UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30,~~March ~~2014~~31, 2015

o¨ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to _____________

Commission File Number: 000-28063

deltathree, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		13-4006766
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1 Bridge Plaza, Fort Lee, New Jersey		07024
(Address of principal executive offices)		(Zip Code)

(212) 500-4850

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

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

As of ~~November~~May 96, ~~2014~~2015, the registrant had outstanding 72,311,025 shares of common stock, par value $0.001 per share.

TABLE OF CONTENTS

	Page	~~Page~~
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	13	12
Item 4. Controls and Procedures	25	25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	26	25
Item 6. Exhibits	26	26
SIGNATURES	27	27
EXHIBIT INDEX	28	28

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

DELTATHREE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

($ in thousands)

	As of September 30, 2014			As of December 31, 2013
	As of March 31, 2015			As of December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	~~189~~163		$	~~158~~286
Restricted cash and short-term investments		4			344
Accounts receivable, net		~~404~~260			~~541~~229
Prepaid expenses and other current assets		~~207~~140			~~271~~118
Inventory		2211			2211
Total current assets		~~826~~578			~~1,026~~648
Property and equipment, net		~~107~~74			~~164~~92
Deposits		5345			8745
Total assets	$	~~986~~697		$	~~1,277~~785
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable – trade		~~920~~1,046			~~984~~734
Accounts payable – related party		1,~~681~~855			1,~~286~~772
Deferred revenues		~~126~~157			~~203~~295
Short-term loan from a related party		5,~~283~~865			45,~~960~~609
Other current liabilities		1,~~103~~117			1,~~116~~106
Total current liabilities		910,~~113~~040			89,~~549~~516
Long-term liabilities:
Severance pay obligations		6365			~~105~~63
Total long-term liabilities		6365			~~105~~63
Total liabilities		910,~~176~~105			89,~~654~~579
Stockholders’ deficiency:
Share capital:
Common stock, par value $0.001 per share; authorized: 225,000,000 shares; issued and outstanding: 72,311,025 at September 30, 2014, and 72,273,525 at December 31, 2013		72			72
Common stock, par value $0.001 per share; authorized: 225,000,000 shares; issued and outstanding: 72,311,025 at March 31, 2015, and 72,311,025 at December 31, 2014		72			72
Additional paid-in capital		177,~~839~~874			177,~~315~~860
Accumulated deficit		(~~186~~187,~~101~~354	)		(~~184~~186,~~764~~726	)
Total stockholders’ deficiency		(89,~~190~~408	)		(78,~~377~~794	)
Total liabilities and stockholders’ deficiency	$	~~986~~697		$	~~1,277~~785

See notes to unaudited condensed consolidated financial statements.

DELTATHREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2014			2013			2014			2013
	2015			2014
Revenues	$	2,~~959~~042		$	4,~~041~~319		$	~~11,669~~		$	~~11,987~~
Costs and operating expenses:
Cost of revenues		21,~~450~~691			3,~~311~~548			~~9,686~~			~~9,529~~
Research and development expenses		~~193~~145			~~303~~275			~~703~~			~~891~~
Selling and marketing expenses		~~143~~89			~~291~~224			~~542~~			~~1,003~~
General and administrative expenses		~~279~~403			~~322~~330			~~959~~			~~1,022~~
Depreciation and amortization		18			4225			68			~~118~~
Total costs and operating expenses		32,~~083~~346			4,~~269~~402			~~11,958~~			~~12,563~~
Loss from operations		(~~124~~304	)		(~~228~~83	)		~~(289~~	)		~~(576~~	)
Interest expense, net		(~~416~~318	)		(~~279~~242	)		~~(1,037~~	)		~~(684~~	)
Loss before income taxes		(~~540~~622	)		(~~507~~325	)		~~(1,326~~	)		~~(1,260~~	)
Income taxes		16			36			11			20
Net loss	$	(~~541~~628	)	$	(~~510~~331	)	$	~~(1,337~~	)	$	~~(1,280~~	)
Net loss per share – basic and diluted	$	(0.01	)	$	(0.0100	)	$	~~(0.02~~	)	$	~~(0.02~~	)
Basic and diluted weighted average number of shares outstanding		72,311,025			72,~~273~~311,~~525~~025			~~72,300,608~~			~~72,273,525~~

See notes to unaudited condensed consolidated financial statements.

DELTATHREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2014			2013
	2015			2014
Cash flows from operating activities:
Net loss for the period	$	(~~1,337~~628	)	$	(~~1,280~~331	)
Adjustments to reconcile loss for the period to net cash (used in) operating activities:
Accumulated interest on short-term loan		~~505~~180			~~433~~158
Depreciation and amortization		6818			~~118~~25
Amortization related to convertible notes		~~317~~76			~~124~~49
Stock-based compensation		2314			776
Decrease in liability for severance pay, net		(42	)		(7	)
Increase in liability for severance pay, net		2			34
Exchange rates differences on deposits, net		1-			(51	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		137			(68	)
(Increase) decrease in accounts receivable		(31	)		171
Decrease in prepaid expenses and other current assets		64			29
(Increase) decrease in prepaid expenses and other current assets		(22	)		47
Decrease in inventory		-			10
Increase in accounts payable		395			77
Increase in accounts payable		331			527
(Decrease) in deferred revenues		(138	)		(80	)
(Decrease) in deferred revenues		(77	)		(249	)
Increase (decrease) in other current liabilities		11			(19	)
(Decrease) increase in other current liabilities		(13	)		139
		505			469
		1,314			1,128
Net cash (used in) provided by operating activities		(123	)		138
Net cash (used in) operating activities		(23	)		(152	)
Cash flows from investing activities:
Purchase of property and equipment		(11	)		(58	)
Release of restricted cash and short-term investment, net		-			30
Release of restricted cash and short-term investment, net		64			22
Net cash provided by investing activities		-			30
Net cash provided by (used in) investing activities		53			(36	)
Cash flows from financing activities:
Proceeds from exercise of options		1-			-1
Net cash provided by financing activities		1-			-1
Increase (decrease) in cash and cash equivalents		31			(188	)
Decrease (increase) in cash and cash equivalents		(123	)		169
Cash and cash equivalents at beginning of period		~~158~~286			~~362~~158
Cash and cash equivalents at end of period	$	~~189~~163		$	~~174~~327

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2014		2013
	2015		2014
Supplemental schedule of cash flow information:
Cash paid for:
Taxes		116		~~110~~6
Total	$	116	$	~~110~~6

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2014		2013
	2015		2014
Non-cash activity:
Issuance of warrants against short-term loan	$	~~498~~-		-498

See notes to unaudited condensed consolidated financial statements.

DELTATHREE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of Presentation

Financial Statement Preparation

The unaudited condensed consolidated financial statements of deltathree, Inc. and its subsidiaries (collectively referred to in this Quarterly Report on Form 10-Q as the “Company”, “we”, “us”, or “our”), of which these notes are a part, have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of our management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial information as of and for the periods presented have been included.

The results for the ~~interim~~ interim periods presented are not necessarily indicative of the results that may be expected for any future period. The unaudited ~~condensed~~ condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, ~~2013~~2014, included in our Annual Report on Form 10-K filed with the SEC on March 31, ~~2014~~2015, ~~our Quarterly Reports on Form 10-Q filed with the SEC on each of May 13, 2014,~~ and ~~August 13, 2014, and~~ all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after the end of our ~~2013~~2014 fiscal year and through the date of this Report.

