GTT Communications (GTTNQ) 10-Q 2006 Q2 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended

June 30, 2006

Commission file number: 000-51211

MERCATOR PARTNERS ACQUISITION CORP.

(Exact Name of Registrant as Specified in its Charter)

Delaware	20-2096338
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

One Fountain Square

11911 Freedom Drive, Suite 590

Reston, Virginia 20190

(Address of Principal Executive Offices and Zip Code)

(703) 995-5533

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

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

Large accelerated file  ¨                    Accelerated filer  ¨                    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 1, 2006
Common Stock, par value $0.0001 per share	1,150,100
Class B Common Stock, par value $0.0001 per share	10,580,000

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Mercator Partners Acquisition Corp.

Condensed Balance Sheets

	June 30, 2006 Unaudited		December 31, 2005 (As Restated)
ASSETS
Current Assets
Cash and cash equivalents	$	877,172	$	1,383,204
Restricted investment held in Trust Fund		55,871,783		54,657,439
Prepaid expenses and other current assets		36,668		60,244
Deferred acquisition costs		632,520		—
Total current assets		57,418,143		56,100,887
Total assets	$	57,418,143	$	56,100,887
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	181,108	$	148,033
Income taxes payable		335,000		56,000
Accrued acquisition costs		468,138		—
Derivative liabilities		5,948,850		6,507,700
Total current liabilities		6,933,096		6,711,733
Common stock, subject to possible conversion to cash (2,114,942 shares at conversion value)		11,168,769		10,926,022
Commitments
Stockholders’ Equity
Preferred stock, par value $.0001 per share, 5,000 shares authorized, no shares issued		—		—
Common stock, par value $.0001 per share, 40,000,000 shares authorized, 1,150,100 shares issued and outstanding		115		115
Common stock, Class B, par value $.0001 per share, 12,000,000 shares authorized, 8,465,058 shares issued and outstanding (excluding 2,114,942 shares subject to possible conversion to cash)		847		847
Additional paid-in capital		36,844,795		37,087,542
Retained earnings		2,466,771		1,369,061
Accumulated other comprehensive (loss) income		3,750		5,567
Total stockholders’ equity		39,316,278		38,463,132
Total liabilities and stockholders’ equity	$	57,418,143	$	56,100,887

See Accompanying Notes to Condensed Financial Statements

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Mercator Partners Acquisition Corp.

Condensed Statements of Operations

(Unaudited)

	For the three months ended June 30, 2006			For the three months ended June 30, 2005 (As Restated)			For the six months ended June 30, 2006			Period from inception (January 3, 2005) to June 30, 2005 (As Restated)
Revenue	$	—		$	—		$	—		$	—
Operating Expenses:
Professional fees		23,382			28,500			264,307			38,000
Other operating costs		80,774			81,267			157,368			81,736
Loss from operations		(104,156	)		(109,767	)		(421,675	)		(119,736	)
Interest income		651,350			315,272			1,239,535			315,576
Gains on derivative liabilities		4,241,050			229,200			558,850			229,200
Income before provision for income taxes		4,788,244			434,705			1,376,710			425,040
Provision for income taxes		186,000			67,000			279,000			67,000
Net income	$	4,602,244		$	367,705		$	1,097,710		$	358,040
Weighted average number of shares outstanding:
Basic and diluted		11,730,100			9,925,485			11,730,100			5,045,966
Net income per common share, basic and diluted	$	0.39		$	0.04		$	0.09		$	0.07

See Accompanying Notes to Condensed Financial Statements

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Mercator Partners Acquisition Corp.

Condensed Statement of Stockholders’ Equity

For the six months ended June 30, 2006

(Unaudited)

	Common Stock			Common Stock, Class B			Additional Paid -In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Shares	Amount
Balance, December 31, 2005 (As Restated)	1,150,100	$	115	8,465,058	$	847	$	37,087,542		$	1,369,061	$	5,567		$	38,463,132
Allocation of value to Class B shares subject to possible conversion to cash	—		—	—		—		(242,747	)		—		—			(242,747	)
Net income	—		—	—		—		—			1,097,710		—			1,097,710
Change in unrealized gain on available-for-sale securities	—		—	—		—		—			—		(1,817	)		(1,817	)
Comprehensive income																1,100,893
Balance, June 30, 2006 (Unaudited)	1,150,100	$	115	8,465,058	$	847	$	36,844,795		$	2,466,771	$	3,750		$	39,316,278

See Accompanying Notes to Condensed Financial Statements

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Mercator Partners Acquisition Corp.

