PARETEUM 10Q 2012 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period endedMarch 31, 2012

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

For the transition period from ______ to ______

000-30061

(Commission file No.)

ELEPHANT TALK COMMUNICATIONS CORP.

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

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

Schiphol Boulevard 249

1118 BH Schiphol

The Netherlands

(Address of principal executive offices)

31 20 6535916

(Issuer's telephone number, including area code)

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

Yesx No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ¨ Accelerated filer x 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¨ Nox

As of May 7, 2012, there were 113,986,233 shares of the Company’s common stock outstanding.

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q REPORT

March 31, 2012

PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
Consolidated Statements of Comprehensive Income for the three months periods ended March 31, 2012 and 2011	4
Consolidated Statements of Cash Flows for the three months periods ended March 31, 2012 and 2011	5

Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	32

PART II - OTHER INFORMATION	33

Item 1. Legal Proceedings	33
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Default upon Senior Securities	34
Item 4. Mine Safety Disclosure	34
Item 5. Other Information	34
Item 6. Exhibits	34
SIGNATURES	35
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 32.1 Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011

ASSETS

CURRENT ASSETS

Cash and cash equivalents	$	3,118,890		$	6,009,576
Financing receivables		6,484,188			—
Restricted cash		1,963,428			190,844
Accounts receivable, net of an allowance for doubtful accounts of $585,761 and $436,546 at March 31, 2012 and December 31, 2011 respectively		8,146,260			6,441,528
Prepaid expenses and other current assets		2,251,278			1,522,461
Total current assets		21,964,044			14,164,409

OTHER ASSETS		1,828,922			1,392,837

DUE FROM RELATED PARTIES		460,655			—

PROPERTY AND EQUIPMENT, NET		13,967,824			13,315,687

INTANGIBLE ASSETS, NET		12,763,508			12,784,199

GOODWILL		3,252,408			3,154,971

TOTAL ASSETS	$	54,237,361		$	44,812,103

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Overdraft	$	321,250		$	312,236
Accounts payable and customer deposits		7,329,064			4,490,455
Deferred Revenue		337,880			132,467
Accrued expenses and other payables		4,296,009			3,035,758
8% Convertible Note		56,552			—
Loans payable		961,439			960,869
Total current liabilities		13,302,194			8,931,785

LONG TERM LIABILITIES
8% Convertible Note		5,254,411			—
Conversion feature		2,695,643			—
Trade note payable		175,070			271,915
Loan from related party		523,638			513,303
Total long term liabilities		8,648,762			785,218

Total liabilities		21,950,956			9,717,003

STOCKHOLDERS' EQUITY
Common stock, no par value, 250,000,000 shares authorized, 111,026,233 issued and outstanding as of March 31, 2012 compared to 110,525,229 shares issued and outstanding as of December 31, 2010		218,511,536			216,188,899
Accumulated other comprehensive income (loss)		(273,512	)		(1,143,295	)
Accumulated deficit		(186,133,560	)		(180,128,371	)
Elephant Talk Communications Corp. stockholders' equity		32,104,464			34,917,233

NON-CONTROLLING INTEREST		181,941			177,867
Total stockholders' equity		32,286,405			35,095,100

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	54,237,361		$	44,812,103

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

	March 31, 2012			March 31, 2011
REVENUES	$	8,580,968		$	8,508,014

COST AND OPERATING EXPENSES
Cost of service		6,889,217			7,557,485
Selling, general and administrative expenses		4,569,958			3,416,357
Non-cash compensation to officers, directors and employees		1,691,746			1,130,063
Depreciation and amortization of intangibles assets		1,278,469			1,302,675
Total cost and operating expenses		14,429,390			13,406,580

LOSS FROM OPERATIONS		(5,848,422	)		(4,898,566	)

OTHER INCOME (EXPENSE)
Interest income		105,162			22,986
Interest expense		(90,607	)		(66,764	)
Other income & (expense)		(163,331	)		230,000
Interest expense related to debt discount		(7,683	)		—
Change in fair value of conversion feature		3,669			—
Amortization of deferred financing costs		(3,977	)		—
Total other income (expense)		(156,767	)		186,222

LOSS BEFORE PROVISION FOR INCOME TAXES		(6,005,189	)		(4,712,344	)
Provision for income taxes		-			(800	)
NET LOSS BEFORE NONCONTROLLING INTEREST		(6,005,189	)		(4,713,144	)
Net (loss) income attributable to non-controlling interest		-			(80	)
NET LOSS		(6,005,189	)		(4,713,224	)

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation gain (loss)		869,783			2,319,564
		869,783			2,319,564

COMPREHENSIVE LOSS	$	(5,135,406	)	$	(2,393,660	)

Net loss per common share and equivalents - basic and diluted	$	(0.05	)	$	(0.05	)

Weighted average shares outstanding during the period - basic and diluted		110,656,531			96,282,943

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	March 31, 2012			March 31, 2011

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,005,189	)	$	(4,713,224	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,278,469			1,302,675
Provision for doubtful accounts		143,849			8,726
Stock based compensation		1,691,746			993,256
Provision for holiday leave		25,059			—
Noncontrolling interest		—			80
Amortization of shares issued for consultancy		—			136,807
Financial Investments in Joint Venture		163,331			—
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		(1,632,045	)		(587,020	)
Decrease (increase) in prepaid expenses, deposits and other assets		(678,765	)		(542,804	)
Increase (decrease) in accounts payable, proceeds from related parties and customer deposits		2,558,360			130,751
Increase (decrease) in deferred revenue		200,202			—
Increase (decrease) in accrued expenses and other payables		368,189			(181,854	)
Net cash used in operating activities		(1,886,794	)		(3,452,607	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(889,775	)		(2,352,854	)
Restricted cash		(256,102	)		11
Issuance of stock		—			242,418
Loans to related party		(449,476	)
Loan to third party		(121,870	)		—
Net cash used in investing activities		(1,717,223	)		(2,110,425	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft		—			(4,481	)
Deferred financing costs		(50,000	)		—
Loan from related party Bridge SPA		—			9,543
Exercise of warrants & options		694,090			6,927,724
Placement & solicitation fees		—			(193,201	)
Net cash provided by financing activities		644,090			6,739,585

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		69,241			745,016
NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,890,686	)		1,921,569
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD		6,009,576			2,245,697
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	3,118,890		$	4,167,266

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for interest	$	—		$	6,262

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of presentation of Interim Periods

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes as included in our 2011 Form 10-K. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Form 10-K. In the opinion of management, the accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation of our financial position, results of operations and cash flows as of and for the periods presented.

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire year.

Principles of Consolidation

The accompanying consolidated financial statements for March 31, 2012 and December 31, 2011 include the accounts of Elephant Talk Communications Corp., including:

its wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its wholly owned subsidiaries Elephant Talk Communications Luxembourg SA, Elephant Talk Communications France S.A.S., Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk Business Services W.L.L., Guangzhou Elephant Talk Information Technology Limited, VoiceBottle BV, Elephant Talk Deutschland GmbH, Elephant Talk Belgium BVBA, and the majority owned (51%) subsidiaries Elephant Talk Communications PRS U.K. Limited and (51%) ET-UTS NV;

Elephant Talk Europe Holding B.V.’s wholly-owned subsidiary Elephant Talk Communication Holding AG and its wholly-owned subsidiaries Elephant Talk Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk Communication Austria GmbH, Elephant Talk Telekom GmbH, Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication Schweiz GmbH, Elephant Talk Communication (Europe) GmbH and the majority owned (51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V.;

Elephant Talk Europe Holding B.V.’s majority (60%) owned subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its wholly owned (100%) and its majority owned (99%) subsidiaries Elephant Talk Middle East & Africa (Holding) Jordan L.L.C. and Elephant Talk Middle East & Africa Bahrain W.L.L.;

its wholly-owned subsidiary Elephant Talk Limited and its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC; and

its wholly-owned subsidiary ValidSoft Ltd and its wholly-owned subsidiaries ValidSoft (UK) Ltd and ValidSoft (Australia) Pty Ltd.

On January 1st, 2012 the subsidiaries ET Caribbean BV, Moba Consulting Partners BV and Elephant Talk Global Holding BV were merged into the surviving entity Elephant Talk Europe Holding BV. There were no restructuring charges taken as a result of the merger other than immaterial fees paid to terminate the various entities.

