                
                545,154
                
                
                
                604,987Deferred
      financing costs and other assets
                
                254,862
                
                
                
                298,266Total
      assets
                $
                2,051,829
                
                
                $
                2,739,301Liabilities
      and Stockholders' Deficit:Current
      liabilities:Accounts
      payable
                $
                353,678
                
                
                $
                264,912Due
      to officer
                
                -
                
                
                
                56,300Accrued
      interest
                
                294,774
                
                
                
                168,774Accrued
      expenses
                
                5,668
                
                
                
                49,320Senior
      secured convertible debentures ($1,500,000 face value)
                
                1,507,260
                
                
                
                1,509,880Derivative
      liabilities
                
                946,200
                
                
                
                382,200Total
      current liabilities
                
                3,107,580
                
                
                
                2,431,386Senior
      secured convertible debentures ($2,700,000 face value),less
      current portion
                
                1,293,662
                
                
                
                1,136,875Derivative
      liabilities, less current portion
                
                1,564,844
                
                
                
                945,072Total
      liabilities
                
                5,966,086
                
                
                
                4,513,333Stockholders'
      Deficit:Preferred
      stock $.001 par value, 10,000,000 sharesauthorized,
      none designated or issued
                
                -
                
                
                
                -Common
      stock, $.001 par value, 300,000,000 sharesauthorized,
      9,719,800 and 8,749,800 issued and outstanding,as
      of September 30, 2009 and 2008, respectively
                
                9,720
                
                
                
                9,720Additional
      paid in surplus
                
                3,458,825
                
                
                
                3,458,825Accumulated
      deficit
                
                (7,382,802
                )
                
                
                (5,242,577
                )Total
      stockholders' deficit
                
                (3,914,257
                )
                
                
                (1,774,032
                )Total
      liabilities and stockholders' deficit
                $
                2,051,829
                
                
                $
                2,739,301The
      accompanying notes are an integral part of the financial
    statements
 3
 
 Net
      Talk.com, Inc.Statements of OperationsThree
      months endedDecember
      31,2009
                
                
                2008Revenues
                
                
                184,193
                
                
                
                -Cost
      of sales
                
                
                332,316
                
                
                
                -Gross
      margin
                
                
                (148,123
                )
                
                
                -Advertising
                
                
                72,930
                
                
                
                -Compensation
      and benefits
                
                
                102,063
                
                
                
                89,000Professional
      fees
                
                
                50,109
                
                
                
                116,367Depreciation
      and amortization
                
                
                90,589
                
                
                
                66,724Research
      and development
                
                
                46,285
                
                
                
                88,127General
      and administrative expenses
                
                
                123,738
                
                
                
                64,691Total
      operating expenses
                
                
                485,714
                
                
                
                424,909Loss
      from operations
                
                
                (633,837
                )
                
                
                (424,909
                )Other
      income (expenses):Interest
      expense
                
                
                (326,191
                )
                
                
                (47,195
                )Derivative
      income (expense)
                
                
                (1,183,772
                )
                
                
                61,200Interest
      income
                
                
                3,575
                
                
                
                2,325(1,506,388
                )
                
                
                16,330Loss
      from operations before income taxes
                
                
                (2,140,225
                )
                
                
                (408,579
                )Benefit
      for income taxes
                
                
                -
                
                
                
                -Net
      income (loss)
                
                
                (2,140,225
                )
                
                
                (408,579
                )Net
      loss per shares:Basic
      and diluted
                
                $
                (0.24
                )
                
                $
                (0.05
                )Weighted
      average shares, basic and diluted
                
                
                9,015,553
                
                
                
                8,749,800The
      accompanying notes are an integral part of the financial
    statements
 4
 Net
      Talk.com, Inc.Statements of Cash FlowsThree
      months ended December 31,2009
              
              
              2008Cash
      flow from operating activities:Net
      income (loss)
              
              $
              (2,140,225
              )
              
              $
              (408,579
              )Adjustments
      to reconcile net loss to cash used in operations:Depreciation
              
              
              30,757
              
              
              
              29,217Amortization
              
              
              59,833
              
              
              
              37,507Amortization
      of finance costs
              
              
              200,190
              
              
              
              3,075Amortization
      of premium on debentures
              
              
              (2,621
              )
              
              
              (2,641
              )Bad
      debt expense
              
              
              8,193
              
              
              
              -Fair
      value of derivatives
              
              
              1,183,772
              
              
              
              (61,200
              )Changes
      in assets and liabilities:Accounts
      receivables
              
              
              (740
              )
              