Going Concern

The Company has sustained significant operating losses in recent periods, which has resulted in a significant reduction in its cash reserves. The Company and its subsidiaries have entered into four loan agreements with D4 Holdings, LLC, its majority stockholder, pursuant to which D4 Holdings agreed to provide the Company with loans in the aggregate principal amount of $4,~~100~~300,000.

On March 1, 2010, the Company and its subsidiaries entered into a Loan and Security Agreement, or the “First Loan Agreement”, with D4 Holdings pursuant to which D4 Holdings agreed to provide the Company and its subsidiaries a line of credit in a principal amount of $1,200,000. On August 10, 2010, the Company and its subsidiaries entered into the Second Loan and Security Agreement, or the “Second Loan Agreement”, with D4 Holdings, pursuant to which D4 Holdings agreed to provide the Company and its subsidiaries an additional line of credit in a principal amount of $1,000,000. In connection with the Second Loan Agreement, the Company issued to D4 Holdings a warrant to purchase up to 4,000,000 shares of its common stock at an exercise price of $0.1312 per share. The Company has drawn down all amounts available to be borrowed under the two lines of credit.

On March 2, 2011, the Company and its subsidiaries entered into the Third Loan and Security Agreement, or the “Third Loan Agreement”, with D4 Holdings, pursuant to which D4 Holdings agreed to provide the Company and its subsidiaries an additional line of credit in a principal amount of $1,600,000. Pursuant to the terms of the Convertible Promissory Note, or the “Convertible Note”, issued by the Company in connection with the Third Loan Agreement, D4 Holdings may elect to convert all or any portion of the outstanding principal amount under the Convertible Note into that number of shares of the Company's common stock determined by dividing such principal amount by $0.08 (as may be adjusted under the terms of the Convertible Note). Simultaneous with the Company's entering into the Third Loan Agreement, D4 Holdings and the Company and its subsidiaries entered into an amendment of the First Loan Agreement, pursuant to which (among other things) the maturity date for repayment of principal under the First Loan Agreement was extended from March 1, 2011, to March 1, 2012, and subsequently extended by oral agreement of the parties to July 1, 2012, and then subsequently orally extended again to January 2, 2014, pending the parties finalizing and entering into a formal amendment. In connection with the Third Loan Agreement, the Company issued D4 Holdings a warrant to purchase up to 1,000,000 shares of the Company's common stock at an exercise price of $0.096 per share. The Company has drawn down the aggregate principal amount available under the Third Loan Agreement, the principal amount of which can be converted by D4 Holdings into an aggregate of 20,000,000 shares of the Company's common stock.

On September 12, 2011, the Company and its subsidiaries entered into the Fourth Loan and Security Agreement, or the “Fourth Loan Agreement”, with D4 Holdings, pursuant to which D4 Holdings agreed to provide the Company and its subsidiaries an additional line of credit in a principal amount of $300,000. The Company has drawn down all amounts available to be borrowed under the Fourth Loan Agreement.

On November 13, 2012, the Company and its subsidiaries entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment", and the Amendment to Warrant Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment and the Warrants Amendment:

· the maturity date for repayment of principal and interest under the First Loan Agreement was extended to January 2, 2014; · the maturity date for repayment of principal and interest under the Second Loan Agreement was extended to January 2, 2015; · the maturity date for repayment of principal and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016; · all interest outstanding under each of the loan agreements was added to the principal amount outstanding under the respective loan agreement and the promissory notes issued pursuant to each respective loan agreement was increased by such amount; and · the exercise price under each of the Warrant Agreements entered into by the Company and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02 per share.

the maturity date for repayment of principal and interest under the Second Loan Agreement was extended to January 2, 2015;

the maturity date for repayment of principal and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016;

all interest outstanding under each of the loan agreements was added to the principal amount outstanding under the respective loan agreement and the promissory notes issued pursuant to each respective loan agreement was increased by such amount; and

the exercise price under each of the Warrant Agreements entered into by the Company and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02 per share.

In connection with the extension of the maturity dates under the Third Amendment, the Company issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of the Company's common stock at an exercise price of $0.02 per share.

On January 2, 2014, the Company did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings. On March 28, 2014, the Company and its subsidiaries entered into a Forbearance Agreement with D4 Holdings, or the "D4 Holdings Forbearance Agreement". Pursuant to the terms and conditions of the D4 Holdings Forbearance Agreement, D4 Holdings agreed to forbear from taking any action with respect to the events of default until the earlier of (i) December 31, 2014, (ii) the occurrence of a breach or default by the Company or its subsidiaries under the D4 Holdings Forbearance Agreement (which, in the event of certain undertakings of the Company's under the D4 Holdings Forbearance Agreement, are not cured within three days) or (iii) the occurrence of any new or additional event of default under the Company's loan agreements with D4 Holdings. In addition, to the extent not yet perfected the Company and its subsidiaries pledged and granted as a security interest to D4 Holdings all of their right, title and interest in the collateral described in the D4 Holdings Forbearance Agreement. In connection with the D4 Holdings Forbearance Agreement the Company also issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.02 per share.

On June 12, 2014, each of the Company and its wholly-owned subsidiaries Delta Three Israel, Ltd., or "Delta Three Israel", and DME Solutions, Inc., or "DME", and together with the Company and Delta Three Israel, the "deltathree Entities", and ACN, Inc., or "ACN", ACN Europe B.V., or "ACN Europe", ACN Digital Phone Service, LLC, or "ACN Digital Phone Service", and together with ACN, Inc. and ACN Europe, the "ACN Entities", entered into the Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement, or the "ACN Forbearance Agreement". The ACN Forbearance Agreement amends that certain letter amendment, dated as of April 3, 2012, to each of the Sales Agency Agreement dated as of September 27, 2010, and amended as of January 26, 2011, or the "Sales Agency Agreement", between the deltathree Entities and ACN, and the Introducer Agreement, dated as of April 13, 2011, between the deltathree Entities and ACN Europe B.V., or the "Introducer Agreement", in regards to outstanding commissions due to be paid by the Company to ACN and ACN Europe under those agreements. The ACN Forbearance Agreement also amends that certain License Assignment entered into on February 7, 2013 between the Company and DPS and the outstanding license assignment payment due to be paid by the Company to DPS.

The terms of the ACN Forbearance Amendment provide as follows:

commencing with the date of the ACN Forbearance Agreement, a late fee in the amount of one percent (1%) per month accrues on any unpaid commissions and the license assignment payment, and commencing on July 15, 2014, and continuing on the 15^th day of each month thereafter the deltathree Entities are obligated to pay to ACN and ACN Europe the interest that accrued during the previous month;

in addition, commencing on July 15, 2014, and continuing on the 15^th day of each month thereafter, the deltathree Entities are required to (i) pay down any outstanding obligations, provided that the amount of each monthly payment will be equal to at least $114,000, and (ii) pay all then-current commissions under the Sales Agency Agreement and Introducer Agreement and any cure periods provided for under the respective agreements for non-payment will no longer apply;

so long as the deltathree Entities fulfill the terms of the ACN Forbearance Agreement, the ACN Entities will forbear from exercising any rights they may have for any breach by the deltathree Entities under the Sales Agency Agreement and the Introducer Agreement and permit the Company to pay the license assignment payment over time in accordance with the terms and conditions of the ACN Forbearance Agreement until July 31, 2014, or the "Initial Forbearance Period". Following the expiration of the Initial Forbearance Period, the ACN Entities' obligation to forbear automatically renews on a monthly basis unless terminated by either party under the terms of the ACN Forbearance Agreement until July 15, 2015, following which such the ACN Entities' obligation to forbear will not automatically renew;

upon the expiration of the Initial Forbearance Period or any subsequent renewals, unless the ACN Entities' requirement to forbear is renewed, all unpaid obligations will become immediately due and payable;

each of Delta Three Israel and DME guaranteed the payment and performance of the Company's obligations under the license assignment and under the ACN Forbearance Agreement;

to secure the payment and performance in full of all of their obligations under the agreement, the deltathree Entities granted to the ACN Entities a continuing security interest in, and pledged to the ACN Entities, all of their right, title and interest in, to and under the collateral set forth on Exhibit A of the ACN Forbearance Agreement; and

in the event of any Event of Default (as defined in the ACN Forbearance agreement), all unpaid amounts due from the deltathree Entities will become immediately due and payable and the ACN Entities may in their sole discretion terminate the ACN Forbearance Agreement and exercise their rights and pursue all remedies available to them as a secured creditor and at law or in equity.

