UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the fiscal year ended December 31, 2013

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

000-30061

(Commission file No.)

ELEPHANT TALK COMMUNICATIONS CORP.

(Exact name of registrant as specified in its charter)

Cross Rock Place Executive Suites No. 102

3600 NW 138 ^th St., 

Oklahoma City, OK 73134

USA

(Address of principal executive offices)(Zip Code)

+ 1 (405) 301-6774

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ¨   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ¨   No  x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $59 million based on the closing sale price of the Company’s common stock on such date of U.S. $0.59 per share, as reported by the NYSE MKT LLC.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 28, 2014, there were 141,201,742 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Proxy Statement for the 2014 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III of this Form 10-K/A.

EXPLANATORY NOTE

Elephant Talk Communications Corp. (unless the context otherwise requires, includes its direct and indirect subsidiaries and is referred to as “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 (the “Amendment No. 1”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 which was originally filed on March 31, 2014 (the “Original Filing”), to amend and restate parts of Part I (Risk factors), Part II (Item 5, Item 7 and Item 8), and incorporates in its entirety Part III (Items 10, 11, 12 and 13).

Except as expressly stated in this Amendment No.1, this Amendment No. 1 continues to speak as of the date of the Original Filing, and we have not updated the disclosure contained in the Amendment No. 1 to reflect events that have occurred since the filing of the Original Filing.  Accordingly, this Amendment No. 1 must be read in conjunction with our other filings, if any, made with the Securities and Exchange Commission (“SEC”) subsequent to the filing of the Original Filing, including amendments to those filings, if any.

Elephant Talk Communications Corp.

Form 10-K/A

For the fiscal year ended December 31, 2013

TABLE OF CONTENTS

Note on Forward-Looking Statements

Explanatory  Note

FORWARD LOOKING STATEMENTS

This Report, including the documents incorporated by reference in this Report, includes forward-looking statements.  We have based these forward-looking statements on our current expectations and projections about future events.   Our actual results may differ materially from those discussed herein, or implied by, these forward-looking statements.  Forward-looking statements are generally identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “should,” “will,” “would” and other similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other “forward-looking” information. Elephant Talk Communications Corp., believes that it is important to communicate our future expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or control. Forward-looking statements included in this Report or our other filings with the SEC include, but are not necessarily limited to, those relating to:

The foregoing does not represent an exhaustive list of risks. Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking statements included in this Report are based on information available to us on the date of this Report. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report.

AVAILABLE INFORMATION

We maintain a corporate website with the address www.elephanttalk.com. We intend to use our website as a regular means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD promulgated by the Securities and Exchange Commission (the “SEC”). Such disclosures will be included on the website under the heading “News” and “Investors – Press Releases”. Accordingly, investors should monitor such portions of the website, in addition to following the Company’s press releases, SEC filings and public conference calls and the webcasts.

We are not incorporating information contained in the website by reference into this Annual Report on Form 10-K. We make available, free of charge, through the website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after electronically filing such material with, or furnishing such material to, the SEC.

Materials filed with the SEC can be read and copies made at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1 800 SEC 0330 for further information about the Public Reference Room. The SEC also maintains a website, www.sec.gov containing the reports, proxy and other information filed with the SEC.

PART I

Item 1.  Business

Business overview

As a mobile Software Defined Network Architecture (Software DNA™) vendor Elephant Talk Communications Corp. and its subsidiaries (also referred to as “Elephant Talk”, “ET” and “the Company”) provide a one stop solution for a full suite of mobile, fixed and convergent telecommunications software services. We also provide layered security services for mission critical applications in the cloud, through our wholly owned subsidiary, ValidSoft UK Limited (“ValidSoft”).

Over the last decade, Elephant Talk has developed a comprehensive Mobile Enabling Platform, capable of hosting an integrated IT/BackOffice and Core Network for Mobile Network Operators (MNO’s) and Mobile Virtual Network Operators (MVNO’s), Enablers (MVNE’s) and Aggregators (MVNA’s) on a fully outsourced basis. Our mobile enabling platform is either made available as an on premise solution or as a fully hosted service in ‘the cloud’, depending on the individual needs of our MNO and MVNO/MVNE/MVNA partners. Our mobile security services supply telecommunications-based multi-factor mutual authentication, identity and transaction verification solutions for all electronic transaction channels. This integrated suite of security services provides mission critical applications in the cloud to customers in industries such as financial services, government benefits, and insurance, as well as electronic medical record providers and MNOs. Our company provides customers the means to effectively combat a variety of electronic fraud while at the same time protecting consumer privacy.

Overall business strategy

The core of our business strategy is developing, or acquiring and maintaining, preferably ring-fenced and company-owned software technologies in the field of communication management, cloud based applications and security concepts, positioning ourselves to be the preferred global outsourcing partner for these types of managed services. We focus on managing and securing the (mobile) cloud for any relevant mission critical application, and more specifically in the following areas, whereby each area may be addressed by a separately managed, majority owned operating entity, coordinated through our listed holding company:

Execution and operational focus of ET business strategy

Management’s attention is fully dedicated to the scalability of our platform, excellence in our operations, and the build-out of our sales, marketing and service and support organization. Our geographical strategic focus is currently aimed primarily at Europe, the Middle East & Africa, and the Americas, usually with the support of local partners in each of those regions. Next to platforms servicing the Netherlands and Belgium, we intend to build out our existing MVNO outsourcing platforms in Spain and Saudi Arabia and the in early 2013 contracted MNO outsourcing platform in Mexico. The Mexican MNO platform will have an initial capacity to host 10 million subscribers and over time will have the dimensions to grow to a 20 million subscriber platform.

Electronic fraud within financial services amounts to a cost of more than $250 billion ¹ in the US alone, and as such, our security services for mission critical applications in the cloud are of major interest to banks, credit card companies and the public sector. The growing importance and awareness of customer’s privacy and data protection is putting additional pressures on those industries to look for fully compliant solutions. In response to these challenges, ValidSoft is regarded as one of the few providers offering security applications of the highest standards in a highly competitive environment. ValidSoft has not only been rewarded with three European Privacy Seals by the European Privacy Seal System (“EuroPrise”) but has also been selected by major financial institutions to provide its mission critical applications.

Global developments in telecommunications industries

A number of relevant factors in the converging global telecommunications industries, along with the increasing adoption by consumers and businesses of mobile and wireless based applications, drive our investments and services. We believe the mobile phone and tablet will become the channel of choice for consumers and will ultimately be the (handheld) device chosen by consumers and businesses to best bring personalized, contextual and time-wise relevant services such as:

¹ Sources: McAfee Inc and /Symantic Corp. 2012

MNO telecommunications markets

On a global scale there are currently more than 800 MNOs worldwide. Over the next couple of years we expect that as many new entrants will start offering mobile broadband services to their customers. As Elephant Talk’s Software Defined Architecture Network (“Software DNA™”) Platform is currently able to service up to 20 million customers, we are positioned to service almost all of the existing MNO’s, except the 20 to 30 largest mobile operations. Over time, with the capacity of the Software DNA™ platform being expanded and its functionality extended, we should be able to cover the requirements of the whole markets. As these MNO’s face issues regarding their legacy systems in a rapidly and deeply changing market, these MNOs will need to look for alternatives, typically in the form of an integrated solution like the one Elephant Talk has spent years building and offers. Currently, we service five MNOs in five different countries.

Due to the fast growing demand for data services and increasing competitive and regulatory pressure, along with an increasing cost base, and slipping Average Revenue Per User (“ARPU”) and margins.

MNO’s are faced with the challenge of rationalizing their cost base, and can do so by streamlining the way they conduct business within three main areas of operation:

MNO’s will soon have to manage new upgrades in technology involving 10B handset and mobile broadband connections, next to the anticipated 50+B so called Internet of Things (Machine2Machine or M2M), providing a substantial addressable market for Elephant Talk. (Multiple sources: e.g. Gartner, Ovum and several MNOs).

MVNO telecommunications markets

By Informa²

Western Europe and North America, both expected to grow in terms of MVNO subscription numbers, are not expected to see a radical shift in terms of market structure. We expect that the global MVNO market will reach 270 million subscriptions by the end of 2018 with North America and Western Europe still accounting for the vast majority. These two regions will remain the largest MVNO markets in terms of the number of subscriptions and players and will also continue to top the ranks in terms of MVNO penetration.

By Ovum³

Ovum forecasts that MVNO connections will grow from 98.6 million in 2012 to 408,2 million in 2018 and will then account for 5% of all global mobile connections. Revenues are expected to be $ 42,3 billion in 2018. Over the next five years, new MVNO markets are expected to open up in South and Central America, Asia-Pacific, and in the Middle East. However, there are still regulatory and market challenges to overcome before these markets can offer an environment that can sustain MVNO activity. Ovum expects the bulk of MVNO connections and revenue growth from 2013–17 will come from established MVNO markets in Western Europe, Asia-Pacific, and North America.

Established MVNO markets

In Western Europe, the fastest-growing MVNO markets are Germany, France, Italy, Spain, and the Netherlands. Germany and the Netherlands have been the largest MVNO markets (in terms of the number of MVNO’s) for many years, and this is not expected to change over the foreseeable future, especially as both markets are regarded as good testing grounds for MVNO’s looking to trial new business models. Due to aggressive pricing from MNO’s to avoid losing market share, there is substantial pressure on these MVNO markets. In due course only larger, established MVNO’s and niche market participants may survive in the competitive market. This market development is the main reason why Elephant Talk is focused on the MNO outsourcing market.

Emerging markets warming to MVNO’s

While currently there are very few MVNO’s in emerging markets, more markets are expected to introduce MVNO’s in the future. MVNO’s are expected to move into markets in Brazil, Chile, Central America and other countries in Latin America, plus Turkey, the Middle East, India, Pakistan, and Vietnam in Asia-Pacific. Markets such as Africa and India present an attractive opportunity for MVNO’s, but there are still a number of obstacles impacting MVNO development in these markets including a lack of cooperation from MNO’s and a lack of regulation to facilitate new MVNO entrants. The Company expects the majority of new MVNO markets to be relatively small and have limited impact on global MVNO connections and revenues. In markets where changes in regulation may be imminent, market opportunities may increase.