Condensed Statements of Cash Flows

(Unaudited)

	For the six months ended June 30, 2006			Period from inception (January 3, 2005) to June 30, 2005 (As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,097,710		$	358,040
Adjustment to reconcile net income to net cash used in operating activities:
Gains on derivative liabilities		(558,850	)		(229,200	)
Amortization of discount on U.S. Government Securities held in Trust Fund		(1,216,161	)		(306,995	)
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets		23,576			(94,583	)
Increase in accounts payable and accrued expenses		33,075			103,036
Increase in income taxes payable		279,000			67,000
Net cash used in operating activities		(341,650	)		(102,702	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of U.S. Government Securities held in Trust Fund		(110,030,180	)		(53,429,000	)
Maturity of U.S. Government Securities held in Trust Fund		110,030,180			—
Payments for deferred acquisition costs		(164,382	)		—
Net cash used in investing activities		(164,382	)		(53,429,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock and warrants to initial stockholders		—			248,000
Portion of net proceeds from sale of Series B units through public offering allocable to shares of common stock, Class B subject to possible conversion to cash		—			10,680,457
Net proceeds from sale of units through public offering		—			44,370,419
Net cash provided by financing activities		—			55,298,876
Net (decrease) increase in cash and cash equivalents		(506,032	)		1,767,174
CASH AND CASH EQUIVALENTS
Beginning of period		1,383,204			—
End of period	$	877,172		$	1,767,174
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—		$	—
Cash paid for interest	$	—		$	—
Supplemental disclosure of non-cash investing activities:
Accrued acquisition costs	$	468,138		$	—

See Accompanying Notes to Condensed Financial Statements

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Mercator Partners Acquisition Corp.

Notes to Condensed Financial Statements

NOTE 1 –ORGANIZATION AND ACTIVITIES

Mercator Partners Acquisition Corp. (the “Company”) was incorporated in Delaware on January 3, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a currently unidentified operating business (a “Business Combination”) (SeeRecent Eventsbelow). The Company is a “shell company” as that term is defined in Rule 405 promulgated under the Securities Act of 1933 and Rule 12b-2 promulgated under the Securities Exchange Act. As such, the Company is subject to rules adopted by the Securities and Exchange Commission applicable to shell companies. In particular, upon completion of a Business Combination which causes the Company to cease being a shell company, the Company will be obligated to disclose the same type of information it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.

As further discussed in Note 3, on April 11, 2005, the Company effected an initial public offering of its securities (the “Offering”) which closed on April 15, 2005.

Although substantially all of the proceeds of the Offering are intended to be utilized to effect a Business Combination, the proceeds are not specifically designated for this purpose. The gross proceeds from the sale of the Series B units of $53,429,000 are held in a trust fund (the “Trust Fund”) until the earlier of the completion of a Business Combination or the distribution of proceeds to Class B stockholders. If a Business Combination is consummated, the conversion rights afforded to the Class B stockholders may result in the conversion cash of up to approximately 19.99% of the aggregate number of Class B shares sold into a pro-rata distribution from the Trust Fund, as further described below. If a Business Combination is not consummated by October 15, 2006 (the “Target Business Acquisition Period”), all of the proceeds of the Trust Fund will be returned to Class B stockholders, subject to potential claims by creditors.

The Company will not effect a Business Combination unless the fair market value of the target, as determined by the Board of Directors of the Company in its sole discretion, based upon valuation standards generally accepted by the financial community including, among others, book value, cash flow, and both actual and potential earnings, is at least equal to 80% of the net assets of the Company at the time of such acquisition.

Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. As discussed previously, if the Company is unable to effect a Business Combination during the Target Business Acquisition Period, the Company’s Certificate of Incorporation provides that the Company’s officers will liquidate the Company as soon as practicable. If the Company were to expend all of the net proceeds of the Offering not held in the Trust Fund prior to liquidation, but recognizing that such net proceeds could become subject to the claims of creditors of the Company which could be prior to the claims of stockholders of the Company, it is possible that the Company’s liquidation value may be less than the amount in the Trust Fund, inclusive of any net interest income thereon. Moreover, all of the Company’s initial stockholders have agreed to waive their respective rights to participate in any such liquidation distribution on shares owned prior to the Offering.

The Company, after signing a definitive agreement for a Business Combination, is obliged to submit such transaction for approval by a majority of the Class B common stockholders of the Company. The information presented to the Class B stockholders will include substantially all of the information that the Company would be required to include in its filing on Form 8-K upon consummation of the proposed Business Combination. Class B stockholders that vote against such proposed Business Combination are, under certain conditions, entitled to convert their shares into a pro-rata distribution from the Trust Fund (the “Conversion Right”). In the event that holders of a majority of the outstanding shares of Class B common stock vote for the approval of the Business Combination and that holders owning 20% or more of the outstanding Class B common stock do not exercise their Conversion Rights, the Business Combination may then be consummated. Upon completion of such Business Combination and the payment of any Conversion Rights (and related cancellation of Class B common stock), the remaining shares of Class B common stock would be converted to common stock.

At the time the Company seeks Class B stockholder approval of any Business Combination, the Company will offer each Class B stockholder who acquired Class B shares through the Offering or subsequently in the after-market the right to exercise his or her Conversion Right if such Class B stockholder votes against the Business Combination and the Business Combination is approved and completed. The holders of the Company’s common stock are not entitled to seek conversion of their shares. The actual per-share conversion price will be equal to the amount in the Trust Fund (inclusive of any interest thereon) as of two business days prior to the proposed Business Combination, divided by the number of Class B shares sold

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in the Offering, or approximately $5.28 per share based on the value of the Trust Fund as of June 30, 2006. There will be no distribution from the Trust Fund with respect to the warrants included in the Series A Units (defined in Note 3 below) and Series B Units (defined in Note 3 below). A Class B stockholder may request conversion of his or her shares at any time prior to the vote taken with respect to a proposed Business Combination at a meeting held for that purpose, but such request will not be granted unless such Class B stockholder votes against the Business Combination and the Business Combination is approved and consummated.

