What changed in this filing

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Item 1. Financial Statements

2011-03-09 compared with 2011-01-13 · 396 added, 188 removed, 519 unchanged (53% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

Current assets:

1 unchanged sentence

Accounts receivable, net of allowance for doubtful accounts of $218,015

for September 30, 2010 and $431,381 for June 30, 2010

for December 31, 2010 and $431,381 for June 30, 2010

Prepaid expenses and other current assets

6 unchanged sentences

Deferred offering costs

Other intangible assets, net

Debt issuance costs, net

LIABILITIES & STOCKHOLDERS' (DEFICIT)

11 unchanged sentences

Convertible notes payable – related parties

Other payable

Total current liabilities

1 unchanged sentence

Lease obligations - long-term

Line of credit – long term

Total liabilities

4 unchanged sentences

$0.001 par value;

5,000,000 authorized, 608,780 issued and outstanding at September 30, 2010, 668,780 issued and outstanding at June 30, 2010

5,000,000 authorized, 606,780 issued and outstanding at December 31, 2010, 366,788 issued and outstanding at June 30, 2010

Common stock:

$0.01 par value;

100,000,000 authorized, 316,900,384 issued and outstanding at September 30, 2010, 129,824,422 issued and outstanding at June 30, 2010

900,000,000 authorized, 41,147,225 issued and outstanding at December 31, 2010, 6,491,221 issued and outstanding at June 30, 2010

Common stock issuable

Additional paid-in capital

Deferred offering costs paid in common stock

Accumulated deficit

Total stockholders' (deficit)

Total liabilities and stockholders’ equity

Total liabilities and stockholders’ (deficit)

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

September 30,

Three Months Ended

Six Months Ended

Cost of revenues

2 unchanged sentences

Bad debt expense

Research & Development Expenses

Salaries and payroll related expense

Management fee payable to Flint Telecom, Ltd.

Management fee to Flint Telecom, Ltd.

Stock compensation and option expense:

1 unchanged sentence

Depreciation and amortization expense

Total operating expenses

Total general and administrative

Operating loss

1 unchanged sentence

Interest expense

Net loss from continuing operations

Income from discontinued operations

Net income (loss) per common share:

Continuing operations

Discontinued operations

Loss on disposal of fixed asset

Foreign Exchange

Impairment of goodwill

Debt issuance costs

Discontinued operations, net of tax

Preferred stock beneficial conversion feature

Accrued dividends and penalties

Net loss attributable to common stockholders

Net loss per share (basic & diluted)

Weighted average shares outstanding:

Basic & diluted

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended

September 30,

Six Months Ended

Cash Flows from Operating Activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Other non-cash transactions:

Impairment of goodwill and other intangible assets

Stock and option compensation expense

Loss on fixed assets

Accretion of debt discount

3 unchanged sentences

Prepaid expense

Deferred offering costs

Deferred offering costs & debt issuance costs

Accounts payable

1 unchanged sentence

Accrued liabilities

Net due from Flint Telecom, Ltd.

Net due to (from) Flint Telecom, Ltd.

Due from related parties

4 unchanged sentences

Investment in notes receivable

Net cash used in investing activities

Cash from acquisition

Net cash provided by (used in) investing activities

Cash Flows From Financing Activities:

1 unchanged sentence

Proceeds from related parties debt

Proceeds from debt

Proceeds from new debt

Payments on debt

Payments on line of credit

Payments on related party debt

Payments on lease obligations

Redemption of preferred stock

2 unchanged sentences

Exchange (gain) loss on convertible notes

Net cash provided by foreign currency activities

Net cash provided by (used in) foreign currency activities

Net increase (decrease) in cash and cash equivalents

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six Months Ended

SUPPLEMENTAL CASH FLOW DISCLOSURE:

2 unchanged sentences

SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:

Conversion of notes payable and accrued interest (Note 11)

Conversion of notes payable and accrued interest

Discounts – warrants

1 unchanged sentence

Capitalization of accrued interest to a note payable

Reduction of Due to Flint Limited through assumption of notes payable

Conversion of series D preferred shares into common stock

Payment on lease obligations

Due from related party satisfied with redeemable preferred stock

Common stock issued upon conversion of notes payable and accrued interest

Common stock issued for deferred offering costs

Preferred shares issued for acquisitions:

Other intangible assets

Accounts payable

Accrued interest

Other payable

Line of credit

Preferred stock beneficial conversion feature

Accrued dividends and penalties

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

STATEMENT OF STOCKHOLDERS’ (DEFICIT)

Common Stock Issuable

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) AND OTHER COMPREHENSIVE LOSS

Preferred Shares

Paid-In Capital

(Series D, E, F & G)

(Series D, F, G & H)

Common Stock Issuable

Additional Paid in Capital

Accumulated Deficit

Balances at June 30, 2010

Conversion of notes payable into equity

Conversion of notes payable

Beneficial conversion feature on convertible notes payable

Shares issued to consultants for services

Shares issued to officer, directors, employees for vested stock compensation

Stock payable issued

Stock compensation expense

Shares issued to officers, directors and employees for vested stock compensation

Conversion of preferred stock into common shares

Conversion of preferred stock shares into common shares

Accrual of redeemable equity securities, dividends and penalties

Net loss for the quarter ended September 30, 2010

Net loss for the quarter

Balances at September 30, 2010

See accompanying notes to consolidated financial statements.

Conversion of notes payable

Beneficial conversion feature on convertible notes payable

Shares issued to consultants for services

Shares issued for deferred offering costs

Shares issued to officer, directors, employees for vested stock compensation

Stock payable issued

Stock compensation expense

Issuance of preferred stock

Beneficial conversion feature on preferred shares

Accrual of redeemable equity securities, dividends and penalties

Issue of warrents to holder of note payable

Deferred Offering Costs paid in Stock

Net loss for the quarter

Balances at December 31, 2010

See accompanying notes to condensed consolidated financial statements.

FLINT TELECOM GROUP, INC.

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The Company intends to expand into the U.K., Africa, Sri Lanka, Bangladesh and the Pacific Rim markets in the near future.

As of December 31, 2010, this company has not yet generated any revenue.

Gotham Ingedigit Financial Processing Corp.

dba Power2Process is a U.S.

dba Power2Process (“P2P”) is a U.S.

based advanced financial transaction processing and technology company, working with banking clients and other program sponsors globally.

1 unchanged sentence

Both MasterCard and fully PCI Certified, as well as being SAS-70 compliant, P2P is in the unique position of having complete control of all its services from applications development and processing to marketing and support for a full array of back office processing, including ATM and POS network integration and management.

As part of our ongoing emphasis on streamlining our operations and reaching sustainable profitability, during the fiscal year ended June 30, 2010 we shut down and disposed of four of our other wholly owned subsidiaries which were originally acquired in January of 2009:

As of December 31, 2010, this company has not yet generated any revenue.

As part of our emphasis on streamlining our operations and reaching sustainable profitability, during the fiscal year ended June 30, 2010 we shut down and disposed of four of our other wholly owned subsidiaries, which were originally acquired in January of 2009:

CVC Int’l, Phone House Inc.

3 unchanged sentences

These segments are (1) the sale of third-party telecoms and networking equipment and software services (collectively referred to as equipment as “telecom software, services & equipment”), (2) the sale of Company produced and third-party prepaid calling products (collectively referred to as “prepaid telecom services”) (3) the delivery of wholesale and VoIP telecom services to other operators and direct to end users (collectively referred to as “telecom services”).

Following the acquisition of III and P2P in October 2010, the Company’s management elected to report these units under a new segment for the sale of financial processing services, debit card programs and mobile payment & remittance services (collectively referred to as “financial processing services”).

These have been included for the current reporting period and for each period thereafter.

Selling, general and administrative expenses, primarily consisting of compensation of corporate employees, professional fees and overhead costs not directly related to a specific operating segment are reflected in the table below as “corporate activities.” See Note 18, Segment Information, for more details

1 unchanged sentence

The accompanying condensed consolidated financial statements have been prepared by us, without audit and in accordance with the instructions to Form 10-Q and Regulation S-K.

On January 14, 2011 a 1:20 reverse stock split went effective and we have retroactively adjusted all our common share amounts and per share stock prices accordingly.