MVNO revenues to remain steady

Global revenues are estimated to remain steady over the next five years through 2019. Currently, Western Europe and the U.S. account for over 84% of global MVNO revenues, and by 2015 we forecast that this figure will fall marginally to 80%. MVNO markets in South and Central America and the Middle East are expected to make up a greater share of global MVNO revenues over the forecast period. In 2009, South and Central America and the Middle East contributed approximately 1% to global MVNO revenues, and Ovum estimates  that this will increase to 6% by 2015.

² Extract Global MVNO Forecast to 2018, © 2013 Informa Telecom & Media, Publication

³ Reference Code: Ovum 2013/18, Publication Date 17 December 2013

Global developments in electronic payments and credit card fraud

The solutions from ValidSoft are targeted to combat electronic fraud and false positives across card, internet and telephone channels. According to industry leaders such as Symantec Corp. and McAfee Inc., which both sell software to protect computers from hackers, theft of intellectual property costs American companies $250 billion a year. McAfee estimates that the global cost of cybercrime is $1 trillion per annum⁴. Utilizing the ValidSoft’s solutions and technology enables companies to tackle this endemic problem, reducing fraud, and operating costs while improving the customer experience.

ValidSoft entered into a strategic partnering agreement with FICO, the leading company providing analytics and decision making services, in late 2011, for the provision of its solutions relating to SIM Swap fraud protection, false positive prevention, and strong authentication. FICO has an enviable commercial relationship with the largest worldwide issuing banks, and opens up a target market of over 5,000 institutions worldwide. FICO has been pressing ahead with the integration of the ValidSoft solutions into its client base and has already deployed with a leading UK bank for the provision of the ValidSoft SIM Swap technology. ValidSoft was awarded its third European Privacy Seal from EuroPrise⁵ on October 30, 2012, for its technology in protecting and securing privacy data.

Technological execution of our strategy

Elephant Talk is believed to be the only managed services vendor that offers a fully integrated OSS/BSS/Core Software Defined Network Architecture platform, providing end-to-end solutions. As Gartner Analysts stated in 2012: “it will be the platforms, the middleware connecting and managing devices, users and applications throughout the cloud/networks, which will drive digital innovation for at least the next decade.”

As platform elements move away from specific hardware to software, we are well positioned as we own most of the required software: Elephant Talk can both deeply integrate such software and follow any future market price erosion as investments have already been mostly expensed. ValidSoft has a growing portfolio of intellectual property on the crossroads of turning raw cloud/network data and capabilities into real-time, contextual management decision info, uniquely supported by EuroPrise Privacy Seals. Again according to the same Gartner 2012 analysis: “cloud security is the ’mother’ of all mission critical applications, and will be the ultimate driver of cloud adoption.” With these network/cloud based in-house security capabilities, ET is expected to lead the next wave of platform USP’s: fully integrated (mobile) cloud management and security solutions.

Our focus on feasible business opportunities is leading us in the execution of our market-strategy. We have been building a full MNO outsourcing platform for the last six years and we have provided telecommunication managed services for a decade. In the last few years, we have worked with our partner/customer Vodafone to further enhance our platform..

We cover over a dozen high-tech hardware and an increasing number of software domains. We have both the capability and credibility to operate core network and core business IT on behalf of MNOs. This capability is the core of our business strategy today. We perceive a genuine acceptability for MNOs as an integrated service provider, illustrated by the fact that the ET Outsourcing Model for our software services has been validated by MNO’s like Vodafone.

The ET Outsourcing Model more specifically and detailed, includes service design and control, API design and control, Intelligent Networking, testing, provisioning, switching, real-time dynamic rating & pre/postpaid billing and customer care, call center support, reporting, managing self-care web environments, change management in active systems, SIM Management, (Data) Session Control Management, Voucher Management, Mobile Marketing systems, (Mobile) Payment Systems, Real Time Credit Checking Systems, Interactive Voice Response Systems, Voicemail Systems, Trouble Ticketing Systems, Device Management Systems, Mass Customer Migrations, life cycle management, database hardware and software, large scale real-time processing, and integrating, provisioning, managing and maintaining all the specific core network elements like MSC, SMSC, MMSC, USSDGW, HLR/HSS, IN-SCP, SGSN, GGSN, GMSC, VLR, OTA, etc.

⁴ Sources: McAfee Inc and /Symantic Corp. 2012

⁵ EuroPriSe is an initiative led by the Unabhaengiges Landeszentrum fuer Datenschutz (“ULD”, Independent Centre for Privacy Protection), Germany. EuroPriSe was funded with 1.3 million Euro by the European Commission's eTEN program. The EuroPriSe project consortium led by ULD included partners from eight European countries: the data protection authorities from Madrid (Agencia deProteccion de Datos de la Communidad de Madrid, APDCM), and France (Commission Nationale de l'Informatique et de Libertés, CNIL), the Austrian Academy of Science, London Metropolitan University from the UK, Borking Consultancy from the Netherlands, Ernst and Young AB from Sweden, TUeV Informationstechnik GmbH from Germany, and VaF s.r.o. from Slovakia. http://www.european-privacy-seal.eu/

Our ownership of the source code of most of the key software elements is a must for the extreme flexibility needed and to stay pricing-wise competitive. Elephant Talk owns key components such as service control/Intelligent Network, Rating and Charging of usage and events, data model, provisioning and CRM/Back-Office as well as most Middleware and protocols stacks. Source code access is an absolute requirement to facilitate a deeply embedded, single platform. Elephant Talk uses its own Research and Development department to develop and maintain the different components of the overall solution (IN, Rating, Back-Office, API/CRM/Provisioning, Protocols, Voice Mail & IVR, etc.).

Previously, we have stated that our security services for mission critical applications in the cloud are of major interest to banks, credit card companies, governments and the public sector as a whole. The growing importance and awareness of safeguarding customer’s privacy and data protection is putting additional pressures on those industries to look for fully compliant solutions. ValidSoft provides strong authentication and transaction verification capabilities, which allow organizations to quickly implement solutions that protect against the latest forms of credit and debit card fraud, on-line transaction and identity theft. ValidSoft’s advanced proprietary software combined with what we believe is a superior telecommunication platform creates a leading electronic fraud prevention total solution.

In that market context, we have developed a portfolio of security services on a thorough foundation of Intellectual Property (patents pending, core patent granted) and very specific operating models required to obtain and maintain Privacy Seals. Moreover, we have our own technology capable of delivering five factor authentication solutions. We are regarded as industry thought leaders in countering electronic fraud and a trusted partner to leading global regulatory authorities. The ValidSoft Security Models are thoroughly reviewed by Royal Holloway University of London.

Market entry strategy US Cloud Security Services

Currently, we are active primarily in Europe. The US market offers ValidSoft a substantial opportunity for deployment of its solutions as well. The US is, at this moment, the largest market in the world, and also the largest non-EMV compliant country in the world. The EMV (Europay, MasterCard, Visa) initiative is an electronic authentication system for credit card present transactions. The US has not deployed EMV yet, although it is slated for deployment in 2015. Many questions remain concerning deployment of EMV in the US, not least the cost involved and the implications of EMV on the current payments infrastructure. In countries that have implemented the EMV initiative there has been a decrease in credit card present fraud, but credit card not present, or internet fraud, has risen significantly. We believe the increase in internet fraud provides us with opportunities to deploy ValidSoft solutions and consequently the US remains a strategic target.

Our people and innovation practice

Learning from experience and substantial investment we have now a thorough understanding of the mobile/cloud ecosystem, and all of its specific software requirements. Our highly skilled people, have a deep knowledge of the security challenges of any mission critical event in the cloud. Within our company there is a fundamental understanding of securing the cloud by creating and providing real-time and contextual information from a variety of sources, also from within the cloud, into a single data point. By a mix of highly-educated, carefully hired staff with a variety of backgrounds and nationalities, we have successfully managed to have a thorough understanding of what it takes to service MVNOs and institutions by offering mission critical services in the cloud in real-time. These capabilities have integrated these elements into a flexible, high performance, user-friendly, and powerful management & security platform available on a managed services basis.

Intellectual Property, Products, Research and Development

Since the acquisition of ValidSoft by Elephant Talk in 2010, we have submitted new patent applications for ValidSoft technologies in Brazil, China, Hong Kong, Russia, the EU and US jurisdictions. In addition, we have successfully extended the patent for VALid® in the United Kingdom, which will be effective until 2023.

In November 2013, ValidSoft was granted an UK patent (GB2494920) with a duration of 20 years for its Dual-Wireless Network (Dual SSID) Authentication System. The Dual SSID (Service Set Identifier) Authentication System authenticates a user or mobile device accessing a visible wireless network, which issues credentials to access a second, highly secure, invisible wireless network. The invention is wide in scope and is suited to the growing usage of mobile phones and personal computers in wireless environments where mobility, security and privacy are essential.

In November 2013, FICO, a leading predictive analytics and decision management software company, announced the availability of a new proximity correlation service for credit and debit card issuers which is aimed at improving the safety of payment card transactions. The new FICO service, which is already deployed by a United Kingdom bank, was developed in partnership with ValidSoft.

In 2013, ValidSoft filed three new patent applications for VALid-ZLC, VALid-BMD and a bitmap-based Man-in-the-Browser detection solution.

As with our other existing patent applications, pursuant to the Patent Co-operation Treaty, ValidSoft will seek patent coverage in major relevant territories such as the EU, US, China, Russia and Brazil. ValidSoft has a number of additional inventions in the fields of fraud-prevention, biometrics and cryptography that it expects to submit patent applications during2014.

ValidSoft and Elephant Talk have also registered a number of trademarks in the EU and US. ValidSoft has registered trademarks for ValidSoft®, VALid®, VALid-SSD® and SMART®. Elephant Talk has registered trademarks for Elephant Talk® and ET Software DNA®. We own all the proprietary copyright-protected source code used in its solutions, and its library has grown significantly in the last three years. Trademarks do not have expiration/duration, however, in certain jurisdictions (i.e. US), the registered trademarks must be renewed every ten years, for another ten years.

European Privacy Seal

One of the most significant barriers to market-entry in authentication and security solutions, particularly those using biometric and location-based data, is privacy and data protection. We have turned this threat into an opportunity and strength by investing in the EuroPriSe system. EuroPriSe is a voluntary audit and, if successful, certification of a technology solution, which tests the solution against the strictest possible European data protection standards. The EuroPriSe audit and certification is carried out by world-leading experts in technology and data protection (for example, experts from Ernst &Young). ValidSoft now has three European Privacy Seals awarded for location-based VALid-POS, biometric-based VALid-4F and VALid-SSD (SIM-swap detection).