On March 28th, 2012, Elephant Talk Europe Holding BV closed a minor acquisition by purchasing all outstanding shares of VoiceBottle BV, a company based in the Netherlands with self-developed software in the area of web-based voicemail. In addition, on March 7, 2012, we incorporated a new subsidiary called Elephant Talk Deutschland GmbH, the entity aimed to support the expansion of the mobile activities in Germany. Lastly, on March 26, 2012, we incorporated Elephant Talk Belgium BVBA.

All intercompany balances are eliminated in consolidation.

Note 2. Significant Accounting Policies

Currency Translation

The functional currency is the Euro for the Company’s wholly-owned subsidiary Elephant Talk Europe Holding B.V. and its subsidiaries, for its wholly-owned subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned subsidiary Elephant Talk Limited and the British Pound Sterling for its wholly-owned subsidiary ValidSoft (UK) Ltd. The financial statements of the Company were translated to US Dollar using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses, and capital accounts were translated at their historical exchange rates when the capital transaction occurred. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 830, Foreign Currency Matters” (“ASC 830”), net gains and losses resulting from translation of foreign currency financial statements are included in the statements of shareholder’s equity as other comprehensive income (loss). Foreign currency transaction gains and losses are included in consolidated income/(loss). The accumulated other comprehensive income/(loss) as of March 31, 2012 and December 31, 2011 was ($273,512) and ($1,143,295), respectively. The foreign currency translation gain for the three months ended March 31, 2012 and 2011 was $869,783 and $2,319,564, respectively.

Use of Estimates

The preparation of the accompanying financial statements conforms with accounting principles generally accepted in the United States of America and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.

Cash and Cash Equivalents

For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

Restricted Cash

Restricted cash of $1,963,428 consists of $1,515,812 in cash proceeds received from the $8,800,000 senior convertible note (see Note 14) which closed on March 29, 2012. In addition, cash deposited as bank guarantee for national interconnection agreements with telecom operators and bid guarantees represent $447,616.

Accounts Receivables, net

The Company’s customer base consists of geographically dispersed customers. The Company maintains an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable on a customer by customer basis and analyzes historical bad debt, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these allowances. As of March 31, 2012 and December 31, 2011, the allowance for doubtful accounts was $585,761 and $436,546, respectively.

Revenue Recognition and Deferred Revenue

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a fixed-line and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax). For its security solutions under the ValidSoft brand name and technologies revenue represents amounts earned for consultancy services, outsourcing, maintenance and licenses (net of value added tax).

Cost of Service

Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility costs of hosting network and equipment, and costs of providing resale arrangements with long distance service providers, costs of leasing transmission facilities and international gateway switches for voice and data transmission services.

Segments

ASC 820, “Segment Reporting” (“ASC 820”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The Company operates in a single business segment because operating and strategic decisions are made by decision makers who monitor the Company as a whole.

Stock-based Compensation

We follow the provisions of ASC 718 “Compensation-Stock Compensation”, (“ASC 718”). Under ASC 718, stock-based awards are recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally up to three years), which we have elected to amortize on a straight-line basis.

To determine the value of our stock options at grant date under our employee stock option plan, we currently use the Black-Scholes option-pricing model. The use of this model requires us to make a number of subjective assumptions. The following addresses each of these assumptions and describes our methodology for determining each assumption:

Expected Life

The expected life represents the period that the stock option awards are expected to be outstanding. We use the simplified method for estimating the expected life of the option, by taking the average between time to vesting and the contract life of the award. Therefore, the expected term assumption was estimated for each individual grant using the simplified method as an average between time to vesting and the contractual term of the award.

Cumulative Volatility

We estimate expected cumulative volatility giving consideration to the expected life of the option of the respective award, and the calculated annual volatility by using the continuously compounded return calculated by using the last 252 closing prices of the share price (= one year trading). The annual volatility is used to determine the generalized (cumulative) volatility of our common stock preceding the grant (= annual volatility x SQRT (expected life)).

Risk-Free Interest Rate

We estimate the risk-free interest rate using the “Daily Treasury Yield Curve Rates” from the U.S. Treasury Department, or the nearest available rate, with a remaining term equal or near to the expected life of the award.

Expected Dividend Yield

We estimate the expected dividend yield by giving consideration to our current dividend policies as well as those anticipated in the future considering our current plans and projections. We do not currently calculate a discount for any post-vesting restrictions to which our awards may be subject.

Income Taxes

The Company accounts for income taxes under ASC 740, “Accounting for Income Taxes” (“ASC 740”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and reimbursement arrangements among related entities, the process of identifying items of revenue and expenses that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. We also assess temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting differences. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome and in assessing the need for the valuation allowance, there is no assurance that the final tax outcome and the valuation allowance will not be different than those that are reflected in our historical income tax provisions and accruals.

ASC 740 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.

The Company has filed or is in the process of filing tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome is unknown, we believe that any adjustments that may result from tax return audits are not likely to have a material, adverse effect on our consolidated results of operations, financial condition or cash flows.

Comprehensive Income/(Loss)

Comprehensive income/(loss) includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders’ equity but are excluded from net income. In the first quarters of 2012 and 2011 the Company’s comprehensive income/(loss) consisted of its net loss and foreign currency translation adjustments.

Intangible Assets

In accordance with ASC 350 “Goodwill and Other” (“ASC 350”), intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360 “Property, Plant, and Equipment”, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

Property and Equipment, Internally Developed and Third Party Software

Property and equipment are initially recorded at cost. Additions and improvements are capitalized, while expenditures that do not enhance the assets or extend the useful life are charged to operating expenses as incurred. Included in property and equipment are certain costs related to the development of the Company’s internally developed software technology platform.

The Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design. Depreciation applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service. Once a new functionality or improvement is released for operational use, the asset is moved from the property and equipment category “projects under construction” to a property and equipment asset subject to depreciation in accordance with the principle described in the previous sentence.

Fair Value Measurements

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level Input:		Input Definition:
Level I		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level II		Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.

Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at March 31, 2012 for financial assets and liabilities measured at fair value on a recurring basis:

	Level I		Level II		Level III		Total
Conversion feature	$	0	$	2,695,643	$	0	$	2,695,643
Total liabilities	$	0	$	2,695,643	$	0	$	2,695,643

We have classified the outstanding conversion feature into level 2 due to the fact that some inputs are not published and not easily comparable to industry peers.

The carrying value of the Company’s financial assets and liabilities, including cash and cash equivalents, other assets, due from related parties, loans payable, accounts payable and accrued liabilities, are carried at historical cost basis and approximate fair value because of the short-term nature of these instruments. The carrying value of the Company’s notes payable approximates fair value based on management’s best estimate of the interest rates that would be available for similar debt obligations having similar terms at the balance sheet date.

Recently Issued Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.This ASU amends current fair value measurement and disclosure guidance to include increased transparency around valuation input and investment categorization. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption not permitted. The adoption of ASU 2011-04 in the first quarter of 2012 did not have an impact on our financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income.ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.

In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied retrospectively. The adoption of ASU 2011-05 in the first quarter of 2012 did not have an impact on our financial position, results of operations, or cash flows.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210),Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of their financial statements to understand the effect of those arrangements on their financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. We do not expect the adoption of ASU 2011-11 in the first quarter of 2013 to have an impact on our financial position, results of operations, or cash flows.

Note 3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets recorded at $2,251,278 as of March 31, 2012, compared with $1,522,461 as of December 31, 2011.

Note 4. Other assets

Other assets are long-term in nature and consist of a financial investment in a joint venture, long term notes receivable, deferred financing costs and long-term deposits.

Financial Investment in Joint Venture

In the fourth quarter 2011, the company acquired one third (33.33%) ownership of Elephant Security I BV, a company incorporated on 26 October 2011 in the Netherlands. For the one-third ownership we paid in 2011 a total of $333,467, comprising $8,003 in capital and $325,464 in loans to Elephant Security I BV, which is equal to what each of the other two joint venture partners provided to Elephant Security I BV. The loans mature on December 31, 2014 and carry an interest rate per annum of 7% that is accrued on a monthly basis. The investment was recorded at cost and is accounted for using the equity method.

The Joint Venture is deemed a related party entity since one of the other owners in Elephant Security I BV, is Elephant Security BV, a majority owned and controlled entity by QAT Investments SA, an affiliate of the company.

As of March 31, 2012, the financial investment was $220,800 comprising the above mentioned outlay of $333,467, increased with $10,648 in accrued interest and $40,016 in a loan provided in 2011 that was previously classified under Note Receivable and decreased with ($163,331) for its equity share in the losses incurred by Elephant Security I BV. Ownership interest remains at 33.33%.