The Company did not make the payments it was required to make to the ACN Entities on July 15, 2014, described in the first and second bullet points above and is currently in default under the ACN Forbearance Agreement. On September 29, 2014 the Company and ACN entered into the Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance Agreement to December 15, 2014 and provided that the Company is obligated to pay a fee of $50,000 on or before December 15, 2014. The Company has not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment penalty fee of one percent (1%) of such amount is accruing on a monthly basis.

AsThe ~~of September 30, 2014, the~~ Company ~~had~~does ~~negative~~not ~~working~~know ~~capital~~when ~~equal~~it towill ~~approximately~~resume ~~$8.3~~making ~~million~~such aspayments ~~well~~again, asand ~~negative~~there ~~stockholders’ equity equal to approximately $8.2 million. The Company believes it~~ is ~~probable~~no assurance that it will ~~continue~~be able to ~~experience~~do ~~losses~~so ~~and~~in ~~increased~~the ~~negative~~near ~~working~~future ~~capital~~(if ~~and~~at ~~negative~~all) ~~stockholders’~~or ~~equity~~that inuntil ~~the~~such ~~near~~time ~~future~~ACN and ~~will~~ACN ~~not~~Europe bewill ~~able~~continue to ~~return~~consent to ~~positive~~ ~~cash~~its ~~flow~~not ~~before~~making itany ~~requires~~such ~~additional cash in the immediate term. The Company may experience difficulties accessing~~required ~~the~~payments ~~equity~~ and ~~debt~~not ~~markets~~exercise ~~and~~any ~~raising~~rights ~~additional~~they ~~capital,~~may ~~and~~have ~~there~~under ~~can be no assurance that~~ the Company's ~~will~~respective beagreements ~~able~~with tothem ~~raise such~~or ~~additional~~under ~~capital~~applicable onlaw. In ~~favorable~~addition, ~~terms~~in orthe atevent ~~all. If~~of ~~additional~~certain ~~funds~~insolvency-related ~~are~~events ~~raised~~defined ~~through~~in the ~~issuance of equity securities~~agreements, ~~the~~all ~~Company’s~~unpaid ~~existing~~amounts ~~stockholders~~ will ~~experience~~become ~~significant~~immediately due ~~further~~and ~~dilution.~~payable ~~Because~~effective ofimmediately ~~the~~prior ~~Company’s significant losses~~ to ~~date~~such ~~and~~event. ~~the~~Such ~~Company’s~~events ~~limited~~include ~~tangible assets,~~ the ~~Company~~filing ~~does~~of ~~not~~any ~~fit~~petition ~~traditional~~or ~~credit~~action ~~lending~~for ~~criteria,~~relief ~~which~~under ~~could~~law ~~make~~relating ~~it difficult for the Company~~ to ~~obtain~~debtors; ~~loans~~application or toconsent ~~access~~for the ~~capital~~appointment ~~markets.~~of Ifa ~~the~~receiver, ~~Company~~trustee, ~~issues additional equity~~ or ~~convertible~~the ~~debt~~like ~~securities~~over tosubstantial assets; ~~raise~~execution ~~funds,~~of ~~the~~a ~~ownership~~general ~~percentage~~assignment ofto ~~the~~creditors; ~~Company’s~~general ~~existing~~inability ~~stockholders would~~to bepay ~~reduced~~debts ~~and~~as they ~~may~~come ~~experience~~due; ~~significant~~or ~~dilution.~~the ~~New~~filing ~~investors~~of ~~may~~any ~~demand~~involuntary petition ~~rights,~~against ~~preferences~~a orparty ~~privileges~~that ~~senior to~~is ~~those~~not ofdismissed ~~existing~~within ~~holders~~60 days of ~~the~~its ~~Company’s common stock~~filing.

On February 25, 2015, D4 Holdings sent a letter to the Company's board of directors that indicated that within three to four weeks of the date of the letter D4 Holdings intended to initiate a tender offer to purchase all of the outstanding shares of the Company's common stock not owned by D4 Holdings at a purchase price of $0.01 per share in cash. D4 Holdings stated that it is not willing to enter into further forbearance arrangements with the Company or to provide the Company additional financing. Finally, D4 Holdings indicated that, in its capacity as majority stockholder of the Company, it is presently not interested in either selling its shares or voting in favor of any alternative transaction, including a merger or sale of the Company's assets or business or similar transaction.

On March 26, 2015, D4 Holdings sent a letter to the Company's board of directors that indicated that D4 Holdings withdraws its previous offer and instead proposes to acquire the company through a merger of the Company with a newly-formed acquisition subsidiary of D4 Holdings. The transaction will be structured as a stock purchase, pursuant to which D4 Holdings will purchase all of the outstanding shares of the Company's common stock not owned by D4 Holdings. D4 Holdings restated its previous offer of $0.01 per share, to be paid in cash from its own funds, and accordingly there will be no financing contingency. In addition, D4 Holdings will assume all of the Company's outstanding debt, currently valued at approximately $7.9 million. The completion of the transaction will be conditioned upon, among other things, approval by a special committee of the Company's board of directors consisting of independent directors. If the transaction is completed, the Company's common stock will no longer be registered under Section 12 of the Exchange Act.

On April 23, 2015, each of the Deltathree Entities entered into the Amendment to Fourth Loan and Security Agreement and Promissory Note, dated as of April 23, 2015 (the “Amendment”) with D4 Holdings. The Amendment amended the Fourth Loan Agreement and the promissory note executed in connection therewith and the D4 Holdings Forbearance Agreement. Pursuant to the terms of the Amendment, the maximum principal amount under the Fourth Loan Agreement was increased from $300,000 to $500,000 and the principal sum in the related promissory note was amended from $300,000 to $500,000. On April 23, 2015, the Company received $200,000 from D4 Holdings pursuant to a notice of borrowing under the Fourth Loan Agreement, as amended.

As of March 31, 2015, the Company had negative working capital equal to approximately $9.5 million as well as negative stockholders’ equity equal to approximately $9.4 million. The Company believes it is probable that it will continue to experience losses and increased negative working capital and negative stockholders’ equity in the near future and will not be able to return to positive cash flow before it requires additional cash in the immediate term. The Company may experience difficulties accessing the equity and debt markets and raising additional capital, and there can be no assurance that the Company will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, the Company’s existing stockholders will experience significant further dilution. Because of the Company’s significant losses to date and the Company’s limited tangible assets, the Company does not fit traditional credit lending criteria, which could make it difficult for the Company to obtain loans or to access the capital markets. If the Company issues additional equity or convertible debt securities to raise funds, the ownership percentage of the Company’s existing stockholders would be reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to those of existing holders of the Company’s common stock.

The Company believes that, unless it is able to increase revenues and generate additional cash, its current cash and cash equivalents will not satisfy its current projected cash requirements beyond the immediate future. As a result, there is substantial doubt about the Company's ability to continue as a going concern.