Competition

Competition for MNO carrier grade outsourcing solutions:

We face competition for MNO carrier grade outsourcing solutions from traditional in-house solutions, supported by System Integrators and a wide variety of consultants. We face competition from other vendors who provide fully outsourced services like Ericsson, Huawei, IBM, Accenture, Alcatel Lucent and NSN, partially outsourced vendors, such as Atos Origin, Cap Gemini, specific functional vendors like Amdocs, Oracle, Syniverse, Telcordia and Comverse, as well as hundreds of smaller local software development and support organizations.

Competition for MVNO outsourcing solutions:

We face competition from MVNOs outsourcing solutions from very fragmented, often smaller, local organizations that act as systems integrator, usually focused on partial solutions: billing, rating; customer care and provisioning. Some larger, multi-country organizations are: Teleena (Netherlands, Poland, UK), Effortel (Belgium, Italy, Poland, Taiwan), Aspider (Netherlands, Ireland, Malta), Transatel (France, Switzerland, Luxembourg, Belgium, Netherlands) and Telogic (Denmark, Poland, Italy). Offering only partially integrated third party solutions, none of these organizations can provide the resilient, full core geo redundant platforms that Elephant Talk has developed in-house over the last decade.

Security Solutions (ValidSoft)

The financial services sector is highly fragmented, and subject to many different local regulations. Many different anti-fraud solutions are used today, typically including tokens, certificates, Out Of Band transmission confirmation and Biometrics. The tokens and certificates are compromised by “Man in the Middle” and “Man in the Browser” malware, while the “Out Of Band” transaction confirmation is compromised by SIM Swap and “Call Forwarding Fraud”.

As a result of this, and the growing cost of electronic fraud, financial services companies are looking beyond traditional providers such as RSA and are seeking new, innovative and secure solutions, such as those provided by ValidSoft. There is also a move away from relying solely on historical data and a move towards real-time processing of contextual awareness for the provision of in-transaction decision information.

Because the financial services industry is demanding global, comprehensive solutions, that contribute to combatting electronic fraud and, at the same time, safeguard the privacy of clients, property patents and EuroPrise Privacy Seals play an increasingly important role in the provision of such solutions.

In addition, ValidSoft has developed its own Voice Biometric engine, which may be used across any and all markets in order to protect access to valuable assets, be they digital, financial or emotional, restricting access to authenticated individuals only.

Sustainability of competitive advantages

Management believes that we have developed an overall understanding of the cloud´s access and transactions security concepts within the scope of a mobile services delivery platform (i.e. existing code and IP) that positions Elephant Talk and ValidSoft competitively towards imminent and future developments that will keep pace with industry requirements. As the industry requirements go beyond current defined standards, each vendor will need to develop, buy (or source code license) the whole range of different software elements, and then integrate, test and fine-tune these components in a real world, massive deployment at a major MNO. Our management believes that Elephant Talk has accrued valuable experience in this respect and is has a head-start against its competitors.

We may need to accelerate the roll-out of our Software DNA™ Mobile Platform and Cloud Security Technology to meet current market demand. Mobile and Cloud Management Platforms may become more commoditized over the next five to ten years. Integrating the variety of ValidSoft cloud based security layers into our Software DNA™ Platform will create another window of sustainable competitive advantages. The more we can offer a comprehensive one stop shop solution for providing managed services and the required, layered security for mission critical applications in the cloud, the more sustainable our advantages will be against multiple point-solutions and the additional integration and operations complexity they represent. As depth and breadth of solutions are important in addressing the one stop shop needs of our customers, a whole range of services should be kept under one roof. Elephant Talk may need to further invest in such services in the future, either with additional in-house development or through smaller acquisitions.

Corporate History

Elephant Talk Communications, Inc., a California corporation (“Elephant Talk Inc.”) was formed in 2001 as a result of a merger between Staruni Corporation (USA, 1962) and Elephant Talk Limited (Hong Kong, 1994) (“ETL”). Staruni Corporation, formerly named Altius Corporation, Inc., until 1997, was a web developer and internet service provider from 1997, following its acquisition of Starnet Universe Internet Inc. ETL began operating in 1994 as an international long distance services provider, specializing in international call termination in China. In 2006, Elephant Talk decided to abandon its strategy of focusing on international calls into China.

In 2000, securities of Staruni Corporation commenced trading on the OTC Bulletin Board under the symbol “SRUN”, later replaced by “ETLK” following the merger with ETL, and then the symbol changed to “ETAK” contemporaneously with a 2008 stock-split.

In January 2007, through our acquisition of Benoit Telecom (Switzerland), we established a foothold in the European telecommunications market, particularly within the market for Service Numbers (Premium Rate Services and Toll Free Services) and to a smaller extent Carrier (Pre) Select Services. Through the human capital, IT resources and software acquired, we obtained the experience and expertise of individuals and software deeply connected to telecom and multi-media systems, telecom regulations and European markets.

In March 2010, Elephant Talk Inc. acquired ValidSoft.

In December 2011, we upgraded from our OTCBB listing to the NYSE MKT LLC (the “Exchange”).

In September, 2011, Elephant Talk Inc. merged into Elephant Talk Communications Corp., a Delaware corporation (the "Reincorporation"). The Reincorporation was approved by the stockholders at the annual shareholder meeting on September 14, 2011. As a result of the Reincorporation, the Company became a Delaware corporation. Elephant Talk Communications, Inc. ceased its corporate existence and Elephant Talk Communications Corp. became the surviving corporation and continued to operate the business of the Company as it existed prior to the Reincorporation.

In April 2013, the Company acquired most of the assets of Telnicity, a U.S. MVNE/MVNO enabler company headquartered in Oklahoma City, Oklahoma, and formed Elephant Talk North America Corp. The Telnicity acquisition provides the Company with an in-market experienced management team with existing relationships with certain major U.S. mobile telecommunications companies.

Government Regulation

We operate in a heavily regulated industry. As a multinational telecommunications company and provider of services to carriers and operators, we are directly and indirectly subject to varying degrees of regulation in each of the jurisdictions in which we provide our services. Local laws and regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we opearte. Enforcement and interpretations of these laws and regulations can be unpredictable and are often subject to the informal views of government officials. Certain European, foreign, federal, and state regulations and local franchise requirements have been, are currently, and may in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals. Such proceedings may relate to, among other things, the rates we may charge for our local, network access and other services, the manner in which the Company offers and bundle our services, the terms and conditions of interconnection, unbundled network elements and resale rates, and could change the manner in which telecommunications companies operate. We cannot predict the outcome of these proceedings or the impact they will have on our business, our revenue and our cash flow.

Employees

As of December 31, 2013, we employed 195 people and retained on a long term basis, the services of 48 independent contractors. We consider relations with our employees and independent contractors to be good. Each of our current employees and independent contractors has entered into confidentiality and non-competition agreements with us. There are no collective bargaining contracts covering any of our employees.

Item 1A.  Risk Factors

An investment in our common stock is subject to risks inherent in our business.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report.  In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.  The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all of your investment.

We have received notices of non-compliance from the Exchange related to the Company’s liquidity and financial impairment.

On May 17, 2013 we received notice from the Exchange indicating that we did not satisfy the continued listing standards of the Exchange set forth in Section 1003(a)(iv) of the Company Guide of the Exchange (the “Company Guide”) in that we have sustained losses which are so substantial in relation to our overall operations, or our existing financial resources, or our financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether we will be able to continue operations and/or meet our obligations as they mature. We were afforded an opportunity to submit our initial plan of compliance (the “Plan”) to the Exchange, and on May 31, 2013, we presented our Plan to the Exchange. On June 13, 2013, the Exchange accepted the Plan and granted us an extension until August 31, 2013 and the Exchange has granted subsequent extensions to November 30, 2013, January 31, 2014 and April 30, 2014 (the “Plan Period”).

During the Plan Period, we will be subject to periodic review by the staff of the Exchange. Failure by us to demonstrate progress consistent with the Plan during the Plan Period or to regain compliance by the end of the Plan Period could result in the Exchange initiating delisting proceedings.

While the Exchange’s notification of non-compliance with Section 1003(a)(iv) has had no current effect on the listing of our shares, failure to make progress consistent with the Plan or to regain compliance with the continued listing standards by the end of the Plan Period could result in our shares being delisted from the Exchange. If our Common Stock, par value $0.0001 (the “Common Stock”) is delisted from the Exchange and transferred to the over-the-counter market, the spreads between the bid and ask prices for our Common Stock may increase and the execution time for orders may be longer. The delisting of our Common Stock from the Exchange may result in decreased liquidity by making the trading of our Common Stock less efficient.

We have received notices of non-compliance from the Exchange related to the current composition of the Company’s board of directors and Audit Committee.

On December 20, 2013, we received a notice from the Exchange indicating that we no longer satisfied the continued listing standards of the Exchange set forth in Sections 802(a) and 803(B)(2)(a) of the Company Guide. These rules require that a majority of our board of directors (the “Board”) consist of independent directors, and that the Audit Committee of the Board be comprised of at least three independent members. We received the notice in connection with the resignation of Charles Levine from the Board on December 18, 2013, and non-reelection of Phil Hickman to the Board at our annual meeting of stockholders on December 18, 2013. As a result, a majority of the directors on the Board are not independent as required under Section 802(a) of the Company Guide and our Audit Committee is no longer comprised of three independent members as required under Section 803(B)(2)(a) of the Company Guide.

Pursuant to Sections 802(b) and 803(B)(6)(b) of the Company Guide, we will have until the earlier of our next annual meeting of stockholders or December 18, 2014 (such earlier date, the “Compliance Date”) to become compliant with those provisions. However, if were to hold our next annual meeting of stockholders before June 16, 2014, then the Compliance Date would instead be June 16, 2014. As from April 1, 2014 the Company appointed two new independent directors filling vacancies created following the 2013 annual meeting of stockholders in December 2013. As part of their appointment, the new directors, Mr. Stevens and Mr. Leland will join Mr. Rijkman Groenink as members of the Board’s Audit and Finance Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

While the Exchange’s notification of non-compliance with Section 802(a) and 803(B)(2)(a) has had no current effect on the listing of our shares, failure to regain compliance by the Compliance Date could result in our shares being delisted from the Exchange. If our Common Stock is delisted from the Exchange and transferred to the over-the-counter market, the spreads between the bid and ask prices for our Common Stock may increase and the execution time for orders may be longer. The delisting of our Common Stock from the Exchange may result in decreased liquidity by making the trading of our Common Stock less efficient. Furthermore, the lack of independence and independent controls over our corporate affairs may result in potential or actual conflicts of interest between our officers, directors and our stockholders, and these conflicts of interests may benefit the interests of our officers and directors over that of our minority stockholders.