Note receivable

As of March 31, 2012 the Note receivable was $521,286 compared to $417,199 as of December 31, 2011. Note receivable as of March 31, 2012 comprises a number of loans provided to Morodo Ltd, from the U.K and includes accrued interest of $7,476.

The loans mature on 1 April 2013 and carry as of 1 January 2012 an interest rate of 7% per annum accrued on a monthly basis. The notes receivable are interim loans prior to the intended acquisition.

Long-term deposits

Long-term deposits to various telecom carriers during the course of its operations and a deposit towards the French Tax Authorities for the total amount of $669,721 as of March 31, 2012 compared with $651,930 as of December 31, 2011. The carrier deposits are refundable at the termination of the business relationship with the carriers.

Deferred financing costs

In connection with the Senior Secured Convertible Notes issued on March 29, 2012, the company incurred expenses for a total amount of $418,500 related to perfecting liens of assets, contract review fees from lawyers, registration fees for registering underlying shares and some other smaller fees. These costs will amortize during the life of the Senior Secured Convertible Loan using the effective-interest method calculation. The total current amount to be amortized is $417,115.

Note 5. Due from related parties

Due from related parties was $460,655 as of March 31, 2012 as result from loans provided during the first quarter 2012 to Elephant Security B.V. This amount includes $3,139 of accrued interest. Elephant Security B.V. is a related party entity since it is majority owned and controlled by QAT Investments SA, an affiliate of the Company.

The loans mature on June 30, 2012 and carry an interest rate of 7% per annum accrued on a monthly basis. The notes receivable are interim loans prior to the potential acquisition of Elephant Security BV.

Note 6. Property and equipment

The Company’s Property & Equipment also include the capitalization of its systems engineering and software programming activities. Typically, these investments pertain to the Company’s:

Intelligent Network (IN) platform;

CRM provisioning Software;

Mediation, Rating & Pricing engine;

ValidSoft security software applications;

Operations and business support software;

Network management tools.

Property and equipment at March 31, 2012 and December 31, 2011 consist of:

	Average Estimated		March 31,			December 31,
	Useful Lives		2012			2011
Furniture and fixtures		5		324,633			290,058
Computer, communication and network equipment		3 - 10		15,761,163			15,247,060
Software		5		5,182,290			4,752,070
Automobiles		5		101,383			98,416
Construction in progress				3,012,225			2,516,476
Total property and equipment				24,381,694			22,904,080

Less: accumulated depreciation				(10,413,870	)		(9,588,393	)
Total property and equipment, Net			$	13,967,824		$	13,315,687

Total depreciation expense for the three months ended in March 31, 2012 and 2011 was $578,522 and $530,188 respectively.

Note 7. Intangible Assets

Intangible assets include customer contracts, telecommunication licenses and integrated, multi-country, centrally managed switch-based interconnects as well as intellectual property held in ValidSoft which includes but is not limited to software source codes, applications, customer lists & pipeline, registration & licenses, patents, and trademarks.

Intangible assets at March 31, 2012 and December 31, 2011 consist of:

	Estimated		March 31,			December 31,
	Useful Lives		2012			2011
Customer contracts, licenses, interconnect and technology		5-10	$	12,034,423		$	11,480,653
ValidSoft IP and technology		1-10		15,900,547			15,428,182
Total intangible assets				27,934,970			26,908,835

Less: Accumulated amortization and impairment charges				(10,109,411	)		(9,735,102	)
Less: Accumulated amortization ValidSoft IP and Technology				(5,062,051	)		(4,389,533	)
Total intangible assets, Net			$	12,763,508		$	12,784,200

Total amortization expense for the three months ended March 31, 2012 totaled $699,947 compared to $772,487 for the same period of 2011.

Estimated future amortization expense related to our intangible assets is:

	2012		2013		2014		2015		2016		2017 and after
Interconnect licenses and contracts	$	507,350	$	647,800	$	299,919	$	80,239	$	4,208	$	0
ValidSoft IP & Technology		1,592,102		2,122,803		2,122,803		1,981,089		1,933,851		768,128
	$	2,099,452	$	2,770,602	$	2,422,722	$	2,061,328	$	1,938,059	$	768,128

Note 8. Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value assigned to the individual assets acquired and liabilities assumed. The Company does not amortize goodwill, but instead is required to test goodwill for impairment in accordance with ASC 350, “Intangibles - Goodwill and Other”(“ASC 350”)at least annually and, if necessary, we would record an impairment based on the results of any such impairment test. The Company will perform an impairment test between scheduled annual tests if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value.

In performing a goodwill impairment test under ASC 350, the Company may first make a qualitative assessment of whether it is more-likely-than-not that the Company’s fair value, as a single reporting unit, is less than its carrying value to determine whether it is necessary to perform a two-step goodwill impairment test. The qualitative impairment test includes considering various factors including macroeconomic conditions, industry and market conditions, cost factors, a sustained share price or market capitalization decrease, and any reporting unit specific events. If it is determined through the qualitative assessment that a reporting unit's fair value is more-likely-than-not greater than its carrying value, the two-step impairment test is not required. If the qualitative assessment indicates it is more-likely-than-not that a reporting unit's fair value is not greater than its carrying value, we must perform the two-step impairment test. We may also elect to proceed directly to the two-step impairment test without considering such qualitative factors.

During the fourth quarter of 2011, we commenced our annual goodwill impairment test for 2011 and after considering qualitative factors including our market capitalization and the Company’s 2012 outlook announced in the Company concluded that a two-step goodwill impairment test was not required.

In performing the first step of the two-step goodwill impairment test, the Company determined that the fair value of the Company, as a single reporting unit, exceeded the carrying value by a significant amount indicating no impairment was necessary.

The carrying value of the Company’s goodwill for the three months ended March 31, 2012 was as follows:

Goodwill	March 31,			December 31,
	2012			2011
Goodwill at acquisition of ValidSoft Ltd	$	3,433,833		$	3,433,833
End of period exchange rate translation		(181,425	)		(278,862	)
Total	$	3,252,408		$	3,154,971

Note 9. Overdraft

In 2004, Elephant Talk Ltd, a subsidiary of the Company executed a credit facility with a bank in Hong Kong pursuant to which Elephant Talk Ltd. borrowed funds. As of March 31, 2012, the overdraft balance, including accrued interest totaled, $321,250 compared to $312,236 as of December 31, 2011. The interest rate and default payment interest rate were charged at 2% and 6% per annum above the Lender’s Hong Kong Dollar Prime Rate quoted by the Lender from time to time. The Company has not guaranteed the credit facility or is otherwise obligated to pay funds drawn upon it on behalf of Elephant Talk Ltd. Further detail can be found in Note 21, Litigation.

Note 10. Deferred Revenue

Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services. They typically represent implementation fees. Deferred revenue was $337,880 and $132,467 as of March 31, 2012 and December 31, 2011, respectively.

Note 11. Accrued Expenses

As of March 31, 2012 and December 31, 2011, the accrued expenses comprised of the following:

	March 31, 2012		December 31, 2011
Accrued Selling, General & Administrative expenses	$	1,959,650	$	1,477,463
Accrued cost of sales and network		0		0
Accrued network costs		183,984		79,638
Accrued cost of sales		24,163		45,155
Accrued taxes		0		0
Accrued payroll taxes		119,342		42,517
Accrued VAT		835,300		246,864
Accrued corporate tax		5,469		5,308
Accrued interest payable		733,067		701,366
Other accrued expenses		435,034		437,447
Total accrued expenses	$	4,296,009	$	3,035,758

Note 12. Loans Payable

	March		December
	31, 2012		31, 2011
Installment loan payable due December 24, 2006, secured by personal guarantees of two shareholders, a former director, and a third party	$	319,955	$	319,765
Installment loan payable, bank, monthly principal and interest payments of $2,798 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 30, 2008, due December 24, 2011, secured by personal guarantees of three shareholders and a former director		254,374		254,224
Installment loan payable, bank, monthly principal and interest payments of $1,729 including interest at bank’s prime rate plus 1.5% per annum, 8.25% at November 24, 2008, due June 28, 2009, secured by personal guarantees of three shareholders and a former director		103,766		103,704
Term loan payable, bank, monthly payments of interest at bank’s prime rate, 7.0% at December 31, 2007		283,344		283,177
Total	$	961,439	$	960,870

The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of the Company. Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

The Bank alleged that ETL was in default on the loans and overdraft account, and that approximately $1,933,308 including interest and default interest was due. The Bank alleged that the Company was directly liable to repay the loans and overdraft account as a successor in interest to ETL or because the Company expressly or impliedly assumed direct liability for the loans and overdraft account. The Company denied the Bank’s allegations and asserted several affirmative defenses. The Company contended that it had no direct liability to the Bank, and that the Bank must pursue its recourse against ETL and its personal guarantors.