In addition, unless the Company is able to increase revenues and generate additional cash flows, based on currently projected cash flows the Company believes that it will be unable to pay future scheduled interest and/or principal payments under the various loan agreements with D4 Holdings as these obligations become due, and beginning January 2013 the Company suspended making scheduled interest payments with the oral consent of D4 Holdings. On January 2, 2014, the Company did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all the Company's other loan agreements with D4 Holdings, following which the Company and its subsidiaries entered into the D4 Holdings Forbearance Agreement. In the event the Company is unable to resume making interest payments and to pay the outstanding principal when due following the termination of the D4 Holdings Forbearance Agreement, if D4 Holdings is not willing to waive compliance or otherwise modify our obligations such that the Company is able to avoid defaulting on such obligations, because D4 Holdings has a lien on all of the Company's assets to secure our obligations under the loan agreements it could take actions under the loan agreements and seek to take possession of or sell the Company's assets to satisfy the Company's obligations thereunder. Any of these actions would likely have an immediate material adverse effect on the Company’s business, financial condition or results of operations.

Due to the Company’s ongoing losses and reduction in cash, the Company initiated restructuring activities beginning in the second quarter of 2011 in an effort to cut operating costs significantly and better align the Company’s operations with its current business model. In accordance with the restructuring, the Company instituted a reduction in force and decreased the number of full time employees from approximately 53 to 32, reduced the salaries of all remaining employees by five percent, and decreased non-material expenses as well as payments to be made to vendors and other third parties. In addition, in December 2013 the Company instituted an additional, smaller reduction in force. As of ~~September~~March 3031, ~~2014~~2015, the Company had 1211 full time employees. During March 2014, as an incentive for the Company's remaining employees the Company reversed the five-percent reduction in salaries that it instituted in 2011.

In view of the Company’s current cash resources, nondiscretionary expenses, debt and near term debt service obligations, the Company has begun exploring strategic alternatives available to it and may explore all such alternatives available to it, including, but not limited to, a sale or merger of the Company, a sale of its assets, recapitalization, partnership, debt or equity financing, voluntary deregistration of its securities, financial reorganization, liquidation and/or ceasing operations. In the event that the Company requires but is unable to secure additional funding, the Company may determine that it is in its best interests to voluntarily seek relief under Chapter 11 of the U.S. Bankruptcy Code. Seeking relief under the U.S. Bankruptcy Code, even if the Company is able to emerge quickly from Chapter 11 protection, could have a material adverse effect on the relationships between the Company and its existing and potential customers, employees, and others. Further, if the Company was unable to implement a successful plan of reorganization, the Company might be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code. There can be no assurance that exploration of strategic alternatives will result in the Company pursuing any particular transaction or, if the Company pursues any such transaction, that it will be completed.

Use of Estimates

The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

Concentration of Credit and Business Risks

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history, age of the balance and the customer’s current credit worthiness, as determined by a review of the customer’s current credit information. The Company monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. A considerable amount of judgment is required in assessing the ultimate realization of these receivables. Customer receivables are generally unsecured.

Gross revenues from sales to material customers for each of the three months ended September 30, 2014 and 2013, and accounts receivables as of September 30, 2014, and December 31, 2013, were as follows: 10

	Revenues						Accounts Receivable
	Three Months Ended September 30,						As of
Customer	2014			2013			September 30, 2014			December 31, 2013
Reseller A		63	%		71	%		34	%		34	%
Reseller B		10	%		4	%		-%			-%
Affiliate A		3	%		4	%		-%			-%
Affiliate B		1	%		1	%		-%			-%
Service Provider A		7	%		3	%		18	%		17	%

Gross revenues from sales to material customers for each of the three months ended March 31, 2015 and 2014, and accounts receivables as of March 31, 2015 and December 31, 2014, were as follows:

	Revenues						Accounts Receivable
	Three Months Ended March 31,						As of
Customer	2015			2014			March 31, 2015			December 31, 2014
Reseller A		64	%		70	%		37	%		-
Reseller B		10	%		4	%		-			-
Affiliate A		2	%		3	%		-			-
Affiliate B		1	%		1	%		-			-
Service Provider A		8	%		4	%		19	%		28	%

Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock option and stock incentive compensation plans, and the weighted-average number of shares of common stock outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money shares, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period.

Commitments and Contingencies

Pursuant to an Assignment and Assumption of Rights, Duties and Interests Agreement between the Company and ACN Digital Phone Services, ACN Digital assigned to the Company (the "Assignment") the licenses it acquired pursuant to that certain Software License and Distribution Agreement, or the "CounterPath Agreement", between ACN Digital and CounterPath Corporation, or "CounterPath", subject to the finalization of the terms of the Assignment. On August 27, 2013, the Company's Board of Directors resolved that the consideration, or the "Consideration", to be paid by the Company to ACN Digital for the Assignment would be equal to $287,000, which ACN Digital informed us was equal to ACN Digital's cost under the CounterPath Agreement, and finalized the terms of the Assignment. Pursuant to a Reassignment and Assumption of Rights, Duties and Interests Agreement entered into between the Company and ACN Digital on March 13, 2014, the Company reassigned to ACN Digital most of the licenses the Company had received pursuant to the Assignment and the amount of the Consideration was reduced to $113,000.

The amount of the Consideration was added to the outstanding amounts owed by the Company to ACN under, and is to be paid in accordance with, the Sales Agency Agreement between (inter alia) the Company and ACN dated September 27, 2010, as amended by that certain Letter Amendment, dated as of April 3, 2012, and by the ACN Forbearance Agreement.

Lease Commitments

The Company leases ~~its~~ its executive offices at 1 Bridge Plaza, Fort Lee, New Jersey, and storage and equipment ~~space~~ space at 8301 River Road, North Bergen,‎ New Jersey‎. The Company ~~leases~~ leases each of these facilities on a month-to-month basis. The aggregate rent expense, net, for the two locations for the ~~three~~ three months ended ~~September~~March 3031, ~~2014~~2015, was $1,~~800~~000.

Delta Three Israel ~~leases~~ leases an office that houses the Company’s research and development facilities in Jerusalem, Israel. The term of the lease is until September 30, 2016. Rent expense, net for Delta Three Israel for the three months ended ~~September~~March 3031, ~~2014~~2015, was $3322,000.

Legal Proceedings

On July 5, 2011, the Company received a notice from the New York City Department of Finance, or the Department of Finance, which claimed that the Company had not paid commercial rent tax required under the New York City Administrative Code from June 1998 through May 2008 for the two offices that the Company had leased during that time. The notice stated that the Company is obligated to pay the outstanding tax amounts, as well as significant interest and penalties that were assessed on the unpaid amounts as well as for the failure to file the applicable tax returns. The Company engaged outside counsel, which began discussions with the Department of Finance, and contested the assessment and simultaneously attempted to negotiate a significant reduction in the amounts to be paid. The Company’s appeal was rejected in July 2012 by an examiner in the Department of Finance, and the Company ~~has~~ subsequently engaged and begun discussions with a manager in the Department of Finance and submitted additional supporting materials. In June 2013 the Company submitted a settlement offer, which the Department of Finance did not accept, and discussions are continuing. The final outcome of this assessment and the Company's negotiations with the Department of Finance cannot be determined at this time. In the event that the Company is required to pay all or most of the amounts claimed by the Department of Finance this would have a material adverse effect on the Company’s financial condition. During 2011 the Company recorded $300,000 as a provision for commercial rent tax.