The Company has identified material weaknesses in internal control over financial reporting

The Company received an adverse opinion on the effectiveness of its internal control over financial reporting as of December 31, 2013 because of material weaknesses identified in management’s assessment of the effectiveness of such internal control resulting from accounting for complex transactions associated with business combinations, complex financial instruments and income taxes. In addition to this, as of year-end, the Company’s board of directors did not have an adequate number of independent board members in order to have effective oversight of the Company’s control system.

These material weaknesses, if not remediated, create an increased risk of misstatement of the Company’s financial results, which, if material, may require future restatement thereof. A failure to implement improved internal controls, or difficulties encountered in their implementation or execution, could cause the Company future delays in its reporting obligations and could have a negative effect on the Company and the trading price of the Company’s common stock. See “Item 9A. Controls and Procedures,” for more information on the status of the Company’s internal control over financial reporting as well as Subsequent events (Note 33) on recent developments on the composition of the board of directors.

The substantial and continuing losses, and significant operating expenses incurred in the past few years, may require us to change our business plan or even may cause us to be unable to pursue all of our operational objectives if sufficient financing and/or additional cash from revenues is not realized. This raises doubt as to our ability to continue as a going concern.

We have incurred net losses of $22,131,615 and $23,131,936 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, we had an accumulated deficit of $225,391,923 and $203,260,307, respectively.

Our losses are the result of our continued investment in engineering, software development and build-up of integration skills and intellectual property of our mobile platform and our fraud prevention solutions as well as increase in international market development efforts. In 2013 these investments saw the continued growth whereby the revenue contribution (revenues minus cost of service) in 2013 increased by 87% in comparison with the previous year and our adjusted ebitda (a non-gaap measure) improved from a negative $9.5 million in 2012 to a negative $2.3 million in 2013. This was due to an increased customer base and growth of existing customers. However, this has not yet resulted in positive cash flow large enough to fund our capital expenditures for the longer term and accordingly, management continues to consider financing and capital leasing options on an on-going basis.

Although we have previously been able to attract financing as needed, such financing may not continue to be available at all, or if available, on reasonable terms as required. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable to us or existing shareholders. If we are unable to secure additional financing, as circumstances require, or do not succeed in meeting our sales objectives we may be required to change, significantly reduce our operations or ultimately may not be able to continue operations As a result of our historical net losses and cash flow deficits, and net capital deficiency, these conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

The current economic climate, especially in Europe, may have an adverse effect in the markets in which we operate.

Much of our business is consumer driven, and to the extent there is a decline in consumer spending, we could experience a reduction in the demand for our services and a decrease in our revenues, net income and an increase in bad debts arising from non-payment of our trade receivables. The potential adverse effects of an economic downturn include:

Uncertainties and risks associated with international markets could adversely impact our international operations.

We have significant international operations in Europe and to a lesser extent in the US, Middle East and the Far East. There can be no assurance that we will be able to obtain the permits and operating licenses required for us to operate, obtain access to local transmission facilities on economically acceptable terms, or market services in international markets. In addition, operating in international markets generally involves additional risks, including unexpected changes in regulatory requirements, taxes, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, restrictions associated with the repatriation of funds, technology export and import restrictions, and seasonal reductions in business activity. Our ability to operate and grow our international operations successfully could be adversely impacted by these risks.

We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.

Our operations are subject to a broad range of complex and evolving laws and regulations. Because of our coverage in many countries, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be adversely affected.

We may not be able to integrate new technologies and provide new services in a cost-efficient manner.

The telecommunications industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. We cannot predict the effect of these changes on our competitive position, our profitability or the industry generally. Technological developments may reduce the competitiveness of our networks and our software solutions and require additional capital expenditures or the procurement of additional products that could be expensive and time consuming. In addition, new products and services arising out of technological developments may reduce the attractiveness of our services. If we fail to adapt successfully to technological advances or fail to obtain access to new technologies, we could lose customers and be limited in our ability to attract new customers and/or sell new services to our existing customers. In addition, delivery of new services in a cost-efficient manner depends upon many factors, and we may not generate anticipated revenue from such services.

We may not be able to develop and successfully market our Software DNA™ platform and security services as planned.

Elephant Talk operates in an exceptionally competitive environment where there is continuous innovation and new development. We are required to be a top performer in over a dozen highly specialized domains to effectively compete with our competitors. Ongoing investments are required to stay ahead of the curve. The sales process for our Software DNA™ platform and the deployment process may be complicated and very slow. We are highly dependent on convincing MNO’s and MVNO’s to believe that outsourcing their requirements to us is the best way to go. We are exposed to business risks associated with turnkey projects and the scalability of our service and support organization. Although our policy is to avoid or minimize risks, it cannot be ruled out that in certain cases events occur that may seriously impact us and our performance.

ValidSoft’s operation is dependent on mobile operators for network data access. Home-routing is sometimes preventing us from capitalizing on our capability. It tends to be a slow process to enter into definitive contracts with mobile operators. In addition, it is difficult to obtain network data access which is slowing our ability to timely address current market opportunities. The current market perception about safeguarding privacy remains challenging. Both the regulatory regime and consumer awareness of privacy protection are developing very slowly.

Implementation and development of our Software DNA™ platform and mobile security businesses both depend on our ability to obtain adequate funding.

Both our Software DNA™ platform and ValidSoft’s mobile security services require ongoing funding to continue the current development and operations and to fund possible future acquisitions. Failure to obtain adequate financing will substantially delay our development, slow down current operations, result in loss of customers and adversely impact our results of operations.

Disruptions in our networks and infrastructure may result in customer dissatisfaction, customer loss or both, which could materially and adversely affect our reputation and business.

Our systems are an integral part of our customers’ business operations. It is critical for our customers, that our systems provide a continued and uninterrupted performance. Customers may be dissatisfied by any system failure that interrupts our ability to provide services to them. Sustained or repeated system failures would reduce the attractiveness of our services significantly and could result in decreased demand for our services.

We face the following risks to our networks, infrastructure and software applications:

Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and/or incur expenses, and thereby adversely affect our business, revenue and cash flow.

Integration of acquisitions ultimately may not provide the benefits originally anticipated by management and may distract the attention of our personnel from the operation of our business.

We strive to broaden our solutions offerings as well as to increase the volume of voice and data that we carry over our existing global network in order to reduce transmission costs and other operating costs as a percentage of net revenue, improve margins, improve service quality and enhance our ability to introduce new products and services. Strategic acquisitions in desired markets are an important part of our growth strategy for both our Software DNA™ platform and our mobile security business. We may pursue additional acquisitions in the future to further strengthen our strategic objectives. Acquisitions of businesses and customer lists involve operational risks, including the possibility that an acquisition may not ultimately provide the benefits originally anticipated by management. Moreover, we may not be successful in identifying attractive acquisition candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired business or assets into our own. There may be difficulty in integrating technologies and solutions, in migrating customer bases and in integrating the service offerings, distribution channels and networks gained through acquisitions with our own. Successful integration of operations and technologies requires the dedication of management and other personnel, which may distract their attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other business acquisition opportunities. Therefore, successful integration may not occur in light of these factors.

Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial condition.

Our business is directly affected by the length of our sales cycle and strategic mobile partnership cycles with MNO’s. Both our telecommunications traffic services as well as our communications information systems, outsourced solutions and value added (communication) services, including our ValidSoft security solutions are relatively complex and their purchase generally involves a significant commitment of mostly human capital, with attendant delays frequently associated with the allocation of substantial human resources and procurement procedures within an organization. The purchase of these types of products typically also requires coordination and agreement across many departments within a potential customer’s and MNO’s organization as well as financial institutions. Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic slowdown in the communications industry, which may recur in the current economic climate, our typical sales cycle lengthens, which means that the average time between our initial contact with a prospective customer and the signing of a sales contract increases. The lengthening of our sales and strategic mobile partnership cycle could reduce growth in our revenue in the future. In addition, the lengthening of our sales and strategic mobile partnership cycle contributes to an increased cost of sales, thereby reducing our profitability.

Because most of our business is conducted outside the US, fluctuations in foreign currency exchange rates versus the US Dollar could adversely affect our (reported) results of operations.

Currently all of our net revenue, expenses and capital expenditures are derived and incurred from sales and operations outside the US, whereas the reporting currency for our consolidated financial statements is the US Dollar (“USD”). The local currency of each country is the functional currency for each of our respective entities operating in that country, where the Euro is the predominant currency. Considering the fact that most income and expenses are not subject to relevant exchange rate differences, it is only at a reporting level that the translation needs to be made to the reporting unit of USD. In the future, we expect to continue to derive a significant portion of our net revenue and incur a significant portion of our operating costs outside the US, and changes in exchange rates have had and may continue to have a significant, and potentially distorting effect (either negative or positive) on the reported results of operations, not necessarily being the result of operations in real terms. Our primary risk of loss regarding foreign currency exchange rate risk is caused by fluctuations in the following exchange rates: USD/Euro (EUR”), USD/Swiss Frank, USD/Hong Kong Dollar, USD/Chinese Yuan, USD/British pound, USD/Bahraini Dinar, and USD/Mexican peso.

We historically have not engaged in hedging transactions since we primarily operate in same currency countries, currently being the EUR. However, the operations of affiliates and subsidiaries in non-US countries have been funded with investments and other advances denominated in foreign currencies and more recently in USD. Historically, such investments and advances have been long-term in nature, and we have accounted for any adjustments resulting from currency translation as a charge or credit to accumulate other comprehensive loss within the stockholders’ deficit section of our consolidated balance sheets. Although we have not engaged in hedging so far, we continue to assess on a regular basis the possible need for hedging.

We are substantially smaller than our major competitors, whose marketing and pricing decisions, and relative size advantage, could adversely affect our ability to attract and retain customers and are likely to continue to cause significant pricing pressures that could adversely affect our net revenues, results of operations and financial condition.