In the opinion of our management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Operating results for the six months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.

information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

We believe that the disclosures provided are adequate to make the information presented not misleading.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our SEC Form 10K filed on October 20, 2010.

Certain reclassifications have been made to the prior year in order to conform to the current year.

Going Concern

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of our business.

As reflected in the accompanying financial statements, Flint had a net loss of $2,089,583 and $28,865,778 for the three months ended September 30, 2010 and for the year ended June 30, 2010, respectively, negative cash flow from operating activities of $226,159 for the three months ended September 30, 2010, an accumulated stockholder’s deficit of $ 12,675,119 and a working capital deficit of $12,915,595 as of September 30, 2010.

Also, as of September 30, 2010, we had limited liquid and capital resources.

As reflected in the accompanying financial statements, Flint had a net loss of $4,311,246 and $28,865,778 for the six months ended December 31, 2010 and for the year ended June 30, 2010, respectively, negative cash flow from operating activities of $589,215 for the six months ended December 31, 2010, an accumulated stockholder’s deficit of $12,428,606 and a working capital deficit of $14,741,401 as of December 31, 2010.

Also, as of December 31, 2010, we had limited liquid and capital resources.

We are currently largely dependent upon obtaining sufficient short and long term financing in order to continue running our operations.

As of the date of this filing we are currently in default on a number of notes payable and other debt repayment plans.

As a result, all outstanding principal and accrued interest, if any, outstanding and owed as of the date of default shall be immediately due and payable, which include, but are not limited to, the following (these amounts reflect principal amounts only):

Thermocredit ($2,000,000), CHVC ($1,520,242), Tom Davis ($800,000), and Bill Burbank ($190,000) (See Related Parties Note 8, Notes Payable Note 11, and Subsequent Events Note 19 for more details).

We have also not made any dividend payments on our Series E preferred stock as these payments have become due (See Stockholders Equity Note 13).

As of the date of the filing of this report, we have a total of approximately $2.8 million of loan principal that is past due from a total principal balance of approximately $6.7 million, representing 11 individual parties.

Under the terms of the loan agreements the $6.7 million principal is payable.

In addition, approximately $2.1 million of accumulated interest, preferred share dividends and related penalties is past due on these loans.

We are in active discussions with these parties about the outstanding debt and rescheduling payments in the future based on the business progress during 2010 and the ability of the Company to meet the new arrangements from the Kodiak funding.

They are waiting to finalize these terms once the Registration Statement is deemed effective and a structured funding environment is in place.

Of the 11 parties, four have initiated legal proceedings, the remainder, including our secured lender, have not initiated legal proceedings.

Of the four that have taken legal steps, we believe, based on discussions with them, that suitable payment terms will be agreed upon over the duration of the Kodiak funding.

In addition to these loans, we have approximately $1.2 million of trade payables that are past due.

Two parties have received summary judgments, as reported in our Form 10-K for the year ended June 30, 2010 and in this quarterly report, and we have been served with a pending action from another.

Despite receiving these judgments, we have agreed to terms to pay down one of the larger amounts over two years.

Management is confident the Company will be successful in satisfying these obligations prior to foreclosure or bankruptcy.

However, there is no assurance that any additional capital will be raised.

The foregoing factors raise substantial doubt about our ability to continue as a going concern.

1 unchanged sentence

The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We recently announced significant reductions in our operating costs and are in ongoing discussions with our creditors to restructure our balance sheet and future debt payments.

Management expects that the successful outcome of these discussions will allow us to become EBITDA positive as soon as possible.

We have secured a $10 million Reserve Equity Financing agreement with AGS Capital Group, LLC that we can draw against when a planned S1 Registration Statement becomes effective with the SEC (See Note 19 for more details) and other indicative funding commitments from investors for additional capital following the planned restructure that management believes is sufficient to fund our operating cash flow needs, before debt repayments, for the next twelve months.

In June of 2010 we announced significant reductions in our operating costs and are in ongoing discussions with our creditors to restructure our balance sheet and future debt payments.

In November of 2010 we secured an Equity Line of Credit Agreement with Kodiak Capital.

This agreement allows us to place up to $15 million worth of our common stock to Kodiak over two years, subject to certain conditions, which will become available to us when a registration statement on Form S-1 is deemed effective by the SEC.