OnIn June ~~May~~2013 ~~1, 2014,~~ the Company ~~was~~submitted ~~informed~~a ~~that~~settlement aoffer, ~~complaint~~which ~~had~~the ~~been~~Department ~~filed~~of inFinance ~~the~~did ~~United~~not ~~States~~accept, ~~District~~and ~~Court~~discussions ~~for~~continued. In November 2013 the ~~Eastern~~Company ~~District~~filed ~~Court~~a ofrequest ~~Texas by~~for ~~Telinit~~a ~~Technologies,~~conciliation ~~LLC~~conference ~~against~~with the ~~Company,~~Department ~~ACN~~of Finance, ~~and~~which ~~ACN~~was ~~Communication~~held ~~Services~~in ~~claiming~~February 2014. ~~infringement~~Following ofthe aconference ~~patent~~the ~~claimed to~~parties becontinued ~~owned~~to byengage ~~Telinit~~in discussions. ~~During~~The ~~the~~parties ~~second~~met ~~quarter~~again ofin September 2014 and the Department ~~Company~~of ~~recorded~~Finance made a ~~provision for~~counter-offer, which the ~~complaint~~Company did not accept. On ~~October~~February 124, ~~2014~~2015, ~~Telinit~~the ~~and~~Company received a notice of conciliation decision from the ~~defendants~~Department ~~entered~~of ~~into~~Finance, awhich ~~license~~stated ~~and~~that ~~settlement~~at ~~agreement.~~as ~~The~~a ~~total~~result ~~amounts~~ of the Company's ~~expects~~failure to ~~pay~~accept inthe Department ~~connection~~of ~~with~~Finance's settlement offer the ~~license~~statutory ~~and~~notice ~~settlement~~issued ~~agreement~~by isthe ~~expected~~Department toof beFinance ~~less~~on ~~than~~July 5, or2011 ~~approximately~~was affirmed. ~~equal~~The Company intends to, ~~the~~file ~~amount~~a ~~that~~petition ~~the~~on ~~Company~~or ~~recorded~~before asMay 22, 2015 to request a ~~provision~~hearing ~~for~~with the ~~complaint~~New York City Tax Appeals Tribunal.

The final outcome of this assessment and the Company's negotiations with the Department of Finance cannot be determined at this time. In the event that the Company is required to pay all or most of the amounts claimed by the Department of Finance this would have a material adverse effect on the Company’s financial condition. During 2011 the Company recorded $300,000 as a provision for commercial rent tax. The Company has determined that $300,000 is the minimum amount that would settle the claim according to ASC 450-20. The amount claimed by the Department of Finance was approximately $912,000; as a result, there is a reasonable possibility that a loss in excess of the $300,000 would be incurred.

On April 26, 2015, the Company was informed that a complaint had been filed in the United States District Court for the Eastern District Court of Texas by UrgenSync, LLC against the Company, claiming infringement of a patent claimed to be owned by UrgenSync. The Company is currently investigating the matter and reviewing the alleged complaint and intends to defend itself vigorously.

In addition, from time to time the Company is a party to legal proceedings, much of which is ordinary routine litigation incidental to the business, and is regularly required to expend time and resources in connection with such proceedings. Accordingly, the Company, in consultation with its legal advisors, accrues amounts that management believes it is probable the Company will be required to expend in connection with all legal proceedings to which it is a party.

Regulatory Taxes, Fees and Surcharges

Some state and local regulatory authorities believe they retain jurisdiction to regulate the provision of, and impose taxes, fees and surcharges on, intrastate Internet and VoIP telephony services, and have attempted to impose such taxes, fees and surcharges, such as a fee for providing E-911 service. Rulings by the state commissions on the regulatory considerations affecting Internet and IP telephony services could affect our operations and revenues, and we cannot predict whether state commissions will be permitted to regulate the services we offer in the future.

The Company paid approximately $116,000 of state and local taxes and other fees during the three months ended ~~September~~March 3031, ~~2014~~2015. To the extent the Company ~~increases~~ increases the cost of services to our customers to recoup some of the costs of compliance this will have the effect of decreasing any price advantage the Company may have over traditional telecommunications companies.

In addition, it is possible that the Company will be required to collect and remit taxes, fees and surcharges in other states and local jurisdictions where it has not done so, and which such authorities may take the position that it should have collected. If so, they may seek to collect those past taxes, fees and surcharges from the Company and impose fines, penalties or interest charges on the Company. The Company’s payment of these past taxes, fees and surcharges, as well as penalties and interest charges, could have a material adverse effect on the Company.

Warrants and Convertible Note

We accounted for the Second Loan Agreement and the Third Loan Agreement in accordance with "Debt with Conversion and Other Options" [ASC 470-20-25]. We accounted for the Second Loan Agreement as a debt instrument with stock warrants. Under ASC 470-20-25, issuers of certain debt instruments with stock warrants are required to separately account for the liability components and the equity components based on the relative fair value of the debt instrument without the warrants and of the warrants themselves at the time of issuance, which the Company did.

We accounted for the Third Loan Agreement as a convertible debt instrument with stock warrants and a beneficial conversion features. As required under ASC 470-20-25, the Company separated the debt instruments and the warrants based on their relative fair value for the liability components and for the equity components. The Company concluded that the liability component includes beneficial conversion features. Under ASC 470-20-25, issuers of certain debt instruments with beneficial conversion features need to allocate to an equity component an amount based on the amount that the feature is in-the-money at the commitment date, which the Company did.

Pursuant to the Third Amendment and the Warrants Amendment, the Company considered the restructured short-term debt to D4 Holdings under the criteria of, and accounted for the restructured short-term debt as, a troubled debt restructuring in accordance with ASC Subtopic 470-60, “Debt-Troubled Debt Restructurings by Debtors”, which requires that the gross future cash flows of principal and interest be reflected in the balance sheet.

The interest expenses relating to both the contractual interest coupon and amortization of the discount on the liability component are as follows:

	For the nine months ended September 30,
	For the three months ended March 31,
	2014		2013
	2015		2014
	($ in thousands)
Contractual interest coupon		~~505~~180		~~433~~158
Amortization of the discount on the liability components		~~317~~76		~~122~~49
Total interest expense on short-term loans		~~822~~256		~~555~~207

On March 28, 2014, we and our subsidiaries entered into the D4 Forbearance Agreement with D4 Holdings. In connection with the extension of the maturity dates under the Third Amendment, the Company issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of the Company's common stock at an exercise price of $0.02 per share. We accounted for the Warrants amendment as a modification of debt terms as required under EITF 86-18 “Debtor’s accounting for a Modification of Debt Terms” and with accordance with ASC 470-50-40. As instructed, we established a new effective interest rate based on the carrying value of the debt and the revised cash flows under the new terms of debt.