              
              -Prepaid
      expenses and other assets
              
              
              3,465
              
              
              
              (1,000
              )Inventories
              
              
              (78,449
              )
              
              
              -Accounts
      payables
              
              
              88,767
              
              
              
              -Accrued
      expenses
              
              
              82,349
              
              
              
              110,519Net
      cash used in operating activities
              
              
              (564,709
              )
              
              
              (293,102
              )Cash
      flow used in investing activities:Acquisition
      of fixed assets
              
              
              (513
              )
              
              
              -Net
      cash used in investing activities
              
              
              (513
              )
              
              
              -Cash
      flow used in financing activities:Loans
      from officers
              
              
              (56,300
              )
              
              
              -Net
      cash used in investing activities
              
              
              (56,300
              )
              
              
              -Net
      increase in cash
              
              
              (621,522
              )
              
              
              (293,102
              )Cash
      and equivalents, beginning
              
              
              1,010,699
              
              
              
              342,793Cash
      and equivalents, ending
              
              $
              389,177
              
              
              $
              49,691Supplemental
      disclosures:Cash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      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:
 
 The
accompanying unaudited condensed financial statements as of and for the three
months ended December 31, 2009 have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for Form 10-Q. Accordingly, they do not
include all the information and footnotes required for complete financial
statements. However, the unaudited condensed consolidated financial information
includes all adjustments which are, in the opinion of management, necessary to
fairly present the financial position and the results of operations for the
interim periods presented. The operations for the three months
ended    December 31, 2009 are not necessarily indicative of
the results for the year ending September 30, 2010. The
unaudited condensed financial statements included in this report should be read
in conjunction with the financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended September 30, 2009,
filed with the Securities and Exchange Commission.
  Going concern:
  To alleviate the effects of
our previously reported working capital deficits and negative cash flows from
operations, 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.
 
 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.
 
 Subsequent
events
 
 We have
evaluated subsequent events that occurred after our three months ended December
31, 2009 through February 12, 2010.
 
 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 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, 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.
  December
      31,
                
                
                September
      30,Inventory
                
                2009
                
                
                2009Productive
      material, work in process and supplies
                
                $
                40,952
                
                
                $
                43,538Finished
      products
                
                
                155,209
                
                
                
                74,174Total
                
                $
                196,161
                
                
                $
                117,712
 During the
three months ended December 31, 2009 and 2008, 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. 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 Note 3. The intangible assets were recorded at our
acquisition cost, which encompassed estimates of their respective and 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.
  December
      31,Components of Research
      and Development:
                
                
                2009
                
                
                
                2008Product
      development and engineering
                
                $
                2,426
                
                
                $
                51,839Payroll
      and benefits
                
                
                43,859
                
                
                
                -Total
                
                $
                46,285
                
                
                $
                51,839
  Reclassifications
 
 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, 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 at historical cost. However, the fair values of debt
instruments are estimated for disclosure purposes (below) based upon the present
value of the estimated cash flows at market interest rates applicable to similar
instruments.
 
 8
  As of
December 31, 2009, estimated fair values and respective carrying values of our
secured convertible debentures are as follows:
  Financial
      Instrument
              
              Note
              
              
              Fair
                Value
              
              
              Carrying
                Value$
      1,000,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              $
              1,168,321
              
              
              $
              1,004,840$
      500,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              
              584,161
              
              
              
              502,420$
      600,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              
              677,953
              
              
              
              335,864$
      500,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              
              564,961
              
              
              
              304,616$
      500,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              
              530,027
              
              
              
              207,165$
      1,100,000 12% Secured Convertible  Debenture
              
              
              6
              
              
              
              1,144,616
              
              
              
              446,017Total
              
              
              
              
              
              $
              4,670,039
              
              
              $
              2,800,922
 
 Derivative
financial instruments, as defined in ASC
815-10-15-83 Derivatives and
Hedging, 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.
 
 The fair
value of our derivative liabilities consist of the following:
 
 Derivative Financial
    Instrument
              
              Indexed
                Shares
              
              
              December
      31,
                2009
              
              
              September
      30,
                2009Warrants:September
      10, 2008 Series B warrants (Tranche 1)
              
              
              2,000,000
              
              
              $
              315,400
              
              
              $
              127,400September
      10, 2008 Series B warrants (Tranche 2)
              
              
              4,000,000
              
              
              
              630,800
              
              
              
              254,800January
      30, 2009 Series C-3 warrants
              
              
              2,400,000
              
              
              
              227,520
              
              
              
              167,040January
      30, 2009 Series BD warrants
              
              
              480,000
              
              
              