(See Note 19 for more details).

Recent Accounting Pronouncements

On December 21, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-29, which impacts any public entity that enters into business combinations that are material on an individual or aggregate basis.

The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenues and earnings of the combined entity as though the business combination(s) that occurred during the year had occurred at the beginning of the prior annual period when preparing the pro forma financial information for both the current and prior reporting periods.

The guidance also requires that pro forma disclosures be accompanied by a narrative description regarding the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenues and earnings.

This guidance is effective for business combinations consummated in periods beginning after December 15, 2010.

We are currently evaluating the impact of this ASU.

In January 2010, the FASB issued ASU No.

32 unchanged sentences

The guidance is effective for fiscal years beginning after November 15, 2009.

We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial statements.

We are currently evaluating the potential

impact, if any, of the adoption of this guidance on our consolidated financial statements.

Management does not believe that there are any recently-issued, but not yet effective, accounting standards that could have a material effect on the accompanying financial statements.

Acquisition of Ingedigit International, Inc.

and Gotham Ingedigit Financial Processing Corp.

On October 25, 2010, Flint Telecom Group, Inc.

(“Flint”) acquired all of the stock of Ingedigit International, Inc.

(“III”) and Gotham Ingedigit Financial Processing Corp dba Power2Process (“P2P”), both Florida corporations, through a merger of each of those companies into two wholly-owned subsidiaries of Flint, in exchange for a maximum potential total of 600,000 shares of Flint’s Series H Convertible Preferred Stock (the “Merger Stock”), pursuant to an Agreement and Plan of Merger dated October 5, 2010 (the “Merger Agreement”).

300,000 shares of the Merger Stock were issued on the Closing Date.

The remaining 300,000 shares of the Merger Stock may be issued, in two tranches of 150,000 each, during the 12 and 24 months following the Closing Date if either or both of the Targets meet or exceed the revenue and/or other operating targets as mutually agreed upon by Flint and the Targets as of the closing date.

The Series H Convertible Preferred Stock has a $10.00 per share liquidation value, a $0.001 par value, one vote for each preferred share issued, and is convertible on or after a period of twelve months from the closing date into common stock at a 25% discount to the Market Price.

Market Price is defined as the average closing price per share over the twenty trading days prior to the date of conversion.

Provided, however, that the conversion price shall never be lower than ten percent of the Market Price on the closing date.

However, the Power2Process and Ingedigit shareholders as a group cannot hold more than 4.99% of Flint’s total issued and outstanding common stock at any one time.

We valued the 300,000 issued preferred shares at $3,000,000.

Additionally, we valued the beneficial conversion feature related to the discount at $1,000,000, of which we accreted $183,562 during the six months ended December 31, 2010.

Our preliminary allocation of the consideration to the assets and liabilities are as follows:

Other intangible assets

Accounts payable

Accrued interest

Other payable

Line of credit

The allocation of the consideration to the assets and liabilities as listed above is preliminary, as we have not completed an audit of III and P2P.

The amount of contingent consideration that was recognized at the acquisition date, October 25, 2010, was $3,000,000 for the contingent future payments through the issuance of additional Series H Convertible Preferred Stock.

The amounts of revenues and earnings included in the statement of operations from October 25, 2010 through December 31, 2010 was $0.00 and $(597,312), respectively.

Separate from the Merger Agreement, as a hiring and retention incentive and in lieu of issuing stock options under the Company’s stock option plan, during the three months ended December 31, 2010 we issued a total of 390,000 shares of restricted common stock, vesting over a period of three years with one third vesting at the first annual anniversary of employment with the company and quarterly thereafter, to the officers and employees at III and P2P.

These shares of restricted common stock were valued at $0.118 per share.

We recorded approximately $3,835 in expense in the three and six months ended December 31, 2010, related to the shares of restricted common stock granted to these officers and employees.

The following are condensed pro forma financial information as though the acquisition of III and P2P had occurred as of July 1, 2009.

In association with the acquisition of III and P2P, we recorded the purchase price in excess of the net assets acquired as of the acquisition date as intangible assets.

Flint Telecom Group, Inc.