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and

The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

The court entered judgment in favor of Elephant Talk Communications Corp. and against the Bank on December 14, 2011, and awarded the Company $5,925 in costs. The judgment became final on February 16, 2012. We continue to accrue for these loans since our subsidiary ETL in Hong Kong may be still held liable for these loans.

Note 13. Trade note payable

The company entered into an arrangement with a vendor for the supply of telecommunication equipment whereby extended credit terms were agreed over and above normal credit terms. The extended credit terms stipulate a repayment of the outstanding purchase price consideration over a period of 24 months starting October 2011. The trade note payable amount relates to the portion of this outstanding price consideration due after one year.

Note 14. 8% Senior Secured Convertible Note

On March 29, 2012, the Company issued certain senior secured convertible notes (“8% Convertible Note”) to a number of investors (“Holders”) in the principal amount of $8,800,000 with the Company whereby the Holders agreed to provide the Company with gross proceeds of $8,000,000, after the $800,000 Original Issue Discount and a net proceed of $7,581,500 after the deduction of $418,500 for financing costs such as various advisory fees and contract preparation fees. According to the terms, the Note will bear an interest rate of 8% and mature May 1, 2014. The monthly installment payments (constituting principal and interest) total $ 2,273,718 for the first year and $7,180,000 for the second year through to maturity.

Of the $8 million in gross proceeds, the amount equal to the first year installments, being $2,273,718, has been placed in escrow and will be applied on a monthly basis for the payment of the monthly installments. At the election of the Company the Company can pay the full installment amount or parts thereof in common stock at an amount equal to 90% of the average of the five lowest volume weighted average price (“VWAP”) of the common stock during the twenty (20) Trading Days immediately prior to such installment on thetrading day payment date.

The proceeds from convertible notes were largely received after March 31, 2012. See also Note 24, Subsequent Events. The amount of $1,515,812 received before March 31, 2012 was placed in escrow and classified under restricted cash, with the remainder of the proceeds in the amount of $6,484,188 classified under Financing Receivable.

In the first year, when the Company elects to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow and becomes available to the Company. The Notes are convertible at the option of the Holder into the Company’s common stock at a fixed conversion price of $2.61 (“fixed conversion price”). After a period of 12 months the Note automatically converts at the fixed conversion price, if the shares of the Company, for any consecutive 30 days, close at or above 150% of the fixed conversion price. The Notes are secured by a first priority security interest in all of the assets of the Company. In the event the Company (in partnership with Adeptra) fails to announce that it has entered into and operationalized a contract with one of the ten largest international financial institutions to provide SIM swapping fraud detection and prevention services to such financial institution in which the Company and/or one of its Subsidiaries receives certain amount of net compensation, the Holders may declare all of the then outstanding principal amount of the Note to be due and payable immediately at 110% of the outstanding principal and accrued and unpaid interest on the notes, which would require the Company to classify the debt as current (See Note 24 “Subsequent Events”). If such event of default is triggered, the Holders may convert the Notes into our common stock at the lowest of (a) the fixed conversion price in effect prior to such failure, (b) 90% of the average of the 5 lowest VWAPs for the 20 days prior to that day (c) 90% of the lowest reported trade price for the common stock as reported by Bloomberg on such date. Upon occurrence thereof the Company has the option to redeem a portion or the entire outstanding amount of this Note at a redemption price of 100% thereof.

8% Senior Secured Convertible Loan Agreement Payable as of March 31, 2012:

8% Convertible Note	Short Term		Long Term		Total

8% Convertible Note	$	1,484,997	$	7,315,003	$	8,800,000
Less:
Debt Discounts (OID and CF)(net of amortization)	$	1,428,445	$	2,060,592	$	3,489,037
	$	56,552	$	5,254,411	$	5,310,963

The remaining unamortized lives of the OID and Conversion feature is approximately 26 months. The Company has not recorded interest expense associated with the amortization of the discounts during the quarter as the two days of interest related to this loan was deemed to be immaterial to the financial statements.

The Company has identified the conversion feature in the above instruments as an embedded derivative that requires evaluation and accounting under the guidance applicable to financial derivatives. The conversion feature is bifurcated from the host debt contract and accounted for as a liability. The conversion feature is recorded at fair value at the date of issuance and marked-to-market each reporting period with changes in fair value recorded to the Company’s statements of operations and classified into “Change fair value in conversion feature” which is part of Other income and expenses. As of March 29, 2012 (“Closing date”) the company recognized a “Fair Market Value” using a lattice model of $2,699,312 and evaluated the value of the conversion feature as per March 31, 2012 at a “Fair Market Value” of $2,695,643. During 2012, the conversion feature liability was neither reduced by any conversion and redemption transactions associated with the convertible notes nor any repayment of the principal amount.

Conversion Feature valuation as per March 31, 2012:
	Conversion Feature at fair market value		Conversion Feature remaining value netted in Convertible Note Payables
At Closing March 29, 2012 (Initial Value)	$	2,699,312	$	2,699,312
Revaluation Closing Q1-2012 (Movement only) Gain	$	3,671	$	-
Amortization Closing Q1-2012 (Movement only) Loss	$	-	$	7,683
Closing Q1-2012 (Remaining values)	$	2,695,643	$	2,691,629

The conversion feature associated with the Note is recorded at fair value using quoted market prices adjusted for historical volatility and future expectations of conversion that use observable market inputs including quoted market prices. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current market prices on active exchanges.

Note 15. Loan from joint venture partner

The Company’s 51% owned subsidiary ET-UTS N.V. has received $523,638 in interest bearing (8% per annum) unsecured loans from the 49% shareholder in the joint venture, United Telecommunication Services N.V., the government owned incumbent telecom operator of Curaçao. The amount is inclusive of accumulated accrued interest. No maturity date has been fixed.

Note 16. Stockholders’ Equity

(A) Common Stock

The Company is presently authorized to issue 250,000,000 shares common stock. The Company had 111,026,233 shares of common shares issued and outstanding as of March 31, 2012, an increase of 501,004 shares since December 31, 2011, largely due to the shares issued in connection with the exercise of 530,000 warrants (of which 510,000 at $1.00 and 20,000 at $1.50); the issue of 50,000 shares due to a double issuance of shares after a warrant exercise by our stock agent in 2011 which received board approval afterwards; 114,505 shares issued as consideration for management and board compensation; 106,499 shares issued to employees as a result of exercised employee stock options and 300,000 shares returned after a settlement agreement with a former executive officer of the Company.

The following table summarizes the shares issued for the year ended March 31, 2012:

	Number of shares
Computation of Full Dilution - March 31, 2012	issued

December 31, 2011 Total number of shares issued		110,525,229

Shares issued for D&O compensation		114,505
Shares issued for warrant exercises		580,000
Shares issued for employee stock option exercises		106,499
Shares returned after settlement agreement		(300,000	)

March 31, 2012 Total number of shares issued		111,026,233

Reconciliation with stock transfer agent records:

The number of 111,026,233 excludes the 245,900 unreturned and the 2,558,938 escrowed contingent shares (see below). The shares issued and outstanding as per March 31, 2012 according to the stock transfer agent’s records are 113,831,071, include 2,558,938 contingent shares for the ValidSoft acquisition and include 245,900 shares which were cancelled by the Company prior to 2006. However, the 245,900 shares were not returned to the stock transfer agent and never cancelled on the Company’s records. These shares have been blocked for trading by the Stock Transfer Agent. Finally, in the above table we included the elimination of a rounding difference of two shares between the Company’s shares issued and the stock transfer agent’s records.

(B) Preferred Stock

The Company’s Certificate of Incorporation (“Articles”) authorizes the issuance of 50,000,000 shares of no par value Preferred Stock. No shares of Preferred Stock are currently issued and outstanding. Under the Company’s Articles, the Board of Directors has the power, without further action by the holders of the Common Stock, to designate the relative rights and preferences of the preferred stock, and issue the preferred stock in such one or more series as designated by the Board of Directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock or the Preferred Stock of any other series. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company without further shareholder action and may adversely affect the rights and powers, including voting rights, of the holders of Common Stock. In certain circumstances, the issuance of preferred stock could depress the market price of the Common Stock.