It is anticipated that the funds to be distributed to Class B stockholders who have shares converted will be distributed promptly after consummation of a Business Combination. Any Class B stockholder who converts his or her stock into his or her share of the Trust Fund still has the right to exercise the Class W Warrants (defined in Note 6 below) and Class Z Warrants (defined in Note 6 below) that were received as part of the Series B Units. The Company will not consummate any Business Combination if 20% or more of the Class B stockholders exercise their conversion rights. Accordingly, the redemption value of $11,168,769 (2,114,942 shares, or 19.99% of the Class B shares sold in the public offering) has been included as temporary capital on the accompanying balance sheet at June 30, 2006.

Recent Events

On May 23, 2006, the Company entered into a stock purchase agreement with Global Internetworking, Inc. (“GII”) and its three shareholders to acquire all of the outstanding shares of common stock of GII. The agreement with GII specifies that the total purchase price for the GII shares will be cash of $14,000,000, $4,000,000 in 6% subordinated promissory notes issued by the Company due on December 29, 2008, 1,300,000 shares of common stock and 1,450,000 of each of Class W Warrants and Class Z Warrants. Of these warrants, 966,666 warrants of each class will be escrowed subject to release upon certain conditions. Additionally, on May 24, 2006, the Company reached agreement with U.K. based European Telecommunications & Technology, Ltd. (“ETT”) for the Company to purchase all of the outstanding ETT shares for a total purchase price of $37,000,000. The GII and ETT acquisitions are referred to as collectively as the “Transactions”.

After giving effect to the Transactions, the Company’s current stockholders will own approximately 90% of the Company’s outstanding common stock. The proposed Transactions are subject to, among other things, the filing of definitive proxy materials with the Securities and Exchange Commission and approval of the Transactions by the Company’s Class B stockholders. The Company filed a Joint Proxy Statement/Form S-4 Registration Statement on June 21, 2006. There can be no assurance that the Transactions will be consummated.

Liquidity

Management believes the Company has sufficient available funds outside of the Trust Fund to meet the expenditures required for the Company’s operating activities through October 15, 2006, assuming that the Transactions are not consummated before then. If the Transactions are not approved by our Class B stockholders by October 15, 2006 and accordingly the entire Trust Fund is required to be distributed to such Class B stockholders, the Company may not have sufficient funds available to satisfy all of its obligations.

NOTE 2 - RESTATEMENT AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Summary of Restatement Items

In August 2006, the Company concluded that it was necessary to restate its financial results for the period from inception (January 3, 2005) to December 31, 2005 and for the interim period ended March 31, 2006 to reflect liabilities and additional gains and losses related to the classification of and accounting for: (1) the warrants to purchase common stock included in the Series A units and Series B units sold in the Offering and (2) the option to purchase Series A Units and Series B Units issued to the underwriters in connection with the Offering (Note 3). The Company had previously classified the value of the warrants to purchase common stock sold in the Offering and the option issued to the underwriters as permanent equity. After further review, the Company has determined that these instruments should have been classified as derivative liabilities and, therefore, the fair value of each instrument must be recorded as a derivative liability on the Company’s balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in the Company’s statement of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.

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The Company had previously issued financial statements which did not present the derivative liability. The accompanying financial statements for the three and six months ended June 30, 2005 have been restated to effect the changes described above. The impact of the adjustments related to the classification of and accounting for the derivative liability on the previously reported June 30, 2005 financial statements are as follows:

	For the three months ended June 30, 2005
	As Previously Reported		As Restated
Gain from derivative liabilities		—		229,200
Interest income		315,272		315,272
Income before provision for income taxes		205,505		434,705
Provision for income taxes		67,000		67,000
Net income		138,505		367,705
Weighted average shares:
Basic and Diluted		9,925,485		9,925,485
Earnings per share:
Basic and Diluted	$	0.01	$	0.04
	For the period from inception (January 3, 2005 to June 30, 2005)
	As Previously Reported		As Restated
Gain from derivative liabilities		—		229,200
Interest income		315,576		315,576
Income before provision for income taxes		195,840		425,040
Provision for income taxes		67,000		67,000
Net income		128,840		358,040
Weighted average shares:
Basic and Diluted		5,045,966		5,045,966
Earnings per share:
Basic and Diluted	$	0.03	$	0.07

NOTE 3 - PUBLIC OFFERING OF SECURITIES

In its initial Offering, effective April 11, 2005 (closed on April 15, 2005), the Company sold to the public 575,000 Series A Units (the “Series A Units” or a “Series A Unit”) and 5,290,000 Series B Units (the “Series B Units” or a “Series B Unit”) at a price of $10.50 and $10.10 per unit, respectively, inclusive of an over allotment option issued to the underwriters to purchase additional Series A Units and Series B Units, which was exercised in full. Net proceeds from the initial public offering, including the exercise of the over allotment option, totaled $55,050,876 which was net of $4,415,624 in underwriting and other expenses. Each Series A Unit consists of two shares of the Company’s common stock, five Class W Warrants, and five Class Z Warrants. Each Series B Unit consists of two shares of the Company’s Class B common stock, one Class W Warrant, and one Class Z Warrant.