The table below details the book value of short-term loan and the amortization balance of the discount on the liability’s component:

	As of
	September 30, 2014			December 31, 2013
	($ in thousands)
Book value of short-term loan prior to modification		5,746			4,960
Change in fair value related to the benefit feature		(463	)		-
Net balance of modified short-term loan		5,283			4,960

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2013~~2014.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance, the industries in which we operate our beliefs and our management’s assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “may,” “expect,” “anticipate,” “forecast,” “intend,” “plan,” “believe,” “seek,” “estimate,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:

● our ability to obtain additional capital in the immediate term to finance operations; ● our ability to meet our obligations under outstanding indebtedness, and the impact of any remedies our secured lender and other counterparties may seek thereunder; ● our ability to successfully pursue strategic alternatives in the event we are unable to increase revenues and generate additional cash; ● our ability to increase revenues and generate additional cash; ● our dependence on a small number of key customers for a significant percentage of our revenue; ● our ability to retain key personnel and employees needed to support our services and ongoing operations and our ability to continue to effectively maintain our ongoing operations, especially following the reduction in force that we recently effected; ● our ability to operate in international markets, including our ability to receive payments from customers located in such markets; ● decreasing rates of all related telecommunications services; ● the public’s acceptance of Video over Internet Protocol, and the level and rate of customer acceptance of our new products and services; ● the competitive environment of VoIP telephony and our ability to compete effectively; ● fluctuations in our quarterly financial results; ● our ability to maintain and operate our computer and communications systems without interruptions or security breaches; ● our ability to provide quality and reliable service, which is in part dependent upon the proper functioning of equipment owned and operated by third parties; ● the uncertainty of future governmental regulation; ● the outcome of our discussions with the New York City Department of Finance regarding the outstanding commercial rent tax, interest and penalties it claims we owe; ● the impact of continuing unrest in the Middle East on our customers doing business in that region; ● our ability to protect our intellectual property against infringement by others, and the costs and diversion of resources relating to any claims that we infringe the intellectual property rights of third parties; ● our ability to comply with governmental regulations applicable to our business; ● the need for ongoing product and service development in an environment of rapid technological change; and ● other risks referenced from time to time in our filings with the SEC.

~~For~~● aour ~~more~~ability ~~complete list and description of such risks and uncertainties, as well as other risks, please refer~~ to ~~the~~meet ~~section entitled "Risk Factors" in~~ our ~~Annual~~obligations ~~Report~~under onoutstanding ~~Form 10-K for the year ended December 31~~indebtedness, ~~2013, as filed with the SEC on March 31, 2014. Except as required under the federal securities laws~~ and the ~~rules~~impact ~~and~~of ~~regulations promulgated thereunder, we do not have~~ any ~~intention or~~remedies ~~obligation~~our tosecured ~~update~~lender ~~publicly~~and ~~any~~other ~~forward-looking~~counterparties ~~statements~~may orseek ~~risk factors after the filing of this report, whether as a result of new information, future events, changes in assumptions or otherwise.~~thereunder;

●

our ability to successfully pursue strategic alternatives in the event we are unable to increase revenues and generate additional cash;

●

our ability to increase revenues and generate additional cash;

●

our dependence on a small number of key customers for a significant percentage of our revenue;

●

our ability to retain key personnel and employees needed to support our services and ongoing operations and our ability to continue to effectively maintain our ongoing operations, especially following the reduction in force that we recently effected;

●

our ability to operate in international markets, including our ability to receive payments from customers located in such markets;

●

decreasing rates of all related telecommunications services;

●

the public’s acceptance of Video over Internet Protocol, and the level and rate of customer acceptance of our new products and services;

●

the competitive environment of VoIP telephony and our ability to compete effectively;

●

fluctuations in our quarterly financial results;

●

our ability to maintain and operate our computer and communications systems without interruptions or security breaches;

●

our ability to provide quality and reliable service, which is in part dependent upon the proper functioning of equipment owned and operated by third parties;

●

the uncertainty of future governmental regulation;

●

the outcome of our discussions with the New York City Department of Finance regarding the outstanding commercial rent tax, interest and penalties it claims we owe;

●

the impact of continuing unrest in the Middle East on our customers doing business in that region;

●

our ability to protect our intellectual property against infringement by others, and the costs and diversion of resources relating to any claims that we infringe the intellectual property rights of third parties;

●

our ability to comply with governmental regulations applicable to our business;

●

the need for ongoing product and service development in an environment of rapid technological change; and

●

other risks referenced from time to time in our filings with the SEC.

For a more complete list and description of such risks and uncertainties, as well as other risks, please refer to the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 31, 2015. Except as required under the federal securities laws and the rules and regulations promulgated thereunder, we do not have any intention or obligation to update publicly any forward-looking statements or risk factors after the filing of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

Overview

We are a global provider of integrated video and voice over Internet Protocol, or VoIP, telephony services, products, hosted solutions and infrastructure. We were founded in 1996 to capitalize on the growth of the Internet as a communications tool by commercially offering Internet Protocol, or IP, telephony services, or VoIP telephony. VoIP telephony is the real-time transmission of voice communications in the form of digitized “packets” of information over the Internet or a private network, similar to the way in which e-mail and other data is transmitted. While we began as primarily a low-cost alternative source of wholesale minutes for carriers around the world, we have evolved into an international provider of next generation communication services.

Today we support tens of thousands of active users around the globe through our service provider and reseller channel and our direct-to-consumer channel. We have built a privately-managed, state-of-the-art global telecommunications platform using IP technology and we offer a broad suite of private label VoIP products and services as well as a back-office platform. Our operations management tools include, among others: account provisioning; e-commerce-based payment processing systems; billing and account management; operations management; web development; network management; and customer care. Based on our customizable VoIP solutions, these customers can offer private label video and voice-over-IP services to their own customer bases under their own brand name, a “white-label” brand (in which no brand name is indicated and different customers can offer the same product), or the deltathree brand. At the same time, our direct-to-consumer channel includes our joip Mobile application (which is a cellular phone application providing low cost mobile calls over 3G cellular networks as well as WiFi networks) and our iConnectHere offering (which provides VoIP products and services directly to consumers and small businesses online using the same primary platform). We are able to provide our services at a cost per user that is generally lower than that charged by traditional service providers because we minimize our network costs by using efficient packet-switched technology and interconnecting to a wide variety of termination options, which allows us to benefit from pricing differences between vendors to the same termination points.

Prior to 1999, we focused on building a privately-managed, global network utilizing IP technology, and our business primarily consisted of carrying and transmitting traffic for communications carriers over our network. Beginning in 1999, we began to diversify our offerings by layering enhanced IP telephony services over our network. These enhanced services were targeted at consumers and were primarily accessible through our consumer website. During 2000, we began offering services on a co-branded or private-label basis to service providers and other businesses to assist them in diversifying their product offerings to their customer bases. In 2001, we continued to enhance our unique strengths through our pioneering work with the Session Initiation Protocol, or SIP, an Internet Engineering Task Force standard that has been embraced by industry leaders such as Microsoft and Cisco. These efforts culminated in the launch of our state-of-the-art SIP infrastructure, and in doing so we became the first major VoIP service provider to deploy an end-to-end SIP network and services. In recent years, we have continued our pioneering efforts in SIP and these efforts have yielded significant new releases.

In 2009 we began the process of expanding the suite of our communications offerings into the global video phone services market. In the third quarter of 2009 we entered into an agreement with ACN Pacific Pty Ltd., a wholly-owned subsidiary of ACN, Inc., or ACN, pursuant to which we provide digital video and voice-over-IP services in Australia and New Zealand to ACN Pacific. In December 2010 we entered into an agreement with ACN Korea, a wholly-owned subsidiary of ACN, pursuant to which we provide digital video and voice-over-IP services in Korea.

In 2010 we continued to update our network by adding a video mail feature to our video phone applications and launching our joip mobile application in July 2010. Following the launch of the mobile application, in October 2010 we entered into a sales agency agreement with ACN pursuant to which ACN sells a private label version of joip Mobile under the ACN Mobile World brand in the United States and Canada. In addition, we offer the joip Mobile application on a white-label basis to other customers. Finally, we entered into affiliate agreements with different third parties pursuant to which such third parties refer potential subscribers to our joip Mobile application.