During 2011 and in the first three months 2012 the Company did not issue any shares of Preferred Stock.

Note 17. Basic and Diluted Net Loss per Share

Net loss per share is calculated in accordance with ASC 260, Earnings per Share (“ASC 260”). Basic net loss per share is based upon the weighted average number of common shares outstanding. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Weighted average number of shares used to compute basic and diluted loss per share is the same since the effect of dilutive securities is anti-dilutive.

Note 18. Employee Benefit Plan and Non-Qualified Stock Option and Compensation Plan

2006 Non-Qualified Stock and Option Compensation Plan

Under this plan there are, as of March 31, 2012, 75,000 stock options outstanding. There are remaining 600,000 shares and 14,490 stock options available for grant.

Options granted generally vest over a 3 year period. Options generally expire 2 years from the date of vesting.

Common stock purchase options consisted of the following as of March 31, 2012:

	Number of shares		Average Exercise Price		Initial Fair Market Value
Options:
Outstanding as of December 31, 2011		75,000	$	2.25	$	53,441
Granted in 2012		0	$	2.25	$	-
Exercised		0	$	2.25	$	-
Cancelled/Forfeited/Returned to reserve		0	$	2.25	$	-
Outstanding as of March 31, 2012		75,000	$	2.25	$	53,441

No grants were made during the first three months of 2012. Also no exercises and or cancellations/forfeitures have occurred.

The current 75,000 outstanding options will expire in 2013 with various expiration dates.

Following is a summary of the status of options outstanding at March 31, 2012:

		Options outstanding				Options exercisable
Range of Exercise Prices		Total Options Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
$	2.25	75,000	1.48 years	$	2.25	75,000	$	2.25

At March 31, 2012, the total compensation cost related to unvested stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2006 stock award plan, but not yet recognized was $0.

2008 Long-Term Incentive Plan

The 2008 plan was adopted on January 15, 2008. This incentive plan authorizes awards of up to 5,000,000 shares of common stock, in the form of incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses. The amount of common stock underlying the awards to be granted remained the same after the 25 to one reverse stock-split that was effectuated on June 11, 2008.

On October 6, 2011 the company filed, after approval of the shareholders, an “Amended and Restated 2008 Long-Term Incentive Compensation Plan” which basically provided in the increase of the existing 5,000,000 shares of common stock into 23,000,000 shares of common stock in order to cover future grants under this Plan.

As of 2012 the company decided, in order to avoid costly separate registrations for the quarterly recurring share issues and the obligatory registration of such shares, to issue the non-cash compensation to directors and officers under this plan. During the first three months of 2012 the company issued 114,505 restricted shares to various directors and officers which were issued in conjunction with their willingness to receive their total or part of their compensation in shares of the company. Those shares are issued with a 25% discount on the 10 day average share price preceding the quarter of their relating services as per the term agreed by the compensation committee dated February 11, 2011.

As of March 31, 2012, a total of 13,017,355 stock options were outstanding under the Plan and 325,000 shares of restricted common stock together with 621,805 shares of restricted common stock had been granted under this plan. Options granted generally begin vesting over a three-year or ten-year period after grant date although options have been granted with a shorter period than three years. Options generally expire between two and ten years from date of vesting.

Common stock purchase options consisted of the following as of March 31, 2012:

	Number of Options		Average Exercise Price		Initial Fair Market Value
Options:
Outstanding as of December 31, 2011		7,793,989	$	1.78	$	10,195,479
Granted in 2012		5,419,167	$	2.28	$	5,166,855
Exercised (delivery of shares)		73,499	$	1.28	$	81,652
Cancelled/Forfeited/Returned		122,302	$	2.07	$	161,882
Outstanding as of March 31, 2012		13,017,355	$	1.94	$	15,118,800

The options granted in 2012 were granted with a weighted average exercise price of $2.28. The grant date fair market value of the options is $5,166,855.

Following is a summary of the status of options outstanding at March 31, 2012:

2008 Plan					Options outstanding						Options exercisable
Range of Exercise Prices					Total Options Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
$	0.60	-	$	3.39		13,017,355		6.16	$	1.94		4,676,642	$	1.93

The weighted average assumptions used for the options granted in 2012 using the Black-Scholes options model are: cumulative volatility of 116%, expected option life 2.68 years (using the simplified method) and a Risk Free Interest Rate of 0.356%. The expected dividend yield is zero.

The weighted average remaining expected life of the outstanding options is not reported as our calculation method does not include an adjustment for out-of-the-money options which represent the majority of the current granted options.

At March 31, 2012 the not yet recognized expense portion of stock-based awards granted to employees under the provisions of ASC 718 and the Company’s 2008 stock award plan, was approximately $7,085,921. The future expensing takes place proportionally to the vesting associated with each stock-award, adjusted for cancellations, forfeitures and returns. The forfeiture rate has been adjusted from 6.50% to 4.66% and the corresponding profit and loss effect has been accounted for in 2012.

Stock-Based Compensation Expense

Under the provisions of ASC 718, the Company recorded for the quarter ended March 31, 2012, $1,691,746 in stock-based compensation expense for management shares, Non-Qualified Stock and Option Compensation Plan and shares issued for consultancy and employee compensation. For the comparable period in 2011 the expensing was $1,130,063. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock-options.

Note 19. Commitments

Commitments of the Company relating to co-location, network and office rents, regulatory and interconnection fees are as follows:

Year		Office		Co- location		Interconnect		Service/Support		Network		Total
	2012	$	555,769	$	399,147	$	2,268,276	$	131,519	$	318,985	$	3,673,696
	2013		504,209		325,882		1,689,186		14,272		246,900		2,780,449
	2014		454,663		261,401		66,135		0		203,329		985,528
	2015		248,874		0		52,784		0		190,964		492,622
	2016	$	248,874	$	0	$	12,732	$	0	$	119,715		381,321
												$	8,313,616

Note 20. Non-controlling Interest

The Company had non-controlling interests in several of its subsidiaries. The balance of the non-controlling interests as of March 31, 2012 and December 31, 2011 were as follows:

	Non-controlling			As of March 31,		As of December 31,
Subsidiary	Interest %			2012		2011
ETC PRS UK		49	%	$	9,787	$	9,500
ETC PRS Netherlands		49	%		130,718		126,894
ET Bahrain WLL		1	%		4,345		4,382
ET ME&A FZ LLC		49.46	%		37,091		37,091
Total non-controlling interest				$	181,941	$	177,867

Note 21. Litigation

(a) Chong Hing Bank Litigation

In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited (Bank), a foreign banking services company based in Hong Kong , commenced a lawsuit in the California Orange County Superior Court calledChong Hing Bank Limited v. Elephant Talk Communications, Inc ., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and

The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

(b) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.

As previously described in our 2004 Annual Report we and New Times Navigation Limited mutually agreed to terminate this purchase agreement. We returned the received shares of New Times Navigation Limited to the concerned shareholders and received back 90,100 of our common stock out of the 204,000 issued by us for the purchase. In addition we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.

We are presently seeking relief from the High Court of the Hong Kong Special Administrative Region against the holders of the unreturned shares to return a total of 113,900 common shares (valued at $381,565) and also to have them return the remaining 18 unsecured convertible promissory notes representing a total amount of $1,740,000 and rescind the purchase agreement. The case is currently pending.

Note 22. Geographic Information

Quarter ended March 31, 2012

	Europe		Other foreign countries		Total
Revenues from unaffiliated customers	$	8,557,059	$	23,909	$	8,580,968

Identifiable assets	$	44,237,555	$	9,999,806	$	54,237,361

Quarter ended March 31, 2011

	Europe		Other foreign countries		Total
Revenues from unaffiliated customers	$	8,463,841	$	44,173	$	8,508,014

Identifiable assets	$	44,012,480	$	1,270,806	$	45,283,286

Note 23. Related Party Transactions

As of March 31, 2012 $460,655 was due from related parties as result from loans provided during the first quarter to Elephant Security B.V. This amount includes $3,139 of accrued interest. Elephant Security B.V. is a related party entity since it is majority owned and controlled by QAT Investments SA, an affiliate of the Company. The loans provided mature on June 30, 2012 and carry an interest rate of 7% per annum accrued on a monthly basis. The notes receivable are interim loans prior to the potential acquisition of Elephant Security BV.