Both the common stock and the Class B common stock have one vote per share. However, the Class B stockholders may, and the common stockholders may not, vote in connection with a Business Combination. Further, should a Business Combination not be consummated during the Target Business Acquisition Period, the Trust Fund would be distributed pro-rata to all of the Class B common stockholders, subject to potential claims by creditors, and their Class B common shares would be cancelled and returned to the status of authorized but unissued shares. Any remaining net assets would be distributed to the holders of the Company’s common stock and the Company would be dissolved and liquidated.

Upon closing of the public Offering, the Company sold and issued an option, for $100, to HCFP/Brenner Securities, LLC (“HCFP”), the representative for the underwriters in the Offering (the “Underwriters Purchase Option” or “UPO”), to purchase up to 25,000 Series A units at an exercise price of $17.325 per unit and/or up to 230,000 Series B units at an exercise price of $16.665 per unit (Note 6).

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NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements – The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the period from inception (January 3, 2005) to December 31, 2005 included in the Company’s Form 10-K for the year ended December 31, 2005, as amended. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for any other interim period or any future year.

Cash and Cash Equivalents - Included in cash and cash equivalents are deposits with financial institutions as well as short-term money market and debt instruments with maturities of three months or less when purchased.

Investments – Investment held in the Trust Fund consist of investments acquired with maturities exceeding three months but less than three years. Consistent with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company classifies all debt securities and all investments in equity securities that have readily determinable fair values as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Such securities are reported at fair value, with unrealized gains or losses excluded from earnings and included in other comprehensive income, net of applicable taxes. Discounts from the face value of restricted investments are amortized using the interest method over the period from the date of purchase to maturity and are included in interest income on the accompanying condensed statement of operations.

The Company’s investment held in Trust Fund at June 30, 2006 consists of United States of America Government treasury securities, with a maturity date of July 20, 2006, and are stated at amortized cost. The fair market value of the restricted investments was $55,871,783 as of June 30, 2006, including $3,750 of unrealized gains, which are reported as a component of other comprehensive income as of June 30, 2006. The Company recognized interest income of $641,086 and $1,216,161 from amortization of the discount on the investment during the three and six months ended June 30, 2006, respectively, which is included in interest income on the accompanying statement of operations.

Deferred Acquisition Costs – Deferred acquisition costs consist principally of accounting fees, legal fees and other fees incurred through the balance sheet date that are related to the proposed Transactions discussed in Note 1. Deferred acquisition costs related to the proposed Transactions will be charged to expense if the Transactions are not consummated or included in the allocation of purchase price should the Transactions be consummated. At June 30, 2006, the Company had incurred acquisition costs of $632,520 relating to the proposed Transactions on the accompanying balance sheet.

Accounting for Derivative Instruments - SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheet at fair value. However, paragraph 11(a) of SFAS No. 133 provides that contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders’ equity in its statement of financial position are not treated as derivative instruments. The Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under SFAS No. 133. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. A contract designated as an equity instrument is included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the Company’s 8,165,000 Class W and 8,165,000 Class Z Warrants to purchase Common Stock included in the Series A Units and Series B Units sold in the Offering and the UPO to purchase up to 25,000 Series A units and/or up to 230,000 Series B units are separately accounted for as liabilities. The agreements related to the Class W Warrants and Class Z Warrants and the UPO provide for the Company to attempt to register and maintain the registration of the shares underlying the securities and are silent as to the penalty to be incurred in the absence of the Company’s ability to deliver registered shares to the holders upon exercise of the securities. Under EITF 00-19, registration of the common stock underlying the warrants and UPO is not within the Company’s control and, as a result, the Company must assume that it could be required to settle the securities on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. The fair values of these securities are presented on the Company’s balance sheet as “Derivative liabilities” and the changes in the values of these derivatives are shown in the Company’s statement of operations as “Gain (loss) on derivative liabilities.” Such gains and losses are non-operating and do not result in cash flows from operating activities.

Fair values for traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The Class W Warrants and Class Z Warrants sold in the Offering are publicly traded, and consequently, the fair value of these warrants is based on the market price of the applicable class of warrant at each period

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end. To the extent that the market price increases or decreases, the Company’s derivative liabilities will also increase or decrease, with a corresponding impact on the Company’s statement of operations.

The UPO issued to the underwriters to purchase up to 25,000 Series A units and/or up to 230,000 Series B units is a derivative that is separately valued and accounted for on the Company’s balance sheet. While the underlying shares and warrants are indexed to the Company’s common stock, because the UPO contains certain registration rights with respect to the UPO and the securities issuable upon exercise of the UPO, the Company has classified these instruments as a liability in accordance with EITF 00-19. This derivative liability has been, and will continue to be, adjusted to fair value at each period end.