              62,616
              
              
              
              33,408February
      6, 2009 Series C-4 warrants
              
              
              2,000,000
              
              
              
              190,200
              
              
              
              139,400February
      6, 2009 Series BD warrants
              
              
              800,000
              
              
              
              104,600
              
              
              
              55,760July
      20, 2009 Series C-5 warrants
              
              
              2,000,000
              
              
              
              363,600
              
              
              
              146,600September
      25, 2009 Series C-6 warrants
              
              
              4,400,000
              
              
              
              485,760
              
              
              
              335,720September
      25, 2009 Series BD warrants
              
              
              880,000
              
              
              
              130,548
              
              
              
              67,144Compound
      Derivative Financial Instruments:$1,000,000
      Convertible Debenture, dated September 10, 2008
              
              
              n/a
              
              
              
              --
              
              
              
              --$500,000
      Convertible Debenture, datedSeptember
      10, 2008
              
              
              n/a
              
              
              
              --
              
              
              
              --$600,000
      Convertible Debenture, datedJanuary
      30, 2009
              
              
              n/a
              
              
              
              --
              
              
              
              --$500,000
      Convertible Debenture, dated February 6, 2009
              
              
              n/a
              
              
              
              --
              
              
              
              --$500,000
      Convertible Debenture, datedJuly
      20, 2009
              
              
              n/a
              
              
              
              --
              
              
              
              --$1,100,000
      Convertible Debenture, dated September 25, 2009
              
              
              n/a
              
              
              
              --
              
              
              
              --Total
              
              
              18,960,000
              
              
              $
              2,511,044
              
              
              $
              1,327,272
 
 9
 
 The
following table summarizes the effects on our income (loss) associated with
changes in the fair values of our derivative financial instruments:
  Three
      months endedDecember
      31,
                  2009
                
                
                
                December
      31,
                  2008September
      10, 2008 Series B warrants (Tranche 1)
                
                $
                (188,000
                )
                
                $
                20,400September
      10, 2008 Series B warrants (Tranche 2)
                
                
                (376,000
                )
                
                
                40,800January
      30, 2009 Series C-3 warrants
                
                
                (60,480
                )
                
                
                --January
      30, 2009 Series BD warrants
                
                
                (29,208
                )
                
                
                --February
      6, 2009 Series C-4 warrants
                
                
                (50,800
                )
                
                
                --February
      6, 2009 Series BD warrants
                
                
                (48,840
                )
                
                
                --July
      20, 2009 Series C-5 warrants
                
                
                (217,000
                )
                
                
                --September
      25, 2009 Series C-6 warrants
                
                
                (150,040
                )September
      25, 2009 Series BD warrants
                
                
                (63,404
                )
                
                
                --Total
                
                $
                (1,183,772
                )
                
                $
                61,200
  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.
 
 Net
Loss per Common Share
 
 Basic loss
per common share represents our net loss 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. 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.
  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.
  Following
the Codification, the FASB will not issue standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead
it will issue Accounting Standards Updates (“ASU”) which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
  The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our fiscal year ended
September 30, 2009 financial statements and the principal impact on our
financial statements is limited to disclosures, as all future references to
authoritative accounting  literature will be referenced in accordance
with the Codification.
  10
  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.
  In March
2008, the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities.  This guidance addresses enhanced
disclosure concerning (a) the manner in which an entity uses derivatives (and
the reasons is uses them), (b) the manner in which derivatives and related
hedged items are accounted for and (c) the effects that derivatives and related
hedged items have on an entity’s financial position, financial performance, and
cash flows.  This guidance was effective for financial statements
issued for fiscal years and interim periods beginning on or after November 15,
2008.  Adoption of this guidance did not have a material impact on our
financial position or results of operations.
  In May
2009, the FASB issued authoritative guidance on subsequent
events.  This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  This
guidance is effective for interim or annual financial periods ending after June
15, 2009.  Adoption of this guidance did not have an impact on our
results of operations or financial position.
  In August
2009, the FASB updated its authoritative guidance on fair value measurement and
disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities.  Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009 – 05.  ASC Update 2009 – 05  became
effective for our  period ended  December 31,
2009.  Adoption of this guidance  did not have any impact on
our results of operations or financial position.
 
 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.
 
 11
 
 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:
 
 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.
 
 As more
fully discussed in Note 7, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition. These
shares are compensatory in nature and are fully vested. We have valued the
shares at $1,500,000, consistent with fair value measurements used elsewhere in
our accounting, and recognized the expense in compensation for the
period.
 