Our services related to communications software and information systems, outsourced solutions and value added communication services, including our fraud prevention and resolution products are highly competitive and fragmented, and we expect competition to continue to increase. We compete with telecom solution providers, independent software and service providers and the in-house IT and network departments of communications companies as well as firms that provide IT services (including consulting, systems integration and managed services), software vendors that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular communications services (such as Internet, land-line and mobile services, cable, satellite and service bureaus) and companies that offer software systems in combination with the sale of network equipment. Also, in this more fragmented market, larger players exist with associated advantages described earlier which we need to compete against.

We believe that our ability to compete depends on a number of factors, including:

A number of our competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong name recognition. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties

Our positioning in the marketplace as a smaller provider places a significant strain on our resources, and if not managed effectively, could result in operational inefficiencies and other difficulties.

Our positioning in the marketplace may place a significant strain on our management, operational and financial resources, and increase demand on our systems and controls. To manage this position effectively, we must continue to implement and improve our operational and financial systems and controls, invest in development & engineering, critical systems and network infrastructure to maintain or improve our service quality levels, purchase and utilize other systems and solutions, and train and manage our employee base. As we proceed with our development, operational difficulties could arise from additional demand placed on customer provisioning and support, billing and management information systems, product delivery and fulfillment, sales and marketing and administrative resources.

For instance, we may encounter delays or cost-overruns or suffer other adverse consequences in implementing new systems when required. In addition, our operating and financial control systems and infrastructure could be inadequate to ensure timely and accurate financial reporting.

We could suffer adverse tax and other financial consequences if US or foreign taxing authorities do not agree with our interpretation of applicable tax laws.

Our corporate structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other relevant laws of applicable non-US jurisdictions. Foreign taxing authorities may not agree with our interpretations or reach different conclusions. Our interpretations are not binding on any taxing authority and, if these foreign jurisdictions were to change or to modify the relevant laws, we could suffer adverse tax and other financial consequences or have the anticipated benefits of our corporate structure materially impaired.

We must attract and retain skilled personnel. If we are unable to hire and retain technical, technical sales and operational employees, our business could be harmed.

Our ability to manage our growth will be particularly dependent on our ability to develop and retain an effective sales force and qualified technical and managerial personnel. We need software development specialists with in-depth knowledge of a blend of IT and telecommunications or with a blend of security and telecom. We intend to hire additional necessary employees, including software engineers, communication engineers, project managers, sales consultants, employees and operational employees, on a permanent basis. The competition for qualified technical sales, technical, and managerial personnel in the communications and software industry is intense in the markets where we operate, and we may not be able to hire and retain sufficient qualified personnel. In addition, we may not be able to maintain the quality of our operations, control our costs, maintain compliance with all applicable regulations, and expand our internal management, technical, information and accounting systems in order to support our desired growth, which could have an adverse impact on our operations. Volatility in the stock market and other factors could diminish our use, and the value, of our equity awards as incentives to employees, putting us at a competitive disadvantage or forcing us to use more cash compensation.

If we are not able to use and protect our intellectual property domestically and internationally, it could have a material adverse effect on our business.

Our ability to compete depends, in part, on our ability to use intellectual property internationally. We rely on a combination of patents, trade secrets, trademarks and licenses to protect our intellectual property. There is limited protection under patent law to protect the source codes we developed or acquired on our Software DNA™ Platform. The copyright and know-how protection may not be sufficient. Our pending patent application in ValidSoft’s technology may be challenged. We are also subject to the risks of claims and litigation alleging infringement of the intellectual property rights of others. The telecommunications industry is subject to frequent litigation regarding patent and other intellectual property rights. We rely upon certain technology, including hardware and software, licensed from third parties. The technology licensed by us may not continue to provide competitive features and functionality. Licenses for technology currently used by us or other technology that we may seek to license in the future may not be available to us on commercially reasonable terms or at all.

We are dependent on two significant customers for our businesses and the loss of one of these customers could have an adverse effect on our business, results of operations and financial condition.

For the year ended December 31, 2013, we had two significant customers which accounted for 48% and 15%, respectively, of our revenue. Although no other customer accounted for greater than 10% of our net sales during this period, other customers may account for more than 10% of our net sales in future periods. The loss, or reduction in services to, these significant customers or other discontinuation of their relationship with us for any reason, or if either of these significant customers reduces or postpones purchases that we expect to receive, it could have an adverse impact on our business, results of operations and financial condition.

Product defects or software errors could adversely affect our business.

Design defects or software errors may cause delays in product introductions and project implementations, damage customer satisfaction and may have a material adverse effect on our business, results of operations and financial condition. Our software systems are highly complex and may, from time to time, contain design defects or software errors that may be difficult to detect and correct. Because our products are generally used by our customers to perform critical business functions, design defects, software errors, misuse of our products, incorrect data from external sources or other potential problems within or outside of our control may arise during implementation or from the use of our products, and may result in financial or other damages to our customers, for which we may be held responsible. Although we have license agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. Our insurance coverage is not sufficient to protect against all possible liability for defects or software errors. In addition, as a result of business and other considerations, we may undertake to compensate our customers for damages caused to them arising from the use of our products, even if our liability is limited by a license or other agreement. Claims and liabilities arising from customer problems could also damage our reputation, adversely affecting our business, results of operations and the financial condition.

Risks Related to Our Industry

Changes in the regulation of the telecommunications industry could adversely affect our business, revenue or cash flow.

We operate in a heavily regulated industry. As a provider of mobile communications technology for the telecommunications and financial industry, we are directly and indirectly subject to varying degrees of regulation in each of the jurisdictions in which we provide our services. Local laws and regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate. Enforcement and interpretations of these laws and regulations can be unpredictable and are often subject to the informal views of government officials. Certain European, foreign, federal, and state regulations and local franchise requirements have been, are currently, and may in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals. Such proceedings may relate to, among other things, the rates we may charge for our local, network access and other services, the manner in which we offer and bundle our services, the terms and conditions of interconnection, unbundled network elements and resale rates, and could change the manner in which telecommunications companies operate. We cannot predict the outcome of these proceedings or the impact they will have on our business, revenue and cash flow.

There can be no assurance that future regulatory changes will not have a material adverse effect on us, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations, any of which could have a material adverse effect upon us. Potential future regulatory, judicial, legislative, and government policy changes in jurisdictions where we operate could have a material adverse effect on us. Domestic or international regulators or third parties may raise material issues with regard to our compliance or noncompliance with applicable regulations, and therefore may have a material adverse impact on our competitive position, growth and financial performance.

The market for communications information systems as well as security and fraud prevention services is highly competitive and fragmented, and we expect competition to continue to increase.

We compete with independent software and service providers and with the in-house IT and network departments of communications companies. Our main competitors include firms that provide IT services (including consulting, systems integration and managed services), software vendors that sell products for particular aspects of a total information system, software vendors that specialize in systems for particular communications services (such as Internet, wire line and wireless services, cable, satellite and service bureaus) and network equipment providers that offer software systems in combination with the sale of network equipment. We also compete with companies that provide digital commerce software and solutions.

The telecommunications industry is rapidly changing, and if we are not able to adjust our strategy and resources effectively in the future to meet changing market conditions, we may not be able to compete effectively.

The telecommunications industry is changing rapidly due to deregulation, privatization, consolidation, technological improvements, availability of alternative services such as mobile, broadband, DSL, Internet, VOIP, and wireless DSL through use of the fixed wireless spectrum, and the globalization of the world’s economies. In addition, alternative services to traditional land-line services, such as mobile, broadband, Internet and VOIP services, have shown a competitive threat to our legacy land-line traffic business. If we do not continue to invest and exploit our contemplated plan of development of our communications information systems, outsourced solutions and value added communication services to meet changing market conditions, or if we do not have adequate resources, we may not be able to compete effectively in providing technology solutions to our customers. The telecommunications industry is marked by the introduction of new product and service offerings and technological improvements. Achieving successful financial results will depend on our ability to anticipate, assess and adapt to rapid technological changes, and offer, on a timely and cost-effective basis, services including the bundling of multiple services into our technology platforms that meet evolving industry standards. If we do not anticipate, assess or adapt to such technological changes at a competitive price, maintain competitive services or obtain new technologies on a timely basis or on satisfactory terms, our financial results may be materially and adversely affected.

If we are not able to operate a cost-effective network, we may not be able to grow our business successfully.

Our long-term success depends on our ability to design, implement, operate, manage and maintain a reliable and cost-effective network. In addition, we rely on third parties to enable us to expand and manage our global network and to provide local, broadband Internet and mobile services.

Risks Related to Our Capital Stock

We could issue additional Common Stock, which might dilute the book value of our capital stock.

Our board of directors has authority, without action or vote of our stockholders, to issue all or a part of our authorized but unissued shares of Common Stock. Any such stock issuance could be made at a price that reflects a discount or a premium to the then-current trading price of our Common Stock. In addition, in order to raise future capital, we may need to issue securities that are convertible into or exchangeable for a significant amount of our Common Stock. These issuances, if any, would dilute your percentage ownership interest in the company, thereby having the effect of reducing your influence on matters on which stockholders vote. You may incur additional dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to purchase shares of our Common Stock. As a result, any such issuances or exercises would dilute your interest in the company and the per share book value of the Common Stock that you owned, either of which could negatively affect the trading price of our Common Stock and the value of your investment.

Our board of directors has the power to designate a series of Preferred Stock without shareholder approval that could contain conversion or voting rights that adversely affect the holders of our Common Stock. .

Our Certificate of Incorporation authorize the issuance of capital stock including 50,000,000 undesignated preferred shares (the “Preferred Stock”), and empower our board of directors to prescribe by resolution and without stockholder approval, subject to the rules of the Exchange, a class or series of such preferred shares, including the number of shares in the class or series and the voting powers, designations, rights, preferences, restrictions and the relative rights in each such class or series thereof. The creation and issuance of any such preferred shares could dilute your voting and ownership interest our company, the value of your investment, the trading price of our Common Stock and any cash (or other form of consideration) that you would otherwise receive upon the liquidation of the Company.

If we issue additional shares of Common Stock in connection with subsequent financings, this could have a dilutive effect on your voting rights.

We are authorized to issue 300,000,000 shares of capital stock, including 250,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, of which 140,466,801 shares of Common Stock and no shares of Preferred Stock were issued and outstanding as of December 31, 2013.