In April 2011 we entered into an introducer agreement with ACN Europe B.V., a wholly-owned subsidiary of ACN, pursuant to which ACN Europe refers potential customers in different countries in Europe to a private label version of joip Mobile sold under the ACN Mobile World brand. In November 2011 we entered into a service agreement with Momentis U.S. Corp., a multi-level marketing company, pursuant to which Momentis refers potential customers in North America to a co-branded offering of joip Mobile and other consumer VoIP products and services.

On April 3, 2012, we entered into an amendment to our sales agency agreement with ACN and our introducer agreement with ACN Europe. Pursuant to the terms of the amendment, we are required to pay all then-current commissions on a timely basis as required under the agreements and a late fee in the amount of one percent per month of any past-due, unpaid commissions (which, as of ~~September~~March 31, 302015, ~~2014,~~ was equal to approximately $1,~~568~~742,000). In addition, beginning July 15, 2012, we were required to pay down any unpaid ~~past~~ past due amounts in an amount equal to at least $15,000 per month through June 15, 2013, and at least $25,000 per month thereafter ~~until~~ until such time as the unpaid balance is paid in full, and are required to pay in full any unpaid, past due amounts upon 30 days' notice. In addition, in the event of certain insolvency-related events defined in the agreements, all unpaid amounts will become ~~immediately~~ immediately due and payable effective immediately prior to such event.

In July 2012 we began making the $15,000 monthly payment of unpaid commissions, however due to our financial condition we suspended making the monthly payments of the unpaid commissions and the current commissions in April 2013 with the oral consent of ACN and ACN Europe. As discussed below in " – Liquidity and Capital Resources", on June 12, 2014, ACN, ACN Europe and we entered into the ACN Forbearance Agreement.

14We did not make the payments we were required to make to the ACN Entities on July 15, 2014, under the ACN Forbearnace Agreement and are currently in default under the ACN Forbearance Agreement. On September 29, 2014 ACN and we entered into the Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance Agreement to December 15, 2014 and provided that we are obligated to pay a fee of $50,000 on or before December 15, 2014. As of March 18, 2015 we have not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment penalty fee of one percent (1%) of such amount is accruing on a monthly basis.

We do not know when we will resume making such payments again, and there is no assurance that we will be able to do so in the near future (if at all) or that until such time ACN and ACN Europe will continue to consent to our not making any such required payments and not exercise any rights they may have under our respective agreements with them or under applicable law. In addition, in the event of certain insolvency-related events defined in the agreements, all unpaid amounts will become immediately due and payable effective immediately prior to such event. Such events include the filing of any petition or action for relief under law relating to debtors; application or consent for the appointment of a receiver, trustee, or the like over substantial assets; execution of a general assignment to creditors; general inability to pay debts as they come due; or the filing of any involuntary petition against a party that is not dismissed within 60 days of its filing.

As a complement to the initiatives we have taken to attempt to organically expand our businesses, we have also evaluated opportunities for growth through strategic relationships. In February 2009 we consummated a transaction with D4 Holdings pursuant to which we sold to D4 Holdings an aggregate of 39,000,000 shares of our common stock and a warrant to purchase up to an additional 30,000,000 shares of our common stock. D4 Holdings is a private investment fund whose ownership includes owners of ACN, a direct seller of telecommunications services. As a result of the transactions with D4 Holdings, we expect to continue to seek opportunities to provide services to ACN and enter into other commercial transactions that give us access to ACN’s international marketing and distribution capabilities.

From an operational standpoint, in 2012 we continued to focus our near-term strategy and market initiatives on growing our service provider and digital next generation communications offerings while still supporting our core VoIP reseller and direct-to-consumer business segments.

Going forward, we expect to:

• actively market our products and services to those entities that wish to offer white-label digital next generation communications offerings; • pursue a targeted strategy of identifying and evaluating appropriate strategic collaborations, such as potentially engaging in commercial transactions with ACN, that we hope will continue to expand and diversify our customer base; • market and sell our direct-to-consumer products and services through affiliates and our affiliate program; and • support and maintain our current reseller base, as we expect our revenue from this key channel will continue to represent a significant percentage of our total revenue in the foreseeable future.

~~As of~~• ~~September~~pursue ~~30,~~a ~~2014,~~targeted westrategy ~~had~~of ~~negative~~identifying ~~working~~and ~~capital~~evaluating ~~equal~~appropriate tostrategic ~~approximately~~collaborations, ~~$8.3~~such ~~million~~ as ~~well~~potentially asengaging negative stockholders’ equity equal to approximately $8.2 million. We believe it is probable that we will continue to experience losses and increased negative working capital and negative stockholders’ equity in ~~the~~commercial ~~near~~transactions ~~future~~with and will not be able to return to positive cash flow before we require additional cash in the immediate term. We may experience difficulties accessing the equity and debt markets and raising additional capitalACN, ~~and there can be no assurance~~ that we ~~will~~hope ~~be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, our existing stockholders~~ will ~~experience~~continue ~~significant further dilution. Because of our significant losses~~ to ~~date~~expand and ~~our~~diversify limited tangible assets, we do not fit traditional credit lending criteria, which could make it difficult for us to obtain loans or to access the capital markets. If we issue additional equity or convertible debt securities to raise funds, the ownership percentage of our ~~existing stockholders~~customer ~~would be reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock.~~base;

•

market and sell our direct-to-consumer products and services through affiliates and our affiliate program; and

•

support and maintain our current reseller base, as we expect our revenue from this key channel will continue to represent a significant percentage of our total revenue in the foreseeable future.

As of March 31, 2015, we had negative working capital equal to approximately $9.5 million as well as negative stockholders’ equity equal to approximately $9.4 million. We believe it is probable that we will continue to experience losses and increased negative working capital and negative stockholders’ equity in the near future and will not be able to return to positive cash flow before we require additional cash in the immediate term. We may experience difficulties accessing the equity and debt markets and raising additional capital, and there can be no assurance that we will be able to raise such additional capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, our existing stockholders will experience significant further dilution. Because of our significant losses to date and our limited tangible assets, we do not fit traditional credit lending criteria, which could make it difficult for us to obtain loans or to access the capital markets. If we issue additional equity or convertible debt securities to raise funds, the ownership percentage of our existing stockholders would be reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock.

We believe that, unless we are able to increase revenues and generate additional cash, our current cash and cash equivalents will not satisfy our current projected cash requirements beyond the immediate future. As a result, there is substantial doubt about our ability to continue as a going concern.

In addition, unless we are able to increase revenues and generate additional cash, based on currently projected cash flows we believe that we will be unable to pay future scheduled interest and/or principal payments under the various loan agreements with D4 Holdings as these obligations become due, and beginning January 2013 we suspended making scheduled interest payments. On January 2, 2014, we did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings, following which we and our subsidiaries entered into the Forbearance Agreement with D4 Holdings, or the "D4 Holdings Forbearance Agreement". In the event we are unable to resume making interest payments and to pay the outstanding principal when due following the termination of the D4 Holdings Forbearance Agreement, if D4 Holdings is not willing to waive compliance or otherwise modify our obligations such that we are able to avoid defaulting on such obligations, because D4 Holdings has a lien on all of our assets to secure our obligations under the loan agreements it could take actions under the loan agreements and seek to take possession of or sell our assets to satisfy our obligations thereunder. Any of these actions would likely have an immediate material adverse effect on our business, financial condition or results of operations.

Due to our ongoing ~~losses~~ losses and reduction in cash, we initiated restructuring activities beginning in the second quarter of 2011 in an effort to cut ~~operating~~ operating costs significantly and better align our operations with our current business model. In accordance with the restructuring, we instituted a reduction in force and decreased the number of full time employees from approximately 53 to 32, reduced the salaries of all remaining employees by five percent, and decreased non-material expenses as well as payments to be made to vendors and other third parties. In addition, in December 2013 we instituted an additional, smaller reduction in force. As of ~~September~~March 3031, ~~2014~~2015, we had 1211 full time employees. During March 2014, as an incentive for our remaining employees we reversed the five-percent reduction in salaries that we instituted in 2011.