 12
 
 Note
4 - Telecommunications Equipment and Other Property:
  Telecommunications
      equipment and other property consist of the following:
                
                
                
                
                
                
                December
      31,
                
                
                
                September
      30,Life
                
                
                
                2009
                
                
                
                2009Telecommunication
      equipment
                
                
                7
                
                
                $
                650,804
                
                
                $
                650,804Computer
      equipment
                
                
                5
                
                
                
                106,577
                
                
                
                106,577Office
      equipment and furnishing
                
                
                7
                
                
                
                23,760
                
                
                
                23,760Purchased
      software
                
                
                3
                
                
                
                10,554
                
                
                
                10,041Sub
      – total
                
                
                
                
                
                
                791,695
                
                
                
                791,182Less:
      accumulated depreciation
                
                
                
                
                
                
                (156,624
                )
                
                
                (125,867
                )Total
                
                
                
                
                
                $
                635,071
                
                
                $
                665,315
 
 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 amounted to $30,757 during the three months ended December
31, 2009 and $29,217 during  December 31, 2008.
 
 Note
5 - Intangible Assets:
 
 Intangible
      assets consist of following:
                
                
                
                
                
                
                December
      31,
                
                
                
                September
      30,Life
                
                
                
                2009
                
                
                
                2008Trademarks
      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
                
                
                
                
                
                
                (306,834
                )
                
                
                (247,001
                )$
                545,154
                
                
                $
                604,987
 
 Amortization
of the above intangible assets amounted to $59,833 and$37,507for the three
months ended December 31, 2009 and 2008, respectively.  The weighted
average amortization period for the amortizable intangible assets is 2.7
years.
  Estimated
future amortization of intangible assets, is as follows:
  September 30,2010
                
                $
                187,0002011
                
                
                225,9102012
                
                
                70,2382013
                
                
                62,006Total
                
                $
                545,154
  13
 
 Note
6 - Secured Convertible Debentures and Warrant Financing
Arrangements:
  The
carrying values of our 12% secured convertible debentures consist of the
following:
 
 December
      31 2009
              
              
              September
      30 2009$1,000,000
      face value convertible debenture, due September 10, 2010
              
              $
              1,004,840
              
              
              $
              1,006,588$500,000
      face value convertible debenture, due September 10, 2010
              
              
              502,420
              
              
              
              503,293$600,000
      face value convertible debenture, due January 30, 2011
              
              
              335,864
              
              
              
              293,726$500,000
      face value convertible debenture, due January 30, 2011
              
              
              304,616
              
              
              
              271,741$500,000
      face value convertible debenture, due July 20, 2011
              
              
              207,165
              
              
              
              179,778$1,100,000
      face value convertible debenture, due September 25, 2011
              
              
              446,017
              
              
              
              391,630Total
              
              $
              2,800,922
              
              
              $
              2,646,756
 
 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 10, 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  less than
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:
 
 We have
evaluated the terms and conditions of the secured convertible debentures under
the guidance of ASC 815, Derivatives and
Hedging. We have 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.
 
 15
 
 As
discussed above, the embedded conversion options 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.
 
 Fair
Value Considerations
 
 We adopted
the provisions of ASC 820 Fair Value Measurements and
Disclosures(“ASC 820”) with respect to our financial instruments. 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 that is
significant to their fair value measurement. Our derivative financial
instruments which are required to be measured at fair value on a recurring basis
under of ASC 815 as of December 31, 2009 are all measured at fair value using
Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities.
 
 The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value:
 
 Balance
      at September 30, 2009
              
              $
              1,327,272Fair
      value adjustments
              
              
              1,183,772Balance
      at December 31, 2009
              
              $
              2,511,044
  16
 
 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 underlying the
BSM calculations are as follows as of December 31, 2009 and September 30,
2009:
 
 December
      31, 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
              
              
              $
              0.50
              
              
              $
              0.50
              
              
              $
              0.25
              
              
              $
              0.50
              
              
              $
              0.25-$0.50Volatility
              
              
              97
              %
              
              
              94
              %
              
              
              94
              %
              
              
              92
              %
              
              
              91
              %
              
              
              91%-94
              %Expected
      term (years)
              
              
              3.69
              
              
              
              4.08
              
              
              
              4.10
              
              
              
              4.55
              
              
              
              4.75
              
              
              
              4.08-4.75Risk-free
      rate
              
              
              1.70
              %
              
              
              1.70
              %
              
              
              1.70
              %
              
              
              2.69
              %
              
              
              2.69
              %
              
              
              1.70-2.69
              %Dividends
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
 
 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 remaining term of our warrants is used as our term
input and for purposes of our risk-free rate, we have used the
publicly-available yields on zero-coupon Treasury securities with remaining
terms to maturity consistent with the remaining contractual term of the
warrants. Until December 2009, when our stock became listed on the OTC Bulletin
Board, we valued the underlying common shares at $0.25 which was representative
of our best estimates of our enterprise value.
 