Note 24. Subsequent Events

The Company’s management evaluated subsequent events through the date the financial statements were available to be issued.

Agreement reached with leading financial institution

On May 10, 2012, the Company announced that it has reached an agreement with a leading financial institution whereby, a subsidiary of the Company will provide SIM Swap fraud detection and prevention services.

Loan to related party

In anticipation of a potential acquisition the Company provided on April 2, 2012 a loan to Elephant Security BV, from the Netherlands, for the amount of $573,780. The loan carries an interest rate of 7% per annum and has a maturity date of June 30, 2012. Elephant Security BV is an entity that is majority owned by QAT Investments SA, a related party of the Company.

Funds received from 8% Senior Secured Convertible loan agreement

Following the closing on March 29, 2012 of the senior secured convertible loan agreement, the company received on April 2 and April 5, 2012 a total of $6,484,188 of which $757,906 was placed in escrow in accordance with the terms of the loan agreement.

Incorporation of Dutch holding company

On April 27, 2012, the Company incorporated as a subsidiary of Elephant Talk Communications Corp, Elephant Talk Group International B.V., based in Amsterdam, The Netherlands. The entity will function as a holding company whereby other operating subsidiaries will be consolidated.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Any forward looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks, changes in governmental regulations, and changing economic conditions in developing countries and an inability to arrange additional debt or equity financing.

Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto and the other financial information included elsewhere in this document.

Our Business

Services and Solutions

Elephant Talk is an international provider of business software and outsourced services to the telecommunications and financial services industry.

Full-MVNE/MVNO Mobile Services – wholesale services and managed services to Mobile Network Operators and Virtual Network Operators.

The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

As of 2007 we positioned ourselves as an MVNE to MNOs and MVNOs offering a wide range of mobile enabling/enhancing services through sophisticated, proprietary technology supported by multi-country operations with a focus on business to business, outsourcing /partnering strategy. Important milestones in this respect are:

On September 17, 2008 a hosting agreement was signed with T-Mobile in the Netherlands. T-Mobile is one of the three MNOs in the Netherlands. Elephant Talk will connect MVNOs in the Netherlands to its platform, making use of the mobile network of T-Mobile.

In Spain, we have provided since June 2009, managed services to Vodafone Enabler.

In the course of 2010 we signed a framework hosting agreement with KPN Group Belgium NV. Elephant Talk will connect MVNOs in Belgium to its platform, making use of the mobile network of KPN in Belgium. The platform will be ready for services as of Q2 2012.

In 2011 the company closed a contract with Zain KSA in Saudi Arabia to provide its mobile platform which is now ready for service.

In November 2011 we executed a mass migration of SIMs on to our platform in Spain. This live migration – without having to replace the SIM cards – was a unique achievement and milestone for the Company.

	·	In February 2012 we acquired out of liquidation proceedings the assets of Ensercom, a small MVNE in Germany giving us instant footprint in the German market.

	·	Following the Ensercom take-over and wholesale partner agreement with Telekom Deutschland, we signed in May 2012 an MVNO contract for 50,000 sims in Germany, using the network of Telekom Deutschland.

ValidSoft – Fraud Prevention and Security Software Solutions

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world’s first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques. The key operational highlights:

In September 2011 ValidSoft and Adeptra (www.adeptra.com) form partnership to Extend Global Fraud Detection and Customer Communications. The partnership provides financial organizations with best-in-class fraud detection and prevention functionality, as well as total control over their customer communications.

Following a successful pilot project at a long-standing Adeptra client, one of the ten largest international financial institutions has now implemented the SIM Swap solution and is now in live production. This truly market changing solution is the first to successfully address the issue of SIM card fraud. The institution’s adoption of the application is another step toward securing all transaction channels, using leading edge technology and communications to benefit its customers.

ValidSoft was successful in a joint bid for the provision of a Self Certification project to an EU Government in the area of citizen benefit payments. The solution will evaluate the use of technology and incorporate ValidSoft’s Speaker Verification Platform, VALid-SVP™ to provide automation in the processing of citizen benefits with a view to achieving cost reduction and efficiencies.

The Company launched VALid-SVP™ (Speaker Verification Platform), a voice biometric technology to improve secure authentication.

ValidSoft has filed applications for three new patents in the Card Not Present fraud prevention area and the high end security area.

ValidSoft successfully renewed the European Privacy Seal in regards to its anti-fraud technology software, VALid-POS®, which is designed to detect and prevent card related fraud, a global multibillion dollar problem for financial institutions.

ValidSoft was awarded its Second European Privacy Seal for its VALid-4F™solution and continues to be the only Security Software Company in the world to be certified to the EuroPriSe standards. The European Privacy Seal certifies IT products and IT-based services privacy compliance with European data protection regulations.

Landline network outsourcing services

Through our fixed line telecom infrastructure and our centrally operated and managed ET Boss and Infitel platform, the Company also provides traditional landline services like Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate Services to the business market.

Support technology

Business Support and Operational Support System (“ET BOSS”) and Intelligent Network – IN – (“Infitel”)

Through our European and Chinese development centers, we develop in-house telecom and media related systems and software, related to companies’ proprietary platforms ET BOSS and IN

Electronic fraud prevention products: VALid-POS®, VALid®, VALid-SVP™ and VALid-4F®

Our subsidiary ValidSoft has given us ownership of technology and intellectual property to combat fraud relating to card, the internet, and telephone channels. ValidSoft solutions are marketed under VALid-POS®, VALid® and VALid-4F®. For its biometrics based product it trades under VALid-SVP™.

Telecom infrastructure & network

We currently operate a switch-based telecom network with national licenses and direct fixed line interconnects with the Incumbents/National Telecom Operators in seven (7) European countries and one (1) in the Middle East (Bahrain). To this we have added mobile access coverage in order to cater for our mobile services and solutions. Our first mobile partners are T-Mobile in the Netherlands, Vodafone Enabler in Spain, KPN in Belgium and wholesale partner Telekom Deutschland in Germany. In Saudi Arabia we partnered with Zain KSA to provide our mobile platform services.

Application of Critical Accounting Policies and Estimates

Revenue Recognition and Deferred Revenue

The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”) (formerly, Staff Accounting Bulletin (SAB) 104). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of arrangement exists, the service is performed and the collectability of the resulting receivable is reasonably assured. The Company derives revenue from activities as a fixed-line and mobile services provider with its network and its own switching technology. Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and inter-company revenue). The Company recognizes revenue from prepaid calling cards as the services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. Deferred revenue represents amounts received from the customers against future sales of services since the Company recognizes revenue upon performing the services.

Stock-based Compensation

Effective January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock Compensation”, using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee’s requisite service period (the vesting period, generally three years), which we have elected to amortize on a straight-line basis.

Business Combinations

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price includes the direct costs of the acquisition. However, beginning in fiscal 2009, acquisition-related costs will be expensed as incurred, in accordance with ASC 805 “Business Combinations” amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

Intangible Assets and Impairment of long Lived Assets

In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, “Property and Equipment”, annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

Goodwill Impairment

On September 15, 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard in 2011 had no material impact on the Company’s financial statements.

Results of Operations

Our results of operations for the three months ended March 31, 2012, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and its subsidiaries, and ValidSoft Ltd and its subsidiaries.

Although the vast majority of our business activities are carried out in Euros, we report our financial statements in US dollars (“USD”). The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. In addition to reporting changes in our financial statements in USD as per the requirements of United States generally accepted accounting principles (“US GAAP”), we also highlight the impact of any material currency translation effect by providing a comparison between periods on a constant currency basis, where the most recent USD/Euro exchange rate is applied to previous periods. Management believes that this allows for greater insight into the trends and changes in our business for the reported periods. Also, since we carry out our business activities primarily in Euro’s we do not currently engage in hedging activities.

The constant currency analysis presented within the comparison of the year-to-year results is calculated by using the average exchange rates over the three months ended March 31, 2012. The same exchange rates are used in the income statement of the three months ended March 31, 2012. The following table shows the USD equivalent of the major currencies for the quarter ended March 31, 2012:

	USD equivalent
Euro	$	1.3104
British Pound	$	1.5705

Adjusted EBITDA

In order to provide investors additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for investors and others, which allows them to better understand and evaluate our operating results.