Condensed Pro Forma Statement of Operations

Three Months Ended

Six Months Ended

December 31, 2010

Net income (loss)

Net income (loss) per common share

Weighted average shares outstanding

Accounts Receivable and Concentration of Credit Risk

3 customer(s) accounted for 59% of our revenue for the three months ended September 30, 2010.

3 customer(s) accounted for 61% of the accounts receivable at September 30, 2010, the largest of which accounted for 24% of the receivables.

One customer accounted for 65% of our revenue for the three months ended September 30, 2009.

Two customers accounted for 38% of the accounts receivable at September 30, 2009, the largest of which accounted for 28% of the receivables.

Four customer(s) accounted for 64% of our revenue for the three months ended December 31, 2010.

Four customer(s) accounted for 63% of our revenue for the six months ended December 31, 2010.

Four customer(s) accounted for 72% of the accounts receivable at December 31, 2010, the largest of which accounted for 27% of the receivables.

The allowance for doubtful accounts at June 30, 2010 was $431,381.

During the period ended December 31, 2010, the Company elected to write off $289,484 in accounts receivable that were deemed no longer collectable.

These amounts had been fully provided for in the allowance for doubtful accounts at June 30, 2010.

As the accounts receivable balance over 90 days was reduced by the amounts written off, the allowance for doubtful accounts required at as at December 31, 2010 was $218,015.

Two customers accounted for 39% and 27% of the Company’s revenue for the three months ended December 31, 2009.

Two customer(s) accounted for 52% of our revenue for the six months ended December 31, 2009.

Three customers accounted for 44% of the accounts receivable at December 31, 2009, the largest of which accounted for 15% of the receivables.

On October 25, 2010 we acquired all of the stock of two companies, III and P2P.

See Note 5 above for more details.

As a result, we recorded an additional $4,568,133 amount in fixed assets as of December 31, 2010, being depreciated over 5 years.

In May of 2010 we entered into a settlement agreement with Telmage Consulting LLC (“TelSpace”) in which TelSpace has furnished to us a perpetual software license as consideration for the repayment of the $250,000 promissory note due to us from TelSpace.

As a result, we recorded an additional $250,000 amount in fixed assets as of June 30, 2010, being amortized over five years.

As a result, we recorded an additional $250,000 amount in fixed assets as of June 30, 2010, being depreciated over five years.

Intangible Assets and Impairment

Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired.

Intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually in our fourth fiscal quarter, or when events indicate that impairment exists.

We have a capitalized intangible asset with a definite life, which are customer contracts.

In recognition of the right to receive future cash flows related to transactions of the asset, we will amortize this value over five years, as it is anticipated that the customer contracts would continue to evolve with our needs and have at least 5 year minimum terms.

We periodically review intangibles for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amount of the impairment loss, if any.

If an asset is deemed impaired, the impairment loss is recognized in current earnings.

Intangible Asset

Customer Contracts

Capital Leases

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Flint Telecom Ltd, which is controlled by Mr.

Browne, Flint’s CEO, has an amount due to it of $146,335 and $156,042 at September 30, 2010 and June 30, 2010, respectively.

This includes charges for management fees earned by Flint Telecom, Ltd., which during the three months ended September 30, 2010 and 2009 were $50,000 and $130,000, respectively.

The management fees are for the executive, operating and financial services provided by Flint Telecom, Ltd.

Browne, Flint’s CEO, has an amount due to it of $163,160 and $156,042 at December 31, 2010 and June 30, 2010, respectively.

This includes charges for management fees earned by Flint Telecom, Ltd., which during the six months ended December 31, 2010 and 2009 were $100,000 and $250,000, respectively.

The management fees are for operating and financial services provided by Flint Telecom, Ltd.

Flint Telecom, Ltd.

also has a direct equity investment in us.

Executive Officer Loans

On November 8, 2010 and November 19, 2010, Vincent Browne, our Chief Executive Officer, invested $48,000 and $24,000, respectively and was issued promissory notes for those principal amounts, accruing no interest and having a maturity date of one year from the date of issuance.

Michael Butler Debt Restructure

28 unchanged sentences

These SEL notes also contain a most favored nations clause as it relates to the conversion price.

As of June 30, 2010, the conversion price is $0.00055 per share, resulting in the maximum potential total of 178,181,818 shares to be issued upon full conversion of both SEL notes.