 Note
7 - Stockholders’ Deficit:
 
 Share-based
payments (employees):
 
 On
September 10, 2008, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition (see
Note 3). These shares are compensatory in nature and are fully vested. We have
valued the shares at $0.25, consistent with fair value measurements used
elsewhere in our accounting.
 
 Officer
              
              Shares
              
              
              ExpenseAnastasios
      Kyriakides, CEO
              
              
              2,100,000
              
              
              $
              525,000Nicholas
      Kyriakides
              
              
              600,000
              
              
              
              150,000Kenneth
      Hosfeld,  EVP
              
              
              1,100,000
              
              
              
              275,000Leo
      Manzewitsch, CTO
              
              
              1,100,000
              
              
              
              275,000Guillermo
      Rodriguez, CFO
              
              
              1,100,000
              
              
              
              275,0006,000,000
              
              
              $
              1,500,000
 
 On July 9,
2009, we issued 1,000,000 shares of our common stock to non-employees for goods
and services.
 
 Consultant/Provider
              
              Shares
              
              
              ExpenseOmni
      Reliant
              
              
              1,000,000
              
              
              $
              250,000
 
 Warrants to purchase common
stock:
 
 On
September 25, 2009, we issued Series C warrants to purchase 4,400,000 shares of
our common stock in connection with financing transactions discussed in Note 6.
These warrants have a strike price of $0.50 and expire five years from
issuance.
 
 On July
20, 2009, we issued Series C warrants to purchase 2,000,000 shares of our common
stock in connection with financing transactions discussed in Note 6. These
warrants have a strike price of $0.25 and expire five years from
issuance.
 
 17
 On
February 6, 2009, we issued Series C warrants to purchase 2,000,000 shares of
our common stock in connection with financing transactions discussed in Note 6.
These warrants have a strike price of $0.50 and expire five years from
issuance.
 
 On January
30, 2009, we issued Series C warrants to purchase 2,400,000 shares of our common
stock in connection with financing transactions discussed in Note 6. These
warrants have a strike price of $0.50 and expire five years from
issuance.
 
 We also
issued Series BD warrants to purchase 1,080,000 shares of our common stock in
connections with financing transactions discussed in Note 6.  These
warrants have a strike price of $0.50 and expire in five years from
issuance.
 
 We also
issued Series BD warrants to purchase 1,080,000 shares of our common stock in
connections with financing transactions discussed in Note 6.  These
warrants have a strike price of $0.25 and expire in five years from
issuance.
 
 On
September 10, 2008, we issued Class B warrants to purchase 4,000,000 shares of
our common stock in connection with financing transactions discussed in Note 6.
These warrants have a strike price of $0.25 and expire five years from
issuance.
 
 On
September 10, 2008, we issued Class B warrants to purchase 2,000,000 shares of
our common stock in connection with financing transactions discussed in Note 6.
These warrants have a strike price of $0.25 and expire five years from
issuance.
 
 On January
17, 2007, we issued Class A warrants to purchase 3,099,712 shares of our common
stock in connection with a sale of common stock. These warrants have a strike
price of $0.25 and expire five years from issuance.
  Indexed Shares
              
              
              Weighted StrikeOctober
      1, 2006Issued
              
              
              3,262,912
              
              
              $
              1.00Exercised
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -September
      30, 2007
              
              
              3,262,912
              
              
              $
              1.00Issued
              
              
              6,000,000
              
              
              $
              0.50Exercised
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -September
      30, 2008
              
              
              9,262,912
              
              
              $
              0.67Issued
              
              
              12,960,000
              
              
              $
              0.50Exercised
              
              
              -
              
              
              
              -Expired/cancelled
              
              
              (163,200
              )
              
              
              0.25September
      30, 2009
              
              
              22,059,712
              
              
              $
              0.57Issued
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -December
      31, 2009
              
              
              22,059,712
              
              
              
              $0.50
 
 The
weighted average remaining life of the aggregate warrants is 3.5
years.
 
 Refer to
Note 2 for income associated with the classification of warrants liabilities at
the three months ended December 31, 2009.
 
 Note
8 - 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 months ended December 31, 2009
and 2008 was $43,156 and $41,260 respectively.
 