The pricing model the Company uses for determining the fair value of the UPO at the end of each period is the Black Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management’s judgment. The Company uses a risk-free interest rate, which is the rate on U. S. Treasury instruments, for a security with a maturity that approximates the estimated remaining contractual life of the derivative. The Company uses volatility rates based upon a sample of comparable special purpose acquisition corporations. If and when the Company consummates a Business Combination, the volatility rates will then be based on comparable companies to the acquired company. The volatility factor used in the Black Scholes model has a significant effect on the resulting valuation of the derivative liabilities on the Company’s balance sheet. The volatility for the calculation of the UPO was 46.63% as of June 30, 2006. This volatility rate will continue to change in the future. The Company uses the closing market price of the Company’s Series A units and Series B units at the end of a period in the Black Scholes model. The Company’s Series A Unit and Series B Unit prices will also change in the future. To the extent that the Company’s Series A unit and Series B unit prices increase or decrease, the Company’s UPO derivative liability will also increase or decrease, absent any change in volatility rates and risk-free interest rates.

Concentration of Credit Risk - Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Net Income Per Share - Net income per share is computed based on the weighted average number of shares of common stock and Class B common stock outstanding.

Basic income per share is computed by dividing income available to common and common, Class B stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented, since the effect of the assumed exercise of 21,280,000 of outstanding warrants to purchase common stock and the outstanding UPO to purchase 25,000 Series A Units and 230,000 Series B Units is anti-dilutive, as their exercise prices are greater than the average market price of common stock during the period, they have been excluded from the Company’s computation of fully diluted net income per share. Therefore, basic and diluted income (loss) per share were the same for the three and six months ended June 30, 2006 and for the three months ended June 30, 2005 and the period from inception (January 3, 2005) to June 30, 2005.

Fair Value of Financial Instruments and Derivatives - The fair values of the Company’s assets and liabilities that qualify as financial instruments under SFAS No. 107 approximate their carrying amounts presented in the balance sheet at June 30, 2006.

Use of Estimates and Assumptions - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.

Income Taxes - Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.

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New Accounting Pronouncements – The Company does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

NOTE 5 - COMMITMENTS

The Company has agreed to pay Mercator Capital L.L.C. (“Mercator Capital”), an affiliate of certain stockholders, directors and officers, $7,500 per month, commencing on consummation of the Offering, for office, secretarial and administrative services. During the three and six months ended June 30, 2006 $22,500 and $45,000, respectively, of expense for such services was recorded in the accompanying condensed statements of operations.

The Company has engaged HCFP, on a non-exclusive basis, to act as its agent for the solicitation of the exercise of the Company’s Class W Warrants and Class Z Warrants. In consideration for solicitation services, the Company has agreed to pay HCFP a commission equal to 5% of the exercise price for each Class W Warrant and Class Z Warrant exercised more than one year after the date of the Offering if the exercise is solicited by HCFP. No solicitation services were provided by HCFP during the three and six months ended June 30, 2006, the three months ended June 30, 2005 or for the period from inception (January 3, 2005) to June 30, 2005.

HCFP has also been engaged by the Company to act as the Company’s non exclusive investment banker in connection with a proposed Business Combination (Note 1). For assisting the Company in structuring and negotiating the terms of a Business Combination, the Company is obligated to pay HCFP a cash transaction fee equal to 5% of the first $5,000,000 of Total Consideration, as defined in the Underwriting Agreement, paid and 4% of Total Consideration paid over $5,000,000, with a maximum fee to be paid of $500,000.

NOTE 6 - CAPITAL STOCK

Preferred Stock

The Company is authorized to issue up to 5,000 shares of Preferred Stock with such designations, voting, and other rights and preferences as may be determined from time to time by the Board of Directors.

Common Stock and Class B Common Stock

The Company is authorized to issue 40,000,000 shares of common stock and 12,000,000 shares of Class B common stock (Note 3). As of June 30, 2006, there are 1,150,100 shares of the Company’s common stock issued and outstanding and 10,580,000 shares of the Company’s Class B common stock issued and outstanding, including 2,114,942 Class B common shares subject to possible conversion to cash.

As of June 30, 2006, there are 5,769,900 and 960,000 authorized but unissued shares of the Company’s common stock and the Company’s Class B common stock, respectively, available for future issuance, after appropriate reserves for the issuance of common stock in connection with the Class W Warrants and Class Z Warrants sold in the offering, the Underwriters Purchase Option and the officers’ and directors’ Class W Warrants and Class Z Warrants.

The Company will issue a substantial number of additional shares of common stock and warrants in connection with the Transactions. If the Transactions are consummated, dilution to the interests of the Company’s stockholders who participated in the Offering will occur.

Warrants

In January 2005, the Company sold and issued to its initial stockholders Class W Redeemable Warrants (a “Class W Warrant”), to purchase 2,475,000 shares of the Company’s common stock, and Class Z Redeemable Warrants (a “Class Z Warrant”) to purchase 2,475,000 shares of the Company’s common stock, for an aggregate purchase price of $247,500, or $0.05 per warrant.