Should we decide to finance the Company through the issuance of additional Common Stock, convertible debt or Preferred Stock, this may have a dilutive effect on your voting rights, the value of your investment and the trading price of the Common Stock. If we issue more than 20% of our outstanding Common Stock in any equity-based financing, we are required to call a special meeting of our stockholders to authorize the issuance of such additional shares before undertaking the issuance. As a result, we cannot assure you that our stockholders would authorize such issuance and we could be required to seek necessary capital in an alternative manner, which may not be available on commercially reasonable terms, if at all. If we are unable to adequately fund ourselves, through our operations or equity/debt financing, this would have a material adverse effect on our ability to continue as a going concern.

As a “thinly-traded” stock, large sales can place downward pressure on our stock price.

Our stock experiences periods when it could be considered “thinly traded”. Financing transactions resulting in a large number of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could place further downward pressure on the trading price of our stock. In addition, the lack of a robust resale market may require a stockholder who desires to sell a large number of shares to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock.

Shares eligible for future sale may adversely affect the market for our Common Stock.

As of December 31, 2013 there are 34,479,773 options, 37,247,889 warrants and convertible notes to purchase 9,635,838 shares of our Common Stock outstanding. All of the shares issuable from exercise have been registered and are freely traded. Options are exercisable at exercise prices between $0.60 and $3.39, warrants are exercisable at exercise prices between $0.887 and $2.21 and the convertible notes are convertible at the price of $0.887. If and when these securities are exercised into shares of our Common Stock, the number of our shares of Common Stock outstanding will increase. Such increase in our outstanding shares, and any sales of such shares, could have a material adverse effect on the market for our Common Stock and the market price of our Common Stock.

In addition, from time to time, certain of our stockholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933 (the “Securities Act”), subject to certain limitations. In general, pursuant to Rule 144, after satisfying a six month holding period: (i) affiliated stockholders (or stockholders whose shares are aggregated) may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale and (ii) non-affiliated stockholders may sell without such limitations, provided that we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one year holding period without any limitation or restriction. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.

Because our executive officers, directors, their affiliates and certain principal stockholders own a large percentage of our voting stock, other stockholders’ voting power may be limited.

As of December 31, 2013 Steven van der Velden, Johan Dejager, Rijkman Groenink, Martin Zuurbier, Mark Nije, and Alex Vermeulen, and certain other of our directors and executive officers, their affiliates, beneficially owned or controlled approximately 35.1% of our outstanding Common Stock. In particular, as of December 31, 2013, Rising Water Capital AG, an entity affiliated with the certain of the aforementioned individuals, beneficially owned 18.6% of our Common Stock and QAT II Investments SA, another entity affiliated with certain of our officers and directors, beneficially owned 3.6% of our outstanding stock and hold 13,353,497 warrants that upon satisfaction of various conditions can be converted into Common Stock. QAT Investments SA (“QAT”), another entity affiliated with certain of our officers and directors, is the owner of 51.3% of Rising Water Capital AG. If those stockholders act together, they will have the ability to have a substantial influence on matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. As a result, our other stockholders may have little or no influence over matters submitted for shareholder approval. In addition, the ownership of such stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our Common Stock. These stockholders may make decisions that are adverse to your interests

We have no dividend history and have no intention to pay dividends in the foreseeable future.

We have never paid dividends on or in connection with our Common Stock and do not intend to pay any dividends to Common Stockholders for the foreseeable future.

Item 1 B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our offices in The Netherlands are located at Schiphol Boulevard 249, 1118 BH Schiphol. The office monthly rental is $16,066, and the lease runs until June 2015. In addition the Company rents office space at Wattstraat 52, 1171 TR, Sassenheim, The Netherlands for a monthly rental of $1,898.

Elephant Talk Communications S.L.U. is currently renting office space at Paratge Bujonis, 17220 Sant Feliu de Guixols, (Girona) Spain, at a monthly rent of $7,694. In Guangzhou, China, we rent office space for a monthly rental of $9,590.

Elephant Talk North America Corp. entered on October 1, 2013 into an operational lease agreement in Oklahoma City, Oklahoma, to rent office space. The leasing agreement has a duration of one year, and it has renewal options for another 1 year term. The monthly rental amounts to $1,050 per month.

ValidSoft Limited Ireland terminated its lease obligations in Tullamore, Ireland, and consequently does not lease office space in Ireland as of January 1, 2013. ValidSoft U.K.Limited rents office space at 9 Devonshire Square, London, United Kingdom on a renewable 12 month rent for a monthly rental of $17,358.

We also rent space for our telecom switches, servers and IT platforms at data centers (“co-locations”) at an aggregate monthly rent of $41, 136. The various co-location spaces include: Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Vienna, Manama, Brussels and other locations where our telecommunications equipment is located.

We believe the facilities currently under rent are adequate for our present activities and that additional facilities are available on competitive market terms to provide for such future expansion of our operations as may be warranted.

Item 3.   Legal Proceedings

Rescission of the Purchase Agreement of March 31, 2004 of New Times Navigation Limited.

As previously described in our 2004 Annual Report on Form 10-K, we entered into a purchase agreement with New Times Navigation Limited (“NTNL”), which we and NTNL mutually agreed to terminate. Upon the termination, we returned the received shares of NTVL to the concerned shareholders and received back 90,100 shares of our common stock out of the 204,000 issued by us for the purchase. In addition, we issued 37 unsecured convertible promissory notes for a total amount of $3,600,000. On our request 21 notes were returned with a total value of $2,040,000.

On April 28, 2006 we instituted proceedings to seek relief from the High Court of the Hong Kong Special Administrative Region against the holders of the unreturned shares to return the remaining 113,900 shares of common stock (valued at $381,565) and return the remaining 16 unsecured convertible promissory notes, representing a total amount of $1,740,000, and rescind the purchase agreement underlying the 2004 Purchase Transaction. The case is currently pending.

Other.

We are involved in various claims and lawsuits incidental to our business.  In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material effect on our financial position, liquidity, or results of operations.

Item 4.  Mine Safety Disclosures

Not applicable.

Part II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

As of December 5, 2011, our Common Stock is listed for quotation on the Exchange under the symbol “ETAK.”  The following table sets forth the high and low closing prices per share for each quarterly period from January 1, 2012 through December 31, 2013 as quoted on the Exchange and published by www.nasdaq.com. These quotations reflect prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not reasonably represent actual transactions.

As of December 31, 2013, we had approximately 4,139 record holders of our Common Stock.

Dividends

We have not declared any cash dividends since inception and do not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit our ability to pay dividends on our Common Stock other than those generally imposed by applicable state law.

EQUITY COMPENSATION PLAN INFORMATION

Securities Authorized for Issuance under Equity Compensation Plans

Stock Performance Graph

The graph below compares the cumulative total stockholder return on ETAK Common Stock with the cumulative return of the NASDAQ Comp. Index (IXIC) and the NASDAQ Telecom Index (IXTC formerly known as IXUT) for each of the five fiscal years ended December 31, 2013, assuming an investment of $100 at the beginning of such period.

The table below shows $100 invested on December 31, 2008 in stock or index:

Item 6.  Selected Financial Data

The selected consolidated financial data presented below should be read in conjunction with the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are elsewhere included in this Form 10-K.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Risk Factors”

Overview

Application of Critical Accounting Policies and Estimates

Revenue Recognition and Deferred Revenue

Revenue represents amounts earned for telecommunication and security services provided to customers (net of value added tax and inter-company revenue). We derive revenue from activities as a fixed-line, security and mobile services provider with its network and its own switching technology.

We follow the appropriate revenue recognition rules for each type of revenue. See “Revenue Recognition” in Note 3 of the Financial Statements for more information. The Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition (“ASC 605”). Revenue is recognized only when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.  Revenue is recorded as deferred revenue before all of the relevant criteria for revenue recognition are satisfied. Deferred revenue represents amounts received from the customers against future sales of services since we recognize revenue upon performing the services.

We report revenue on a gross basis using authoritative guidance issued by the FASB. Particularly for our landline services, we consider the following factors to determine the gross versus net presentation: if we (i) act as principal in the transaction and (ii) have risks and rewards of ownership, such as the risk of loss for collection and delivery of service.

Telecommunications revenues are recognized when delivery occurs based on a pre-determined rate and number of user minutes and number of calls that the Company has managed in a given month.

For the mobile solutions services the Company recognizes revenues from two different service offerings, namely managed services and bundled services. For managed services, revenues are recognized for network administration services provided to end users on behalf of Mobile Network Operators (MNO) and virtual Mobile Network Operators (MVNO’s). Managed service revenues are recognized monthly based on an average number of end-users managed and calculated on a pre-determined service fee per user. For bundled services, the Company provides both network administration as well as mobile airtime management services. Revenues for bundled services are recognized monthly based on an average number of end-users managed and mobile air time and calculated based on a pre-determined service fee. Other revenues recognized in the mobile solutions include technical services which are recognized as the services are performed.

For the security solutions we recognize revenues primarily from SIM (Subscriber Identity Module) lookup services using the VALid-SSD platform. Security solutions revenue is recognized based on the number of SIM lookups performed and calculated based on a pre-determined service fee per lookup. Other revenues recognized in the security business include consulting services which are recognized as the services are performed.

Management’s judgment is applied regarding, among other aspects, conformance with acceptance criteria and if delivery of services has occurred to determine if revenue and costs should be recognized in the current period, the degree of completion and the customer credit standing to assess whether payment is likely or not to justify revenue recognition.

Stock-based Compensation

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

For both the long term contractors and advisory board members, we recognize the guidance for stock-based compensation awards to non-employees in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees” ("ASC 505-50"). Under ASC 505-50, we determine the fair value of the options or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

Stock-based compensation (cash and non-cash) related to equity plans for employees and non-employee directors is included within our cost of revenues and operating expenses.

Business Combinations

As described in “Business Combinations,” in Note 3 of the Financial Statements, under the purchase method of accounting we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. This method also requires us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with acquisitions, these adjustments could materially decrease our operating income and net income and result in lower asset values on our balance sheet.

Significant estimates and assumptions that we must make in estimating the fair value of acquired technology, customer lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

Intangible Assets and Impairment of long Lived Assets

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

Impact of Accounting Pronouncements

In July 2013 the Financial Accounting Standards Board, or FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists. This guidance provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, except to the extent that carryforwards are not available to settle any additional income taxes that would result from disallowance of a tax position. The unrecognized tax benefit should be presented as a liability. This guidance is applicable for fiscal years and interim periods beginning after December 15, 2013. We are evaluating the potential impact of adopting this standard on its consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We are evaluating the potential impact of this adoption on its consolidated financial statements.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830)—Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. These amendments provide guidance on releasing Cumulative Translation Adjustments when a parent company sells partial equity method investments in step acquisitions. The amendments are effective on a prospective basis for fiscal years and interim reporting periods beginning after December 15, 2013. The guidance is applicable to us in principle, but since its enactment, we have not derecognized any subsidiary or group of assets as of December 31, 2013.