 Minimum
non-cancellable future lease payments as of December 31, 2009, were as follows:
2010 - $71,800.
 
 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 December 31, 2009, none of these incentive arrangements and plans had been
realized. Theagreement is effective through September 30,
2013.
 
 18
 
 Note
9 - Related Parties:
  Effective
December 30, 2007, we sold all of the assets associated with our
advertising business as a going concern to Robert H. Blank, who was then our
President and Chief Operating Officer. The purchase price for the assets was
$185,000. Mr. Blank paid the purchase price by assuming a convertible
debenture issued by us to Mr. Robin C. Hoover in the amount of
$185,000. The convertible debenture constituted substantially all of our
liabilities at the time of the acquisition. In addition, Mr. Hoover and
Mr. Blank tendered 208 and 200 shares of common stock, respectively, to the
Company. These shares had been issued to Mr. Blank and Mr. Hoover as
“founders” shares.
 
 Effective
September 10, 2008, we issued 1,000,000 shares to Apogee Financial Investments,
Inc. in connection with certain consulting services rendered to us. Mr. Richard
Diamond is president of Apogee Financial Investments, Inc. and served as a
member of our board of directors until his resignation on November 23, 2009. On
the date of the issuance, Mr. Diamond was not a member of our board of
directors.
 
 Midtown
Partners & Co., LLC (“Midtown Partners”), an FINRA registered broker dealer,
acted as the placement agent in connection with multiple Convertible Debt
Offerings.  In connection with these offerings, we paid Midtown
Partners a cash commission equal to $198,000; issued Series BD Common Stock
Purchase Warrant to Midtown Partners entitling Midtown Partners to purchase
1,080,000 shares of our common stock at an initial exercise price
of  $0.50 per share; and issued Series BD Common Stock Purchase
Warrant to Midtown Partners entitling Midtown Partners to purchase 1,080,000
shares of our common stock at an initial exercise price of $0.25 per share.
Midtown Partners is a wholly-owned subsidiary of Apogee Financial Investments,
Inc.
 
 A company
owned or controlled by a major shareholder of NetTalk.com, Inc., provided
services to us, as follows:
 
 In June
2009, we incurred advertising expense for the creation of an infomercial. The
infomercial is presently running weekly in some  US
markets. The advertising expense incurred, was as follows:
  Items
                
                AmountCash
      payment
                
                $
                100,000Share-based
      payment (1,000,000 common shares)
                
                
                250,000Total
                
                $
                350,000Accounts
      payable to Omni Reliant at December 31, 2009
                
                $
                111,178
  19
  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.
  20
 
 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.
  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.
  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;
 
 21
 
 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 December 31, 2009 compared to three months ended December 31,
2008
  Revenues: Our revenues
amounted to $184,193and $0 for the three months ended December 31, 2009, and
2008, 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 $332,316 and $0 for the three months ended December 31, 2009,
and 2008, 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 $(148,123) for the three months ended December
31, 2009 and $0, respectively. This is due to allocating additional expenses to
technical support and telecommunication expenses.
  Advertising:Our
advertising expenses amounted to $72,930 and $0 for the three months ended
December 31, 2009 and 2008, respectively.  The breakdown of our
advertising expense is as follows:
 
 December
      31,2009
                
                
                
                2008Infomercial/production
      time
                
                $
                18,500
                
                
                $
                -Media and
      others
                
                
                54,430
                
                
                
                -Total
                
                $
                72,930
                
                
                $
                -
  Compensation and Benefits: Our
compensation and benefits expense amounted to$102,063 and $89,000 for the three
months ended December 31, 2009 and 2008, respectively. This amount
represents normal salaries and wages paid to management members and employees
including marketing and administrative functions.
  Professional Fees: Our
professional fees amounted to $50,109 and $116,367 for the three months ended
December 31, 2009 and 2008, 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.
  22
  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 $90,589 and $66,724 for the three
months ended December 31, 2009 and 2008, 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 December 31, 2009, 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.  Why decrease between 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:
                
                December
      31,2009
                
                
                2008Product
      development and engineering
                
                $
                2,250
                
                
                $
                88,127Payroll
      and benefits
                
                
                43,859
                
                
                
                -Total
                
                $
                46,285
                
                
                $
                88,127
 
 General and Administrative
Expenses. General and administrative expenses amounted to $123,738 and
$64,691for the three months ended December 31, 2009 and 2008, respectively, and
consisted of general corporate expenses and certain other start up expenses.
General corporate expenses included $43,156 in occupancy costs for the three
months ended December 31, 2009 and $41,260 for comparable period ended September
30, 2008.  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:
  For
      the three months ended December 31,2009
                