In connection with the Offering, the Company sold and issued Class W warrants to purchase 8,165,000 shares of the Company’s common stock. Except as set forth below, the Class W Warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase shares at $5.00 per share for a period commencing on the later of: (a) completion of a Business Combination, or (b) April 11, 2006 and ending April 10, 2010. As of June 30, 2006, there were 10,640,000 Class W Warrants outstanding.

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In connection with the Offering, the Company sold and issued Class Z warrants to purchase 8,165,000 shares of the Company’s common stock. Except as set forth below, the Class Z Warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase shares at $5.00 per share for a period commencing on the later of: (a) completion of a Business Combination, or (b) April 11, 2006 and ending April 10, 2010. As of June 30, 2006, there were 10,640,000 Class Z Warrants outstanding.

The Company may redeem the outstanding Class W Warrants and/or Class Z Warrants with the prior consent of HCFP, in whole and not in part, at a price of $.05 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days’ prior written notice of redemption, and if, and only if, the last sale price of the Company’s common stock equals or exceeds $7.50 per share and $8.75 per share, for a Class W Warrant and Class Z Warrant, respectively, for any 20 trading days within a 30 trading day period ending three business days before the Company sends the notice of redemption.

The Class W Warrants and Class Z Warrants issued in the Offering are subject to registration provisions which require the Company to file a registration statement with respect to the shares of common stock underlying the warrants, and to use its best efforts to cause the registration statement to become effective and to maintain its effectiveness. The warrants also provide that the Company is not obligated to deliver any securities upon exercise of a warrant unless a registration statement covering those securities is effective.

The 2,475,000 Class W Warrants and 2,475,000 Class Z Warrants outstanding prior to the Offering, all of which are held by the Company’s officers and directors or their affiliates, shall not be redeemable by the Company as long as such warrants continue to be held by such individuals. These warrants are also subject to registration rights. If the Company is unable to register the underlying shares, however, it may satisfy its obligations to the initial securityholders by delivering unregistered shares of common stock.

As the proceeds from the exercise of the Class W and Class Z Warrants will not be received until after the completion of a Business Combination, the expected proceeds from exercise will not have any effect on the Company’s financial condition or results of operations prior to a Business Combination.

Purchase Option

Upon the closing of the Offering, the Company sold and issued the UPO, for $100, to purchase up to 25,000 Series A units and/or up to 230,000 Series B units. The Company accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense of the public offering. The Company estimated the fair value of this UPO at the date of issuance, $752,450, using a Black Scholes option-pricing model. The fair value of the UPO granted was estimated as of the date of grant and issuance using the following assumptions: (1) expected volatility of 44.5%, (2) risk-free interest rate of 4.02% and (3) contractual life of 5 years. The UPO may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the UPO (the difference between the exercise prices of the option and the underlying warrants and the market price of the units and underlying securities) to exercise the UPO without the payment of any cash. The Series A Units and Series B Units issuable upon exercise of this option are identical to those in the Offering, except that the exercise price of the warrants included in the units are $5.50 per share and the Class Z Warrants shall be exercisable for a period of only five years from the date of the Offering. The UPO is exercisable at $17.325 per Series A Unit and $16.665 per Series B Unit commencing on the later of (a) April 11, 2006 or (b) the completion of a Business Combination with a target business, and expires on April 11, 2010.

The UPO is classified as a derivative liability on the accompanying financial statements. Accordingly the Company uses the Black Scholes option-pricing model for determining fair value of the UPO at the end of each period. The fair value of the UPO of $723,250 at June 30, 2006 of was estimated using the following assumptions: (1) quoted fair value of a Series A Unit of $8.75 and quoted fair value of a Series B Unit of $10.77, (2) expected volatility of 46.63%, (3) risk-free interest rate of 5.13% and (4) contractual remaining life of 3.79 years. The fair value of the UPO at December 31, 2005 of $547,250 was estimated using the following assumptions: (1) quoted fair value of a Series A Unit of $10.00 and quoted fair value of a Series B Unit of $10.90, (2) expected volatility of 34.99%, (3) risk-free interest rate of 4.35% and (4) contractual life of 4.29 years.

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NOTE 7 - DERIVATIVE LIABILITIES

The Company’s derivative liabilities are the following at December 31, 2005 and June 30, 2006:

	At December 31, 2005		At June 30, 2006 (Unaudited)
Fair value of 8,165,000 Class W Warrants and 8,165,000 Class Z Warrants issued as part of Series A and Series B Units sold in the Offering	$	5,960,450	$	5,225,600
Fair value of Underwriter Purchase Option		547,250		723,250
Total	$	6,507,700	$	5,948,850

During the three months ended June 30, 2006 and 2005 the Company recognized gains of $4,241,050 and $229,200, respectively on derivative liabilities as a result of declines in the fair values of the warrants and the UPO. During the six months ended June 30, 2006 and the period from inception (January 3, 2005) to June 30, 2005 the Company recognized gains of $558,850 and $229,200, respectively on derivative liabilities as a result of declines in the fair values of the warrants and the UPO.

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

The following discussion should be read in conjunction with our financial statements and footnotes thereto contained in this report.