A reconciliation of Adjusted EBITDA to net loss, the most directly comparable measure under U.S. GAAP, for each of the fiscal periods indicated, is as follows:

	Three months ended March 31,
EBITDA Adjusted	2012			2011			2011 in constant currency

Net loss	$	(6,005,189	)		(4,713,224	)		(4,552,654	)
Provision for income taxes		0			800			800
Net loss attributable to non-controlling interest		0			80			80
Depreciation and amortization		1,278,469			1,302,675			1,249,410
Intangible assets impairment charge		0			0			0
Stock-based compensation		1,691,746			1,130,063			1,123,644
Other income & expenses		171,322			(230,000	)		(230,000	)
Interest income and expenses		(14,555	)		43,778			43,807
Adjusted EBITDA	$	(2,878,207	)		(2,465,828	)		(2,364,913	)

Comparison of Three Months Ended March 31, 2012 and December 31, 2011

Revenue

Revenue for the three months ended March 31, 2012 was $8,580,968, an increase of $72,954 or 0.9%, compared to $8,508,014 for the three months ending March 31, 2011. The rise in revenues was led by an increase of $1,245,539 (or 105.4%) in our revenues in the higher margin mobile and security solutions business, including revenues derived from the commencement of the operation phase of our agreement with Adeptra and one of the ten largest international financial institutions' implementation of Validsoft's SIM Swap solution. We expect that revenue from this contract will continue.

This rise in revenues was off-set by the expected continued decrease in our low margin legacy landline business by $1,172,585 (or 16.0%). The increase in our higher margin mobile and security solutions business is mainly due to the increasing revenues of already existing customers and a customer with a large consumer base with monthly recurring revenues coming on to our mobile platform at the end of the 4th quarter 2011.

	Three months ended March 31,
	2012		2011		Variance
Landline Services	$	6,153,261	$	7,325,846	$	(1,172,585	)
Mobile & Security Solutions		2,427,707		1,182,168		1,245,539
Total revenue		8,580,968		8,508,014	$	72,954

Cost of service

Cost of service for the three months ended March 31, 2012 was $6,889,217, a decrease of $668,268 or 8.8%, compared to $7,557,485 for the three months ending March 31, 2011. This decrease is fully related to the decline in landline revenue.Cost of service as a percent of the total revenue was 80.3% and 88.8% for the three months ended March 31, 2012 and 2011, respectively.

Cost of service includes origination, termination, network and billing charges from telecommunications operators, out payment costs to content and information providers, network costs, data center costs, facility cost of hosting network and equipment and cost in providing resale arrangements with long distance service providers, cost of leasing transmission facilities, international gateway switches for voice, and data transmission services.

Management expects cost of service to decline further as a percent of revenue as a greater proportion of future revenue is comprised of our mobile services and security solutions, which have a substantially lower cost of service than our traditional landline business.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expense for the three months ended March 31, 2012 and 2011, were $4,569,958 and $3,416,357, respectively. SG&A expenses increased by $1,153,601, or 33.8%, in the first three months 2012 compared to the same period 2011. This was led by an increase of 31.6% in our staffing levels on March 31, 2012 compared to March 31, 2011, largely in sales force and European hires, as well as by higher investor relation and marketing & communication related expenses. The increases in staffing levels and higher marketing and selling costs are mainly related to expected future revenues.

Non-cash compensation to officers, directors, consultants and employees

Non-cash compensation for the three months ended March 31, 2012 and 2011 was $1,691,746 and $1,130,063, respectively. The increase of $561,683 is primarily attributable to the increased staffing levels. Moreover, the non-cash compensation for the three months ended March 31, 2012 included also the grants of the yearly companywide incentive plan, whereas in 2011 these were not granted nor expensed until the second quarter.

Non-cash compensation is comprised of:

the companywide 2008 Long-Term Incentive Compensation Plan;

expense related to shares of restricted common stock that were issued to directors and officers in lieu of cash compensation.

Depreciation and amortization

Depreciation and amortization for the three months ended March 31, 2012 and 2011, was $1,278,469 and $1,302,675 respectively. Depreciation and amortization expenses decreased by $24,206 or 1.9% in the first three months 2012 compared to the same period 2011.

Intangible assets impairment charge

The March 31, 2012 consolidated balance sheet includes: $12.8 million of intangible assets, net, and $3.3 million of goodwill. Management updated its analysis of intangible assets and long-lived assets as of March 31, 2012 and we determined that for the first three months 2012 no asset impairment charges are necessary.

We have acquired several companies in the last few years and our current business strategy includes continuing to make additional acquisitions in the future. These acquisitions may continue to give rise to goodwill and other intangible assets which will need to be assessed for impairment from time to time.

Other Income and Expenses

Interest income was $105,162 and $22,986 for the three months ended March 31, 2012 and 2011. Interest income was interest received on bank balances and interest on loans to related and third parties.

Interest expense was $90,607 and $66,764 for the years ended March 31, 2012 and 2011 respectively.

Other expense was ($163,331) and $230,000 for the three months ended March 31, 2012 and 2011 respectively. The other income for 2011 related to the release of an accrual for a tax provision, following a successful abatement. For 2012 other expense was incurred as a result of the company’s equity share in the losses of its financial investment in a joint venture.

Non-controlling Interest.

Our majority owned subsidiaries are Elephant Talk Communications PRS U.K. Limited, Elephant Talk Communications Premium Rate Services Netherlands B.V., Elephant Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain W.L.L., Elephant Talk Middle East & Africa FZ-LLC and ET-UTS NV.

We incurred a non-controlling interest charge attributable to minority shareholders’ interest for the three months ended March 31, 2012 and 2011 of $0 and $80 respectively.

Net Loss

Net Loss was ($6,005,189) and ($4,713,224) for the three months ended March 31, 2012 and 2011 respectively. The increase in loss of ($1,291,965) was the result a ($949,856) increase in loss from operations and a higher other expense of ($342,109).

Other Comprehensive Income (Loss)

We record foreign currency translation gains and losses as other comprehensive income or loss. Other comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011 was 869,783 and $2,319,564 respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

Constant currency Comparison of Three Months Ended March 31, 2012 and 2011

			Constant currency
Revenue	2012		2011		Variance
Landline Services	$	6,153,261	$	7,011,324	$	(858,063	)
Mobile & Security Solutions		2,427,707		1,133,985		1,293,722
Total Revenue	$	8,580,968	$	8,145,309	$	435,659

Revenue - constant currency. In constant currency, the revenue for the three months ended March 31, 2012 increased by $435,659 or 5.35% compared to the same period 2011. The increase in revenue was led by an increase of $1,293,722 (or 114.1%) in our revenues in the higher margin mobile and security solutions business, which was off-set by the expected continued decrease in our low margin legacy landline business by $858,063 (or 12.2%).

Cost of service– constant currency. In constant currency the cost of service for the three months ended March 31, 2012 decreased by $349,846 or 4.83% compared to the same period in 2011, primarily as a result of lower levels of revenue in our landline business and the lower cost of service associated with our mobile and security solutions business.

Selling, general and administrative expenses – constant currency. In constant currency, SG&A increased by $1,298,799 or 39.7%, compared to the same period in 2011. The increase in expenses was mainly attributable to increased staffing levels.

Non-cash compensation to officers, directors, consultants and employees – constant currency. Since non-cash compensation comprises United States Dollars denominated shares, options and warrants, a constant currency analysis is not applicable.

Depreciation and amortization– constant currency. In constant currency the depreciation and amortization expenses decreased by $29,059 or 2.33% compared to the same period in 2011.

Liquidity and Capital Resources

We have an accumulated deficit of $186,133,560 as of March 31, 2012. Historically, we have relied on a combination of debt and equity financings to fund our ongoing cash requirements.

In the first quarter of 2012 we received a total of $694,090 in gross proceeds from warrants and options exercised. After the deduction of deferred financing costs ($50,000) the net proceeds from financing activities amounted to $644,090.

We believe that together with our cash balance at March 31, 2012, of $3,118,890, the convertible secured loan the Company secured on March 29th 2012 for the net proceeds of $5.7 million and an up to $2 million commitment from an affiliated party, we believe that the funds available are sufficient to carry out our business plans.

In addition, the Company believes that it will continue to attract funds, through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners in the form of debt, mezzanine or permanent equity. In case cash flows from operations or financing are delayed, the company will lower its capital expenditures on new developments and markets as well as reduce the hiring of new employees and contractors.

Operating activities

Net cash used in operating activities for the three months ended March 31, 2012 was $1,886,794 compared to $3,452,607 in the same period 2011, a decrease of $1,565,813. This decrease is primarily attributable to working capital changes.