                
                
                2008Rent
      and occupancy
                
                $
                43,156
                
                
                $
                41,260Insurance
                
                
                18,588
                
                
                
                1,375Taxes
      and licenses
                
                
                4,398
                
                
                
                11,465Telephone
                
                
                2,890
                
                
                
                2,413Travel
                
                
                28,539
                
                
                
                1,744Bad
      debt expense
                
                
                8,193
                
                
                
                -Other
                
                
                17,974
                
                
                
                6,434Total
                
                $
                123,738
                
                
                $
                64,691
  Interest Expense: Interest
expense amounted to $326,191 and $47,195 for the three months ended December 31,
2009 and 2008, 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.
  23
  Derivative Income : Derivative
income (expense) amounted to $(1,183,772) and $61,200 for the three months
ended December 31, 2009 and 2008, 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.
  Net Loss. The net loss
amounted to $2,140,225 and $408,579 for the three months ended December 31, 2009
and 2008, 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,
negative gross margin and increase in travel expenses.
  Net Loss Per Common Share:
Basic loss per common share represents our net loss 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. Applying this method, 22,059,712 shares
indexed to warrants were excluded from our computation because the effect
was anti-dilutive. We computed the effects on diluted loss per common share
arising from convertible securities using the if-converted method. The effects,
if anti-dilutive are excluded. Applying this method, 16,800,000 shares indexed
to our convertible debentures were excluded from our computation because the
effect was anti-dilutive.
  Liquidity
and Capital Resources
  We had
a net loss for the three months ended December 31, 2009 of $2,140,225, net cash
used in operations for the three months ended December 31, 2009 of $564,709, and
negative working capital of $1,260,653 at December 31, 2009. However, we are
expecting to close on a $5,000,000 financing on or about February 17, 2010,
which will provide sufficient working capital to operate through December 31,
2010 and therefore any risk of not being able to operate as a going concern is
alleviated at least through December 31, 2010.
  Statement
      of cash flow data:
                
                
                December
      31,2009
                
                
                
                2008Net
      cash provided (used) in operating activities
                
                $
                (564,709
                )
                
                $
                (293,102
                )Net
      cash provided (used) in investing activities
                
                
                (513
                )
                
                
                -Net
      cash provided (used) in financing activities
                
                
                (56,300
                )
                
                
                -
 Net cash
provided by operating activities of $(564,709) was primarily due to operating
expenses and negative gross margin.
 Net cash
provided by investing activities of $(513) was primarily due to acquistion of
equipment.
 