Restatement of Financial Statements

We have restated our financial statements for the period from inception (January 3, 2005) to December 31, 2005 and for the interim period ended March 31, 2006 to reflect additional gains and losses related to the classification of and accounting for: (1) the warrants to purchase common stock associated with the Series A and Series B units sold in our initial public offering and (2) the option to purchase Series A units and/or Series B units issued to the underwriters in connection with our initial public offering. We had previously classified the value of these securities as equity. After further review, we have determined that these instruments should be classified as derivative liabilities and therefore, the fair value of each instrument must be recorded as a derivative liability on our balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in our statement of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.

The accompanying June 30, 2005 statements of operations for the three months ended June 30, 2005 and the period from inception (January 3, 2005) to June 30, 2005 have been restated to effect the changes described above. See Note 2 to our accompanying Condensed Financial Statements for an explanation of these restatements. The following table sets forth the effects of the restatement adjustments on the Company’s statements of operations:

	For the three months ended June 30, 2005
	As Previously Reported		As Restated
Gain from derivative liabilities		—		229,200
Interest income		315,272		315,272
Income before provision for income taxes		205,505		434,705
Provision for income taxes		67,000		67,000
Net income		138,505		367,705
Weighted average shares:
Basic and Diluted		9,925,485		9,925,485
Earnings per share:
Basic and Diluted	$	0.01	$	0.04
	For the period from inception (January 3, 2005 to June 30, 2005)
	As Previously Reported		As Restated
Gain from derivative liabilities		—		229,200
Interest income		315,576		315,576
Income before provision for income taxes		195,840		425,040
Provision for income taxes		67,000		67,000
Net income		128,840		358,040
Weighted average shares:
Basic and Diluted		5,045,966		5,045,966
Earnings per share:
Basic and Diluted	$	0.03	$	0.07

General

We were formed on January 3, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a currently unidentified operating business. On April 15, 2005, we completed our initial public offering (“IPO”) of 575,000 Series A Units (“Series A Units”) and 5,290,000 Series B Units

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(“Series B Units”), including 75,000 Series A Units and 690,000 Series B Units issued upon exercise of the underwriters’ over-allotment option. Each Series A Unit consists of two shares of common stock, $.0001 par value per share (“Common Stock”), five Class W warrants (“Class W Warrants”), each to purchase one share of Common Stock, and five Class Z warrants (“Class Z Warrants”), each to purchase one share of Common Stock. Each Series B Unit consists of two shares of Class B Common Stock, $.0001 par value per share, one Class W Warrant and one Class Z Warrant. Each Class W Warrant and Class Z Warrant entitles the holder to purchase one share of our common stock at a price of $5.00 per share. Our net proceeds from the initial public offering, including the exercise of the over allotment option, totaled $55,050,876 which was net of $4,415,624 in underwriting and other expenses.

Recent Events

On May 23, 2006, we entered into a stock purchase agreement with Global Internetworking, Inc. (“GII”) and its three shareholders to acquire all of the outstanding shares of common stock of GII. The agreement with GII specifies that the total purchase price for the shares will be cash of $14,000,000, $4,000,000 in 6% subordinated promissory notes issued by Mercator due on December 29, 2008, 1,300,000 shares of common stock and 1,450,000 of each of Class W Warrants and Class Z Warrants. Of these warrants, 966,666 warrants of each class will be escrowed subject to release upon certain conditions. Additionally, on May 24, 2006, we reached agreement with U.K. based European Telecommunications & Technology, Ltd. (“ETT”) for ETT to recommend to its shareholders to sell all of their outstanding ETT shares to Mercator for a total purchase price of $37,000,000. The GII and ETT acquisitions are referred to collectively as the “Transactions”.

After giving effect to the Transactions, Mercator’s current stockholders will own approximately 90% of our outstanding common stock. The proposed Transactions are subject to, among other things, the filing of definitive proxy materials with the Securities and Exchange Commission and approval of the Transactions by the Mercator’s Class B stockholders. We filed a Joint Proxy Statement/Form S-4 Registration Statement on June 21, 2006. There can be no assurance that the Transactions will be consummated.

Results of Operations

Three months ended June 30, 2006 and 2005

Net income for the three months ended June 30, 2006 of $4,602,244 consisted of interest income on the Trust Fund investment of $641,086, interest on cash and cash equivalents of $10,264 and gains on derivative liabilities of $4,241,050, offset by professional fees of $23,382 and other operating expenses of $80,774, consisting of $22,500 for a monthly administrative services agreement with an affiliate, $27,500 for officer liability insurance, $13,137 for Delaware franchise tax and $17,637 for other expenses, and $186,000 for income taxes.

Net income for the three months ended June 30, 2005 of $367,705 consisted of interest income on the Trust Fund investment of $306,995, interest on cash and cash equivalents of $8,277 and gains on derivative liabilities of $229,200, offset by professional fees $28,500 and other operating expenses of $81,267, consisting of $22,500 for a monthly administrative services agreement, $22,917 for officer liability insurance, $15,693 for Delaware franchise taxes and $20,157 for other expenses, and $67,000 for income taxes.