Investment activities

Net cash used in investment activities for three months ended March 31, 2012 was $1,717,223 a decrease of $393,202, (or 18.63%) compared to $2,110,425 in the same period 2011. The decrease was primarily attributable to a lower level of equipment and software purchases.

We invested in the first quarter of 2012 an amount of $449,476 as loan to a related party named Elephant Security BV from the Netherlands and $121,870 as a loan to a third party to Morodo Ltd, from the U.K. The loans are interim loans prior to the potential acquisitions.

Financing activities

Net cash received by financing activities for the three months ended March 31, 2012 was $644,090 compared to $6,739,585 for the three months ended March 31, 2011. In 2012, we received $694,900 from warrant and option exercises and paid $50,000 as cost of financing related to thesenior secured convertible loan agreement.

As a result of the above activities, the Company had the cash and cash equivalents balance of $3,118,890 as of March 31, 2012, a net decrease in cash and cash equivalents of $2,890,686 since December 31, 2011.

Off- Balance Sheet Arrangements

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosure about Market Risks

Foreign currency exchange rate

As the vast majority of our business activities are carried out in Euros and we report our financial statements in US dollars, fluctuations in foreign currencies impact the total amount of assets and liabilities that we report for our foreign subsidiaries upon the translation of those amounts in US dollars. Since we carry out our business activities primarily in Euro’s we have not engaged in hedging activities. However, since we have recently concluded the convertible a loan of $8.8 million, we will evaluate if the repayments on the loan will require and justify hedging for exchange rate risk, since our business activities are carried out in Euro’s.

Apart from installment and interest payments on the $8.8 million convertible loan, we do not believe that we currently have material exposure to interest rate, foreign currency exchange rate or other relevant market risks.

Contractual obligations

The contractual obligations are presented in the Note 19, Commitments to the financial statements. Changes in our business needs, cancellation provisions and other factors may result in actual payments differing from these estimates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2012 the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company' disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on the evaluation and consistent with what was reported in the 2011 annual report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were ineffective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Previously Reported Material Weakness in Internal Control over Financial Reporting

A "material weakness" is defined as a significant deficiency or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is defined as a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial information reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Previously Reported Material Weakness: The Company did not maintain effective controls over its annual financial statement reporting process which resulted in two significant adjustments encountered during our audit. These adjustments were in the areas of stockholders equity and intangible assets and occurred as a direct result of our inability to staff our accounting department with experienced US GAAP and SEC reporting personnel due to budgetary constraints. A material weakness in financial reporting impacts the Company’s ability to timely report financial information in conformity with U.S. generally accepted accounting principles (“GAAP”), which could affect all significant financial statement accounts and disclosures.

Changes in Internal Control over Financial Reporting

There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, except for the remediation steps to address the material weakness in its internal control over financial reporting described above. Specifically, the following steps are being implemented:

• Management has formalized the Company's process for identifying the relevant accounting areas and included controls; and

• Management is investigating steps to improve the US GAAP and SEC accounting knowledge of the Company's accounting personnel.

Under the direction of the Audit Committee, management will continue to review and make any changes it deems necessary to the overall design of the Company's internal control over financial reporting, including implementing improvements in policies and procedures. We are committed to a proper internal control environment, and believe that, when fully implemented, these remediation actions will represent significant improvements in the Company's accounting function. We will continue to assess the effectiveness of our remediation efforts in connection with management's future evaluations of internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

(a) Chong Hing Bank Litigation

In December 2009 Chong Hing Bank Limited, fka Liu Chong Hing Bank Limited, a foreign banking services company based in Hong Kong (Bank), commenced a lawsuit in the California Orange County Superior Court calledChong Hing Bank Limited v. Elephant Talk Communications, Inc ., Case No. 30-2009-00328467. The Bank alleged that it entered into various installment and term loan agreements and an overdraft account with Elephant Talk Limited (ETL), a wholly-owned Hong Kong subsidiary of Elephant Talk Communications Corp. (Company). Various former officers and directors of ETL personally guaranteed the loans and overdraft account.

The Bank and the Company tried the case to the court without a jury between October, 5 and 12, 2011. The court found, among other things, that

The Company was not liable as a successor in interest or otherwise on the Bank loans and overdraft account to ETL;

The Company was not liable on the Bank’s claims because the Bank filed its action after the applicable California 4-year statute of limitations had expired; and

The Company was not liable to the Bank under the alternative theories of negligent or intentional misrepresentation.

The court entered judgment in favor of the Company and against the Bank on December 14, 2011, and awarded the Company $5,925.41 in costs. The judgment became final on February 16, 2012.

(c) Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation Limited.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the Risk Factors included in Part I, “Item 1A. — “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, the “Risk Factors” in our Form S-3 filed on April 26, 2012. These Risk Factors could materially impact our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely impact our business, financial condition and/or operating results.

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

On March 30, 2012, we consummated a private placement of certain senior secured convertible notes (the “Convertible Notes” or “Notes”) in the principal amount of $8,800,000 to five accredited investors (the “Holders”) pursuant to a Securities Purchase Agreement on the terms set forth below. We received gross proceeds of $8,000,000, after the $800,000 original issue discount. In connection with the Private Placement, we entered into the following transaction agreements: a Security Purchase Agreement (the “SPA”), the Convertible Notes, the Escrow Agreements, the Security Agreement, the Subsidiary Guaranty Agreement, the Voting Agreement and the Registration Rights Agreement.

The Convertible Notes bear an annual interest rate of 8% of the principal amount and mature on May 1, 2014. The monthly installment payments (constituting interest and amortization) in the aggregate amount of $2,273,718 for the first year were reserved to ensure payment of the monthly installments. We can elect, on a monthly basis, to pay the full installment amount or parts thereof in our common stock at an amount equal to 90% of the average of the five lowest volume weighted average prices (“VWAP|”) of the common stock during the twenty (20) trading days immediately prior to such installment on the trading day payment date. The remaining amount of $5,726,282 was made available to us immediately at closing of the transaction. In the first year, if we elect to pay a monthly installment in common stock, the equivalent cash installment amount will be released from the escrow to us.

The Convertible Notes are convertible at the option of the Holders into our common stock at a fixed conversion price of $2.61 (the “Fixed Conversion Price”), which equals to 115% of the trailing 30 day closing price prior to closing of the transaction. Twelve months after the issuance date, the Notes are automatically convertible at the Fixed Conversion Price, if the price of our common stock, for any consecutive 30 days, close at or above 150% of the Fixed Conversion Price.

The Convertible Notes were issued pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended and Regulation D thereunder.

See also Note 14, 8% Senior Secured Convertible Note.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

10.1	Securities Purchase Agreement by and among the Company and certain purchasers dated March 29, 2012; incorporated herein by reference Exhibit 10.28 to our annual report on Form 10-F filed on March 30, 2012

10.2	Form of Secured Convertible Note issued to certain purchasers dated March 29, 2012. incorporated herein by reference Exhibit 10.29 to our annual report on Form 10-F filed on March 30, 2012

10.3	Security Agreement by and among the Company and its subsidiaries and certain purchasers dated March 29, 2012. incorporated herein by reference Exhibit 10.30 to our annual report on Form 10-F filed on March 30, 2012

10.4	Form of Escrow Agreement by and among the Company, certain purchasers and Wells Fargo Bank, National Association dated March 29, 2012; incorporated herein by reference Exhibit 10.31 to our annual report on Form 10-F filed on March 30, 2012

10.5	Subsidiary Guaranty by and among the company and its subsidiaries and certain purchasers dated March 29, 2012; incorporated herein by reference Exhibit 10.32 to our annual report on Form 10-F filed on March 30, 2012

31.1	Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page 32. *

31.2	Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page 33. *

32.1	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on page 34. *

32.2	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on page 35. *

101.INS **	XBRL Instance Document

101.SCH **	XBRL Taxonomy Extension Schema Document

101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **	XBRL Taxonomy Extension Label Linkbase Document

101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document

* filed herein.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ELEPHANT TALK COMMUNICATIONS CORP.

May 10, 2012	By	/s/ Steven van der Velden
		Steven van der Velden
		President and Chief Executive Officer (Principal Executive Officer)

May 10, 2012	By	/s/ Mark Nije
		Mark Nije
		Chief Financial Officer (Principal Financial and Accounting Officer)

Index to Exhibits

Number	Exhibit	Page

31.1	Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)	32

31.2	Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)	33

32.1	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	34

32.2	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	35

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PARETEUM (TEUM) 10-Q2012 Q1 Quarterly report

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