Company milestone overview

Recent milestones for mobile product line:

Recent milestones for security product line (ValidSoft):

Results of Operations

Our results of operations for the year ended December 31, 2013, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, ETL and its subsidiaries, Elephant Talk Europe Holding B.V. and its subsidiaries, Elephant Talk Group International B.V. and Elephant Talk North America Corp. and ValidSoft and its subsidiaries.

Although the vast majority of our business activities are carried out in Euros, we report our financial statements in U.S. dollars (“USD”). The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. We carry out our business activities primarily in Euros, and we do not currently engage in hedging activities.

The following table shows the USD equivalent of the major currencies for the year ended December 31, 2013:

Adjusted EBITDA

In order to provide our stockholders with additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before provision for income taxes, depreciation and amortization, stock-based compensation, interest income and expenses, interest expense related to debt discount and conversion feature, change in the fair value of conversion feature, loss on extinguishment of debt, changes in fair value of warrant liabilities, other income & (expense), impairment of related party loans, amortization of deferred financing costs, equity in earnings of unconsolidated joint venture and intangible assets impairment charge, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for stockholders and others to allow them to better understand and evaluate our operating results.

A reconciliation of Net Loss – (under) US Generally Accepted Accounting Principles (“GAAP”) to Adjusted EBITDA, the most directly comparable measure under GAAP, for each of the fiscal periods indicated, is as follows:

Comparison of Years Ended December 31, 2013 and 2012

Revenue for the year ended December 31, 2013 was $22,827,261 a decrease of $6,374,927 or 22%, compared to $29,202,188 for the year ended December 31, 2012. The continued and expected market decline of landline based telecommunications caused our legacy landline business to decrease to $3,626,251, for a decrease of $13,863,491 or 79%, compared to $17,489,742 in 2012 which was partially off-set by the increase in revenues of our mobile and security solutions business to $19,201,010 compared to $11,712,446 in 2012, $7,488,564 or 64%. The increase in our mobile and security solutions business is mainly due to the increasing revenues of new and existing customers.

Following the increased mobile and security revenues, Revenue minus Cost of Service increased by $7,295,247 or 87% because of the revenue increase in the mobile and security business.

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

Cost of Service for the year ended December 31, 2013 was $7,149,153 a decrease of $13,670,174 or (66%), compared to $20,819,327 for the year ended December 31, 2012. The decrease in cost of service was mainly caused by the decrease in revenues in our legacy landline business. Cost of service as a percent of revenue was 31% and 71% for the years ended December 31, 2013 and 2012, respectively.

The following table illustrates revenues and costs of service “in millions USD” for the quarters ended:

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expense for the years ended December 31, 2013 and 2012, were $26,533,283 and $24,186,278, respectively. SG&A expenses increased by $2,347,005 or 10% in 2013 compared to 2012.  The changes are partly due to the unfavorable impact of ($407,194) arising from a higher average USD/Euro exchange rate. The increase of SG&A was mostly due to the increase in our staffing levels as well as by higher marketing, IP and product development costs and travel due to the growth of our markets. The weighted average number of employees and long term independent contractors in the year 2013 was 161 and 50, respectively, an increase of 36 employees and 2 long term independent contractors or (29%) and (4%) respectively from the weighted average number of full-time employees of 125 and 48, respectively, from 2012. The described increases in costs and employees are mainly related to expected future revenues. As of December 31, 2013, SG&A includes the non-cash compensation to officers, directors, consultants and employees, in line with a change in presentation as explained in Note 1 of the Financial Statements. Non-cash compensation for the years ended December 31, 2013 and 2012 was $8,515,391 and $6,302,141, respectively. The increase was mainly due to additional staff.

Non-cash compensation is comprised of:

Depreciation and Amortization. Depreciation and amortization for the years ended December 31, 2013 and 2012, was $6,601,246 and $5,710,396 respectively. Depreciation and amortization expenses increased by $890,850 or 16% in 2013 compared to 2012. The increase was caused primarily by additions to property and equipment. In addition, we had an unfavorable impact of $192,004 arising from a higher USD/Euro exchange rate compared to the prior year.

In 2013 and 2012, interest income consisted of interest received on bank balances.

Interest expense for the years ended December 31, 2013 and December 31, 2012 was $1,064,999 and $780,852, respectively. Interest expense increased by $284,147, or 36% in 2013 compared to 2012. Higher levels of interest expense in 2013 were the result of convertible notes issued in 2013 to an affiliate investor and an accredited investor. See Item 8, Note 15 and 16 to the Financial Statements for more information.

As of December 31, 2013 and 2012, interest expenses related to debt discount and conversion feature were $2,069,649 and $1,089,126, respectively. Interest expenses related to debt discount and conversion features increased by $980,523 or 90%. This increase was due to to the convertible notes issued in 2013. See Notes 15 and 16 to the Financial Statements for more information.

Change in Fair Value in Conversion Feature. As of December 31, 2013, the fair value changes of the conversion feature of the convertible notes was a gain of $232,267, compared to a gain of $2,387,326 as of December 31, 2012. The change in fair value of the conversion feature decreased by 2,155,059 or 90%. The decrease is because the amount recognized as a gain was the remaining amount of the conversion feature related to the 8% Senior Secured Convertible Note issued on March 29, 2012, that was extinguished when the convertible note was repaid in June 2013. See Note 18 of the Financial Statements for more information.

Change in Fair Value of Warrant Liabilities. As of December 31, 2013, the change in the fair value of the remaining outstanding warrants related to a registered direct public offering by us on June 2013, which amounted to $479,322. The fair value of the remaining warrants was determined using a Monte-Carlo Simulation model.

Loss on Extinguishment of Debt. As of December 31, 2013, we entered into a Purchase Agreement pursuant to which we purchased certain Convertible Notes we issued on March 29, 2012, and this resulted in accelerated amortization expense of the original issue discount (OID), the conversion feature and the remaining financing costs of the Convertible Note. The loss on extinguishment of debt amounted to $1,960,594. Refer to Item 8, Note 18 of the Financial Statements. Additionally, on July 14, 2013, the Company entered into an amendment to terminate the Loan Agreement and cancel the Warrant we had with a member of the board of directors. In exchange for termination of the Loan Agreement, we entered into a Stock Purchase Agreement, dated July 15, 2013, pursuant to which the Company agreed to convert the Principal Amount of the loan into restricted shares of the Company’s Common Stock. Upon conversion and termination of the loan agreement, we accelerated the debt discount amortization, which resulted in an additional loss on extinguishment of debt of $44,506 in July 2013. Refer to Item 8, Note 17 of the Financial Statements. The total amount of loss on extinguishment of debt recognized as of December 31, 2013 amounted to $2,005,100.

Equity in Earnings of Unconsolidated Joint Venture. As of December 31, 2012, we incurred expenses of $501,776 as a result of the loss from our equity investment in the Modale B.V. joint venture. This expense follows a full impairment of the investment in this joint venture following the bankruptcy of Modale B.V. on January 30, 2013.

Impairment of Related Party Loans. As of December 31, 2013 and December 31, 2012, we had impaired loans with a value of $0 and $1,060,784, respectively. These loans were provided in 2012 to Elephant Security B.V., which filed for bankruptcy on December 19, 2012. Elephant Security B.V. was a related party since it was majority owned by QAT, one of our affiliates.

Provision for income taxes. Provision for income taxes for the years ended December 31, 2013 and December 31, 2012 was $200,301 and ($289,136), respectively. In the ordinary course of our business there are transactions where the ultimate income tax determination is uncertain. We believe that we have adequately provided for income tax issues not yet resolved with federal, state, local and foreign tax authorities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an additional expense would be recorded.

Net Loss. Net loss for the year ended December 31, 2013, net loss was $22,131,615, a decrease of $1,000,321 or 4%, compared to $23,131,936 from the year ended December 31, 2012. The decrease in loss was due to the loss from operations of $4,057,392 or 19%, which was partially offset by the increased revenues from our mobile and security business. SG&A for the year ended December 31, 2013 increased by $2,347,005 or 10%, compared to $24,186,278 for the year ended December 31, 2012. Depreciation and amortization of intangibles assets for the year ended December 31, 2013 increased by $890,850 or 16%, from $5,710,396 for the year ended December 31, 2012. The equity in earnings of unconsolidated joint venture amounted to $0 and $501,776 for the years ended December 31, 2013 and December 31, 2012, respectively. Other expenses for the year ended December 31, 2013 increased by $4,048,284 or 489%, compared to $827,211 for the year ended December 31, 2012. The reason for the increase was due to higher interest expense, higher interest expense related to debt discount and conversion feature, revaluation of euro based loans and the loss on extinguishment of debt.

Other Comprehensive (Loss). We record foreign currency translation gains and losses as other comprehensive income or loss, which amounted to gains of $1,001,959 and $411,205 for the years ended December 31, 2013 and December 31, 2012, respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

Comparison of Years Ended December 31, 2012 and 2011

Revenue for the year ended December 31, 2012 was $29,202,188, a decrease of $3,030,793 or 9.40%, compared to $32,232,981 for the year ending December 31, 2011. The decrease in revenue was mainly the result of the unfavorable impact of $2,445,331 arising from a lower USD/Euro exchange rate. Moreover, the continued and expected market decline of landline based telecommunications caused our legacy landline business to decrease by $8,965,084 (or 33.89%), which was partly off-set by the increase in revenues of our mobile and security solutions business of $5,934,291 (or 102.70%) compared to 2011. The increase in our mobile and security solutions business is mainly due to the increasing revenues of existing customers.

Following the increased mobile and security revenues, Revenue minus Cost of Service increased by 4,873,145 (or 138.85%) because of the revenue increase in the mobile and security business.

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

Cost of Service for the year ended December 31, 2012 was $20,819,327, a decrease of $7,903,983 or 27.52%, compared to $28,723,265 for the year ended December 31, 2011. The decrease in cost of service was mainly caused by the decrease in revenues in our legacy landline business. Cost of service as a percent of revenue was 71.3% and 89.1% for the years ended December 31, 2012 and 2011, respectively.