 Net cash
of $(56,300) used in financing activities was due to loan
repayment.
  As of
December 31, 2009, we had cash on hand of $377,931.
  24
  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.
  We
currently have the following outstanding warrants:
  ·
              Series
      A Common Stock Purchase Warrants outstanding entitling the holders to
      purchase up to an aggregate of 3,099,712 shares of our common stock at an
      exercise price of $0.25 per share;
  ·
              Series
      B Common Stock Purchase Warrants outstanding entitling the holders to
      purchase up to an aggregate of 6,000,000 shares of our common stock at an
      exercise price of $0.50 per share;
  ·
              Series C
      Common Stock Purchase Warrants entitling the holders to purchase up to an
      aggregate of 10,800,000 shares of our common stock at an exercise price of
      $0.25 per share;
  ·
              Series BD
      Common Stock Purchase Warrants entitling the holders to purchase up to an
      aggregate of 1,080,000 shares of our common stock at an exercise price of
      $0.50 per share; and
  ·
              Series BD
      Common Stock Purchase Warrants entitling the holders to purchase up to an
      aggregate of 1,080,000 shares of our common stock at an exercise price of
      $0.25 per share.
  If  the
holders of our Series A, B, C and BD Common Stock Purchase Warrants
exercise these warrants, we will receive aggregate proceeds of $12,574,036.
However, we cannot provide any assurance that the Series A Common Stock Purchase
Warrants, the Series B Common Stock Purchase Warrants, Series C Common
Stock Purchase Warrants or Series BD Common Stock Purchase Warrants will be
exercised. [not sure I would put this in the liquidity section since it is a
contingent event. Consider moving down just past the borrowing arrangement
section]
  Borrowing
Arrangements
  12%
Senior Secured Convertible Debentures
  We issued
a series of 12% Senior Secured Convertible Debentures in the aggregate principal
amount of $4,200,000, all of which are currently held by Vicis Capital Master
Fund, as follows:
  ·
              $1,000,000
      is due on September 10, 2010,
  ·
              $   500,000
      is due on September 10, 2010,
  ·
              $   600,000
      is due on January 30, 2011,
  ·
              $   500,000
      is due on January 30, 2011,
  ·
              $   500,000
      is due on July 20, 2011,and
  ·
              $1,100,000
      is due on September 25, 2011.
  Each
debenture bears interest on the principal amount outstanding and unpaid from
time to time at a rate of 12% per annum from the date of issuance until paid in
full. The debentures convert into shares of our common stock at the option of
the holder at $0.25 per share. The debentures are secured by a lien on all our
assets.
  The
following constitute events of default under the secured debentures held by
Vicis Capital Master Fund: (i) failure to pay any interest or principal payment
when due; (ii) failure to observe any covenant contained in the secured
debenture or the purchase agreement that we executed in connection with the
issuance of the secured debenture; (iii) the occurrence of an event of default
by us under any other material agreement or lease; (iv) entry of a judgment
against us in excess of $150,000; and (v) the appointment of a receiver, the
filing of bankruptcy by us, or if we otherwise become insolvent. Additionally,
if we seek to prepay the secured debentures, we must pay a prepayment penalty
equal to 110% of the then outstanding principal, plus all other amounts
due.
  25
  The
debentures contain full ratchet anti-dilution price protection. The secured
debentures contain negative covenants that prohibit us from taking certain
corporate actions without the prior written consent of the holder of the secured
debentures, Vicis Capital Master Fund. We cannot take the following actions
without Vicis Capital Master Funds’ consent while the secured debentures remain
outstanding:   (i) incur any additional indebtedness or allow any
lien to be filed against our assets, except in certain limited instances; (ii)
amend our articles of incorporation or bylaws in a manner that adversely effects
the holder of our secured debentures; (iii) repay, repurchase or otherwise
acquire more than a de minimis number of shares of our common stock or common
stock equivalents from any security holder, except in certain limited instances;
(iv) enter into any transactions with our executive officers, directors or
affiliates; (v) increase our executive officers’ salary or bonus more than 15%
from what was paid in the previous year; or (vi) pay cash dividends or
distributions on any of our equity security. We are currently in compliance with
all restrictive covenants.
  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.
  ·
              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.
  26
  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.
  Following
the Codification, the FASB will not issue standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead
it will issue Accounting Standards Updates (“ASU”) which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
  The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented.    The Codification is effective
for our fiscal year ended September 30, 2009 financial statements and the
principal impact on our financial statements is limited to disclosures, as all
future references to authoritative accounting  literature will be
referenced in accordance with 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.
  In March
2008, the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities.  This guidance addresses enhanced
disclosure concerning (a) the manner in which an entity uses derivatives (and
the reasons is uses them), (b) the manner in which derivatives and related
hedged items are accounted for and (c) the effects that derivatives and related
hedged items have on an entity’s financial position, financial performance, and
cash flows.  This guidance was effective for financial statements
issued for fiscal years and interim periods beginning on or after November 15,
2008.  Adoption of this guidance did not have a material impact on our
financial position or results of operations.
  In May
2009, the FASB issued authoritative guidance on subsequent
events.  This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  This
guidance is effective for interim or annual financial periods ending after June
15, 2009.  Adoption of this guidance did not have an impact on our
results of operations or financial position.
  27
  In August
2009, the FASB updated its authoritative guidance on fair value measurement and
disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities.  Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009 – 05.  ASC Update 2009 – 05  became
effective for our  period ended  December 31,
2009.  Adoption of this guidance  did not have any impact on
our results of operations or financial position.
  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
December 31, 2009, 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 developed 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.
  28
 Changes
in Internal Controls.
  During the
three months ended December 31, 2009, 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.
 
 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
 
 None.
 
 Item 3.   Defaults Upon Senior
Securities
 
 None.
 
 Item 4.   Submission of Matters to a Vote of
Security Holders
 
 None.
 
 Item 5.  Other Information
 
 None.
 
 29
 Item
      6
              ExhibitsExhibit 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
      July 30, 2009.31.2(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
      July 30, 2009.32.1(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 July 30,
      2009.32.2(1)
              Certification
      of Acting 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
      July30, 2009.
 
 (1) Filed
herewith.
 
 
 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:  February
      12, 2010
              By:
      /s/ Anastasios
      KyriakidesAnastasios
      KyriakidesChief
      Executive Officer (Principal Executive Officer)Date:  February
      12, 2010
              By:/s/ Guillermo
      RodriguezGuillermo
      RodriguezChief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)
    30


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