Six months ended June 30, 2006 and the period from January 3, 2005 (inception) to June 30, 2005

Net income for the six months ended June 30, 2006 of $1,097,710 consisted of interest income on the Trust Fund investment of $1,216,161, interest on cash and cash equivalents of $23,374 and gains on derivate liabilities of $558,850, offset by professional fees of $264,307 and other operating expenses of $157,368, consisting of $45,000 for a monthly administrative services agreement with an affiliate, $55,000 for officer liability insurance, $32,025 for Delaware franchise tax and $25,343 for other expenses, and $279,000 for income taxes.

Net income for the period from January 3, 2005 (inception) to June 30, 2005 of $358,040 consisted of interest income on the Trust Fund investment of $306,995, interest on cash and cash equivalents of $8,581 and gains on derivative liabilities of $229,200, offset by professional fees of $38,000 and other operating expenses of $81,736, consisting of $22,500 for a monthly administrative services agreement, for, $22,917 for officer liability insurance, $15,693 for Delaware franchise tax and $20,626 for other expenses, and $67,000 for income taxes.

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Derivatives

In accordance with accounting principles, we account for our Class W Warrants and Class Z Warrants issued in our initial public offering and the option issued to the underwriters in our initial public offering (“UPO”) as derivative liabilities. Accordingly, changes in the fair values of such instruments give rise to gains and losses on our statement of operations and impact the value of the derivative liability presented on our balance sheet. Such gains and losses are non-operating and do not have an impact on our cash flows from operations.

Fair values for traded warrants are based on quoted market prices. The Class W Warrants and Class Z Warrants sold in the initial public offering are publicly traded and consequently the fair values of these warrants are based on the market price of the applicable class of warrant at each period end. To the extent that the market prices of our warrants and units increase or decrease, our derivative liabilities will also increase or decrease with a corresponding impact on our statement of operations.

Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The pricing model we use for determining fair value of the UPO at the end of each period is the Black Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management’s judgment. We use a risk-free interest rate, which is the rate on U. S. Treasury instruments, for a security with a maturity that approximates the estimated remaining contractual life of the derivative. We use volatility rates based upon a sample of comparable special purpose acquisition corporations. If and when we consummate a business combination, the volatility rates will then be based on comparable companies to the acquired companies. The volatility factor used in Black Scholes model has a significant effect on the resulting valuation of the derivative liabilities on our balance sheet and gain (loss) on our statement of operations. The volatility for the calculation of the UPO was 46.63% as of June 30, 2006. This volatility rate will continue to change in the future. We use the closing market price of the Company’s Series A units and Series B units at the end of a period in the Black Scholes model for the valuation of the UPO. The Company’s Series A unit and Series B unit prices will also change in the future. To the extent that the Company’s Series A and Series B unit prices increase or decrease, our UPO derivative liability will also increase or decrease, absent any change in volatility rates and risk-free interest rates and will result in an effect on our balance sheet and gain (loss) on our statement of operations.

Liquidity and Capital Resources

We consummated our initial public offering on April 15, 2005. Gross proceeds from our initial public offering, including the full exercise of the underwriters’ over-allotment option, were $59,466,500. After deducting offering expenses of $4,415,624 including $517,100 representing the underwriters’ non-accountable expense allowance of 1% of the gross proceeds, and underwriting discounts of $3,567,990, net proceeds were $55,050,876. Of this amount, $53,429,000 was placed in a trust account and the remaining proceeds are available to be used to provide for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. We will use substantially all of the net proceeds of the offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust fund as well as any other net proceeds not expended will be used to finance the operations of the target business.

We believe we have sufficient available funds outside of the trust fund to meet the expenditures required for our operating activities through October 15, 2006, assuming that the business combination contemplated by the letters of intent with GII and ETT are not consummated before then. If the Transactions are not approved by our Class B stockholders by October 15, 2006 and accordingly the entire trust fund is required to be distributed to such Class B stockholders, we may not have sufficient funds available to satisfy all of our obligations.

Forward Looking Statements

The statements discussed in this report include forward looking statements that involve risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plans,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information.

We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The cautionary language in this quarterly report provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence or non-occurrence of events

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described in this quarterly report or detailed from time to time in our filings with the Securities and Exchange Commission, could have a material adverse effect on our business, operating results and financial condition, including our ability to successfully consummate a business combination.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. We do not believe we are exposed to significant market risk.

Item 4. Control and Procedures

Our management carried out an evaluation, with the participation of H. Brian Thompson, our principal executive officer, and David Ballarini, our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2006. Based upon that evaluation, Messrs. Thompson and Ballarini concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified un the rules and forms of the Securities and Exchange Commission.

There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the three months ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 6. Exhibits

Exhibits

Exhibit No.	Description
2.1	Stock Purchase Agreement dated May 23, 2006, among Mercator Partners Acquisition Corp., Global Internetworking, Inc. and the shareholders of Global Internetworking, Inc.
31.1	Rule 13a-14(a)/15d-14(a) Certification
31.2	Rule 13a-14(a)/15d-14(a) Certification
32.1	Section 1350 Certification
32.2	Section 1350 Certification

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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.

Date: August 21, 2006	MERCATOR PARTNERS ACQUISITION CORP.
	By:	/s/ H. Brian Thompson
		H. Brian Thompson Chairman and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ David Ballarini
		David Ballarini Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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