As of December 31, 2010, the conversion price is $0.011 per share, resulting in the maximum potential total of 8,909,090 shares to be issued upon full conversion of both SEL notes.

However, in accordance with the terms of the agreements related to these notes, each note holder cannot beneficially own greater than 4.99% of our total issued and outstanding common stock at any given point in time without shareholder approval.

SEL is a related party due to the fact that SEL is controlled by Mr.

SEL is recorded in the accounts as a related party due to the fact that SEL is controlled by Mr.

Butler, who was one of our board members in March of 2010.

For the year ended June 30, 2010 we recognized $98,000 in interest expense for beneficial conversion features on these notes.

Employment Agreements :

1 unchanged sentence

Browne receives a salary in the amount of $180,000 per year, which shall immediately increase to $240,000 when the Company achieves sustainable profitability for one quarter, and 125,000 shares of restricted common stock, vesting over a period of four years, such that one-fourth of the shares shall vest at the first annual anniversary of the Effective Date, and quarterly thereafter so that 100% of the shares shall be fully vested at his four year anniversary.

Browne’s emplo yment is terminated by the Company without cause or by Mr.

Browne’s employment is terminated by the Company without cause or by Mr.

Browne for good reason as provided in the Agreement, or if the Company is acquired or dissolves and a new employment agreement satisfactory to Mr.

9 unchanged sentences

Fried will receive a salary in the amount of $186,000 per year, and (iv) Mr.

Fried was issued 6,000,000 shares of restricted common stock vesting over a period of four years, such that ј of the shares shall vest at the first annual anniversary of the Effective Date, and quarterly thereafter so that 100% of the shares shall be fully vested at his four year anniversary with Flint.

The Company may ter minate this agreement without cause at any time by giving Mr.

Fried was issued 300,000 shares of restricted common stock vesting over a period of four years, such that one-fourth of the shares shall vest at the first annual anniversary of the Effective Date, and quarterly thereafter so that 100% of the shares shall be fully vested at his four year anniversary with Flint.

The Company may terminate this agreement without cause at any time by giving Mr.

Fried 60 days prior written notice, and the Company shall have no further liability other than for the payment of any unpaid salary through the termination date and reimbursement of reasonable business expenses incurred prior to the termination date.

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Keaveney to convert a portion of this note, $20,000, into 100,000 shares at $0.20 per share.

As of September 30, 2010, there is a total outstanding principal balance and accrued interest due on the note of $75,000.

See Note 19, Subsequent Events for more information on this note.

During the three months ended December 31, 2010, Mr.

Keaveney sold the remaining principal balance and accrued interest due on the note to a third party, who converted the assigned note into a total of 1,729,336 shares of common stock.

As of December 31, 2010, there is no outstanding principal balance or remaining accrued interest due on the note.

Accounts Payable

Accounts payable at September 30, 2010 were $3,927,178.

4 vendors accounted for 40% of the payables at September 30, 2010, the largest of which accounted for 13% of the payables.

Accounts payable at December 31, 2010 were $4,706,432.

Three vendors accounted for 33% of the payables at December 31, 2010, the largest of which accounted for 17% of the payables.

Accounts payable at June 30, 2010 were $3,641,554.

3 vendors accounted for 30% of the payables at June 30, 2010, at 13%, 11% and 6% each.

Three vendors accounted for 30% of the payables at June 30, 2010, at 13%, 11% and 6% each.

Although we believe that we have adequate alternative vendors to purchase services and products, there can be no assurance of comparability, which could have a detrimental effect on the business.

6 unchanged sentences

The indebtedness is secured by a pledge and grant to Thermo of a security interest in all of our property or assets, real or personal, tangible or intangible, now existing or hereafter acquired.

As of September 30, 2010, we owed $2,000,000 under the Thermo line of credit.

As of December 31, 2010, we owed $2,000,000 in principal and $421,000 in outstanding interest and penalties under the Thermo line of credit.

Effective as of June 8, 2010, Flint executed an amendment to the $2,000,000 promissory note issued to Thermo, whereby Thermo has agreed to a forbearance of principal payments, with the first principal payment of $100,000 due on or before August 31, 2010, and an extension of the Maturity Date to March 31, 2012.