The following table illustrates revenues and costs of service “in millions USD” for the quarters ended:

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

Selling, general and administrative expenses. SG&A expense for the years ended December 31, 2012 and 2011, were $17,884,137 and $16,589,649, respectively. As of December 31, 2013, SG&A includes the non-cash compensation to officers, directors, consultants and employees, in line with a change in presentation as explained in Note 1 of the Financial Statements, and we have reclassified the figures of 2012 and 2011 for comparability purposes. SG&A expenses increased by $1,294,488 or 7.80%, in 2012 compared to 2011. This was impacted by the favorable impact of $813,629 arising from a lower USD/Euro exchange rate. The increase of SG&A was led by the increase in staffing levels, largely from European hires, as well as by higher marketing and product development costs. The weighted average number of full-time employees in the year 2012 was 173, an increase of 20 full-time employees or 13.09% from the weighted average number of full-time employees of 153 in 2011. The described increases in costs and employees are mainly related to expected future revenues. Non-cash compensation for the years ended December 31, 2012 and 2011 was $6,302,141 and $6,818,905, respectively. The decrease was mainly due to shorter contractual lifes of the newly issued options under the 2008 Plan.

Non-cash compensation is comprised of:

Depreciation and Amortization. Depreciation and amortization for the years ended December 31, 2012 and 2011, was $5,710,396 and $5,254,708 respectively. Depreciation and amortization expenses increased by $455,688 or 8.67% in 2012 compared to 2011. This was impacted by the favorable impact of $372,730 arising from a lower USD/Euro exchange rate. During the fourth quarter of 2012, we shortened the estimated useful lives of certain assets expected to be abandoned. The change in estimate increased depreciation expense by approximately $512,000 for the year ended December 31, 2012.

Intangible Assets Impairment Charge. The Consolidated Balance Sheet as of December 31, 2012 includes: $10,503,026 of intangible assets, net, and $13,088,271 of fixed assets, net. As of December 31, 2011, our net intangible assets had a value of $12,784,199 and the net property and equipment had a value of $13,315,687. In 2011, we incurred an impairment charge of $522,726. We updated our analysis of intangible assets and long lived assets as of December 31, 2012 and we determined that for the year end ed 2012 no asset impairment charges are necessary.

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

Other Income and Expenses. Interest income for the year ended December 31, 2012 was $248,017, an increase of $141,296 or 132%, from $106,721 for the year ended December 31, 2011. Interest income was interest received on bank balances.

Interest expense for the year 2012 and 2011 was $780,852 and $201,184, respectively. Higher levels of interest expense in 2012 were the result of the Convertible Note agreements the Company issued in March 2012.

In 2012, interest expenses related to debt discount and amortization of deferred financing costs were $1,089,126 and $531,792, respectively. In 2011 we did not incur these costs, as they are related to the Convertible Note we issued in March 2012.

Other income was $0 and $460,000 for the years ended December 31, 2012 and 2011, respectively. Other income in 2011 was the result of the release of the ASC 740-10 provision following a successful abatement request with the IRS for the year 2007. Following this abatement, we decided to release a similar provision it had made for a potential IRS fine for the year 2008.

Change in fair value in conversion feature. In 2012, the income related to the fair value changes of conversion feature of convertible notes was $2,387,326, compared to $0 from 2011.

Equity in earnings of unconsolidated joint venture. In 2012, we incurred expenses of $501,776 as a result of our equity share in the losses of our financial investment in Modale B.V. joint venture. This expense follows a full impairment of the investment in this joint venture following the bankruptcy of Modale B.V. on January 30, 2013.

Impairment of related party loans. In 2012 we impaired loans in the value of $1,060,784. These loans were provided in 2012 to Elephant Security B.V., which went bankrupt on January 30, 2013. Elephant Security B.V. was a related party since it was majority owned by QAT Investments SA, one of our affiliates.

Provision for income taxes. Provision for income taxes for the year ended December 31, 2012 and 2011 was $289,136 and $0, respectively. In the ordinary course of our business there are transactions where the ultimate income tax determination is uncertain, we believe that we have adequately provided for unresolved income tax issues with federal, state, local and foreign tax authorities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an additional expense would be recorded.

Net Loss. Net loss for 2012 was $23,131,936, a decrease of $2,178,799 (or 8.61%), compared to $25,310,735 in 2011. The decrease in loss was led by the decrease in the loss from operations by $4,162,459. Loss from operations reduced because of increased revenues from our mobile and security business as well as due to lower non-cash compensation expenses. On the other hand, in 2012, the provision for income taxes of $289,136, the equity in earnings of unconsolidated joint venture of $501,776 and total other expense of $827,211 worsened net loss.

Other Comprehensive (Loss). We record foreign currency translation gains and losses as other comprehensive income or loss. Other comprehensive Income (Loss) for the years ended December 31, 2012 and 2011 was $411,205 and ($624,275) respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

Liquidity and Capital Resources

We have an accumulated deficit of $225,391,923 and $203,260,307 as of December 31, 2013 and 2012, respectively. Historically, we have relied on a combination of debt and equity financings to fund our on-going cash requirements. The consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

With cash and cash equivalents at December 31, 2013 of $1,252,315, proceeds from warrant and option exercises through March 14, 2014 of $350,903, the net proceeds of $3,732,668 following the exercise of a Warrant on March 17, 2014 and the improvement of net cash used in operating activities, we believe that we can carry out our operational plans for the coming 12 months. For our longer term growth, we believe we will continue to attract financing in order to finance or lease our capital expenditures. If we are unable to achieve the anticipated revenues or if proceeds from financing arrangement with our major vendors, we will need to attract further debt or equity financing. Although we have been successful in the past in meeting our cash needs, there can be no assurance that proceeds from additional revenues, vendor financings or debt and equity financing where required will be received in the necessary time frames. If this occurs, we may, therefore, be unable to continue our operations. As of December 31, 2013, these conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Operating activities

Before changes in operating assets and liabilities, net cash used reduced from $10,205,853 to $3,078,850, which is a decrease of $7,127,003 or 69.8%, largely driven by the increased revenues in the mobile and security revenues.

Changes in operating assets and liabilities were primarily negatively affected by reducing the accounts payable debt that was built-up in earlier periods. This impacted cash used by $ 3,415,032 which combined with the other working capital changes, resulted in cash used by changes in operating assets and liabilities of $2,888,836 for 2013.

In total, net cash used for operating activities decreased by $2,831,586, or 32% from $8,799,272 in 2012 to $5,967,686 in 2013. Net cash used for operating activities in 2011 was $14,570,936.

Investing activities

Net cash used in investing activities for year ended December 31, 2013 was $6,061,711 an increase of $2,554,673 or 73%, compared to $3,507,038 in 2012. Net cash used in investing activities for year ended December 31, 2012 decreased by $5,010,173, or 59%, compared to $8,517,211 in 2011. The higher net cash used in investing activities in 2013, in comparison with 2012, was primarily attributable to a higher level of equipment and software purchase in 2013 following the increased revenues.

Financing activities

Net cash received by financing activities for the year ended December 31, 2013 was $12,280,154 compared to $7,481,061 and $25,894,241 for the year ended December 31, 2012 and December 31, 2011, respectively. See Notes 15, 16, 17, 18 and 19 of the Financial Statements for more information.

As a result of the above activities, we had a cash and cash equivalents balance of $1,252,315 as of December 31, 2013, a net increase in cash and cash equivalents of $19,047 since December 31, 2012.

Off- Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have either a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, nor we have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual obligations

The following table summarizes the payments due by fiscal year for our outstanding commercial obligations as of December 31, 2013.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Foreign currency exchange rate

Although the vast majority of our business activities are carried out in Euros, we report its financial statements in USD. The conversion of Euros and USD leads to period-to-period fluctuations in our reported USD results arising from changes in the exchange rate between the USD and the Euro. Generally, when the USD strengthens relative to the Euro, it has an unfavorable impact on our reported revenue and income and a favorable impact on our reported expenses. Conversely, when the USD weakens relative to the Euro, it produces a favorable impact on our reported revenue and income, and an unfavorable impact on our reported expenses. The above fluctuations in the USD/Euro exchange rate therefore result in currency translation effects (not to be confused with real currency exchange effects), which impact our reported USD results and may make it difficult to determine actual increases and decreases in our revenue and expenses which are attributable to our actual operating activities. We carry out our business activities primarily in Euros, and we do not currently engage in hedging activities. As the vast majority of our business activities are carried out in Euros and we report our financial statements in USD, fluctuations in foreign currencies impact the total amount of assets and liabilities that we report for our foreign subsidiaries upon the translation of those amounts in USD. Since we carry out our business activities primarily in Euros, we do not currently engage in hedging activities.

We do not believe that we have currently material exposure to interest rate or other market risks.

Item 8.  Financial Statements and Supplementary Data

ELEPHANT TALK COMMUNICATIONS CORP.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Elephant Talk Communications Corp.

We have audited the accompanying consolidated balance sheets of Elephant Talk Communications Corp. (“Company”) as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elephant Talk Communications Corp. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $225.4 million and continues to generate negative cash flows. These factors, among others discussed in Note 2, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Elephant Talk Communication Corp.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 31, 2014 expressed an adverse opinion thereon.

/s/ BDO USA, LLP

Los Angeles, California

March 31, 2014

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Elephant Talk Communications Corp.

We have audited Elephant Talk Communications Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Elephant Talk Communication Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified material weaknesses in internal controls over financial reporting relating to accounting for complex transactions associated with business combinations, complex financial instruments, and income taxes. In addition to this, as of year-end, the Company’s Board of Director’s did not have an adequate number of independent Board members in order to have effective oversight of the Company’s internal control system.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 financial statements, and this report does not affect our report dated March 31, 2014 on those financial statements.

In our opinion, Elephant Talk Communications Corp. did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Elephant Talk Communications Corp. as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated March 31, 2014 expressed an unqualified opinion thereon and included an explanatory paragraph regarding the Company’s ability to continue as a going concern.

/s/ BDO USA, LLP

Los Angeles, California

March 31, 2014

ELEPHANT TALK COMMUNICATION CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS AT DECEMBER 31, 2013 AND 2012

The accompanying notes are an integral part of these consolidated financial statements

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

The accompanying notes are an integral part of these consolidated financial statements.

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

The accompanying notes are an integral part of these consolidated financial statements.

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011