1 unchanged sentence

Additionally, two one-time commitment fees of $20,000 each shall be paid on August 31, 2010, and an additional waiver/forbearance fee of $20,000 shall be paid on or before the one year anniversary of the execution of the Amendment, or June 8, 2011.

As of the date of the filing of this quarterly report, the first principal payment, which was due on or before August 31, 2010, has not been made and we are therefore in default and the total balance has therefore been classified as a current liability.

Upon default, the entire unpaid balance of principal, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Thermo at such time, which as of September 30, 2010 was $2,254,828 shall, at the option of Thermo, become immediately due and payable without further notice.

As of December 31, 2010, the first principal payment, which was due on or before August 31, 2010, had not been made and we are therefore in default and the total balance has therefore been classified as a current liability.

Upon default, the entire unpaid balance of principal, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Thermo at such time, which as of December 31, 2010 was $2,421,000 shall, at the option of Thermo, become immediately due and payable without further notice.

In addition, Thermo shall be entitled to foreclose upon its security interests granted under the Agreement and to cause the Collateral to be immediately seized wherever found and sold with or without appraisal.

Collateral consists of any and all of our subsidiaries’ property or assets, real or personal, tangible or intangible, now existing or hereafter acquired, and all supporting obligations, products and proceeds of all of the foregoing.

One of our subsidiaries, Phone House, Inc., has a line of credit with Wells Fargo bank in the amount of $ 35,312 and $38,102 as of September 30, 2010 and June 30, 2010, respectively.

Despite the default status, Thermo remains supportive of the company and have not initiated any legal process to foreclose on the outstanding amount.

Management are confident that a new payment schedule will be agreed with Thermo when our Form S1 registration is deemed effective by the SEC, allowing us to commence drawing against the equity funding line with Kodiak capital.

In February of 2011, $50,000 of the principal of the Thermo note was sold and assigned to a third party (See Note 21, Subsequent Events for more details.)

One of our subsidiaries, Phone House, Inc., has a line of credit with Wells Fargo bank in the amount of $ 33,825 and $38,102 as of December 31, 2010 and June 30, 2010, respectively.

Another one of our subsidiaries, Ingedigit International Inc.

has a line of credit with the Florida Export Finance Corporation (“FEFC”) in the amount of $1,072,916, with monthly payments to commence July 15, 2011 in the principal amount of $65,000.00 plus 6% per annum interest on the then outstanding balance.

Promissory Notes and Convertible Promissory Notes

3 Months Ended September 30, 2010

During the three months ended September 30, 2010, we issued $150,000 of total principal in the form of convertible promissory notes.

3 & 6 Months Ended December 31, 2010

During the three and six months ended December 31, 2010, we issued $122,000 of total principal in the form of promissory notes, and $324,000 and $474,000, respectively, of total principal in the form of convertible promissory notes.

Substantially all of the proceeds have been used for the continued operation of our business, including capital expenditures and working capital.

During the three months ended September 30, 2010 we also restructured $74,850 principal amount of promissory notes into convertible promissory notes, which were assigned to third parties and subsequently partially converted into shares of common stock.

As of September 30, 2010, we had (taking into consideration the calculation of debt discounts) $4,055,927 of total principal owed under promissory notes and $1,785,563 of total principal owed under convertible promissory notes.

During the three and six months ended December 31, 2010 we also restructured $260,000 and $334,850, respectively, principal amount of promissory notes into convertible promissory notes, which were assigned to third parties and subsequently partially converted into shares of common stock.

As of December 31, 2010, we had (taking into consideration the calculation of debt discounts) $4,007,321 of total principal owed under promissory notes and $1,981,918 of total principal owed under convertible promissory notes.

New Convertible Promissory Notes

In August of 2010 a $35,000 note was issued accruing interest at 18% per annum and convertible into shares of common stock at 50% of the Market Price at the date of conversion, and containing a most favored nations clause relating to this variable conversion price.

As of the date of the filing of this quarterly report, the lowest conversion price is $0.0006 per share, resulting in a potential total issuance of 58,333,333 shares of common stock.

However, in accordance with the terms of this note, the note holder cannot beneficially own greater than 4.99% of our total issued and outstanding common stock at any given point in time.