In view of our current cash resources, nondiscretionary expenses, debt and near term debt service obligations, we have begun exploring strategic alternatives available to us and may explore all such alternatives available to us, including, but not limited to, a sale or merger of our company, a sale of our assets, recapitalization, partnership, debt or equity financing, voluntary deregistration of its securities, financial reorganization, liquidation and/or ceasing operations. In the event that we are unable to secure additional funding, we may determine that it is in our best interests to voluntarily seek relief under Chapter 11 of the U.S. Bankruptcy Code. Seeking relief under the U.S. Bankruptcy Code, even if we are able to emerge quickly from Chapter 11 protection, could have a material adverse effect on the relationships between us and our existing and potential customers, employees, and others. Further, if we were unable to implement a successful plan of reorganization, we might be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code. There can be no assurance that exploration of strategic alternatives will result in our company pursuing any particular transaction or, if we pursue any such transaction, that it will be completed.

Trends in Our Industry and Business

A number of factors in our industry and business have a significant effect on our results of operations and are important to an understanding of our financial statements. These trends include:

Overall Economic Factors: Our operations and earnings are affected by local, regional and global events or conditions that affect supply and demand for telecommunications products and services. These events or conditions are generally not predictable and include, among other things, general economic growth rates and the occurrence of economic recessions; changes in demographics, including population growth rates; and consumer preferences. Our strategy and execution focus is predicated on an assumption that these factors will continue to promote strong desire for the utilization of telephony products and services and that the cost and feature advantages of VoIP alternatives will not be negatively impacted by unforeseen changes in these factors.

Industry: The telecommunications industry is highly competitive. In recent years we have seen new sources of supply for our underlying infrastructure that have reduced our overall costs of operation, including both advances in telecommunications technology and advances in technology relating to telecommunications usage, and have enjoyed the benefits of competition among these suppliers for a relatively limited amount of viable customers. A key component of our competitive position, particularly given the number and range of competing communications products, is our ability to manage operating expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency.

Consumer Demand: There is significant competition within the traditional telecommunications marketplaces (landline and wireless) and also with other emerging next generation telecommunications providers, including IP telecommunications providers, in supplying the overall telecommunications needs of businesses and individual consumers.

A key component of our competitive position, particularly given the commodity-based nature of many of our products, is our ability to sell to a growing demand base for alternative communications products, in both the developed and developing global marketplace. Within the developed global marketplace, our ability to sell broadband video and voice-over-IP products and services is directly linked to the significant growth rate of broadband adoption, and we expect this trend to continue. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases. Within the developing areas of the world, our ability to sell alternative telephony products and services is linked to both the increasing baseline economic trends within these countries as well as the growing desire for individuals and businesses to communicate and do business outside of their own countries. We expect these trends to continue, and benefit from them because both the ability to afford long distance calls and the desire to make them increase as a result.

Political Factors: Our operations and earnings have been, and may in the future be, affected from time to time in varying degree by political instability, social unrest (including the recent and continuing social unrest in the Middle East) and by other political developments and laws and regulations, such as: telecommunications regulations; war, civil war, armed conflict, terrorism and other international conflicts; restrictions on production, imports and exports; price controls; tax increases and retroactive tax claims; expropriation of property; and cancellation of contract rights. Both the likelihood of such occurrences and their overall effect upon us vary greatly from country to country and are not predictable. At the same time, VoIP is becoming legal in more countries as governments seek to increase competition, and this helps us as service providers and resellers seek to meet their customers’ telecommunications needs with newly available solutions. Both the likelihood of VoIP legalization and its overall effect upon us vary greatly from country to country and are not predictable.

Regulatory Factors: Our business has developed in an environment largely free from regulation. However, the United States and other countries have begun to examine how VoIP services should be regulated and to begin instituting such regulation, and a number of initiatives could have an impact on our business. These initiatives include the assertion of state regulatory and taxing authorities over us, FCC rulemaking regarding emergency calling services, the imposition of law-enforcement obligations like the Communications Assistance for Law Enforcement Act, referred to as “CALEA”, marketing restrictions and data protection rules for Customer Proprietary Network Information, referred to as “CPNI”, access to relay services for people with disabilities, local number portability, proposed reforms for the inter-carrier compensation system, and an ongoing generic rulemaking considering the classification of interconnected VoIP services under federal law. Complying with regulatory developments will impact our business by increasing our operating expenses, including legal fees, requiring us to make significant capital expenditures or increasing the taxes and regulatory fees we pay. We may impose additional fees on our customers in response to these increased expenses. This would have the effect of increasing our revenues per customer, but not our profitability, and increasing the cost of our services to our customers, which would have the effect of decreasing any price advantage we may have over traditional telecommunications companies.

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Project Factors: In addition to the factors cited above, the advancement, cost and results of particular projects depend on the outcome of: negotiations with potential partners, governments, suppliers, customers or others; changes in operating conditions or costs; and the occurrence of unforeseen technical difficulties or enhancements. The likelihood of these items occurring and its overall positive or negative effect upon us vary greatly from project to project and are not predictable.

Risk Factors: ~~For~~ For a discussion of the impact of market risks, financial risks and other risks and uncertainties that we face, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2013~~2014, as filed with the SEC on March 31, ~~2014~~ 2015.

Revenues

Our revenues are derived mainly from resellers, service providers, and direct consumers of our video and voice-over-IP products and services. Revenue is recognized from these products and services as follows:

postpaid minutes: revenue from the sale of minutes on a postpaid basis (primarily sold to our wholesale resellers) is recognized at the time such minutes are used;

prepaid minutes: prepayments for communications services and the sale of minutes are deferred and recognized as revenue at the time communications services are provided and at the time the minutes are utilized , service charges are levied or remaining balances expire. We conduct evaluations of outstanding prepaid balances that do not have expiration dates or service fees associated with them to determine, based on terms and condition of agreements and historical data, whether such balances are likely to be utilized. If we determine that balances are unlikely to be used, the deferred revenue liability is reduced accordingly and other revenue is recognized. The outstanding prepaid balances likely to be utilized are reconciled to our deferred revenue account and deferred revenue is increased or decreased accordingly to properly reflect our estimated liability;

monthly recurring charges: revenue from fees such as set monthly recurring charges based on the level of service or calling plans that the subscriber subscribes for is recognized as the applicable service is provided; and

other revenues: these revenues include, but are not limited to, prepaid balances with no services fees or expiration dates that are unlikely to be utilized.

The following sets forth our revenues per segment for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2014		2013		2014		2013
Segment	2015		2014
	($ in thousands)				~~($ in thousands)~~
Segment
Reseller	$	1,696	$	3,668
Reseller	$	2,371	$	3,270	$	9,824	$	9,309
Direct-to-consumer		159		316
Direct-to-consumer		232		441		816		1,643
Service provider		166		295
Service provider		326		268		924		799
Other		21		40
Other		30		62		105		236
Total	$	2,042	$	4,319
Total	$	2,959	$	4,041	$	11,669	$	11,987

The provision of video and voice-over-IP products and services through our reseller, direct-to-consumer and service provider channels accounted for approximately 8083% and 8185%, 8% and 117%, and 118% and 7%, respectively, of our total revenues for the three months ended ~~September~~March 3031, ~~2014~~2015 and ~~2013~~ 2014.

Costs and Operating Expenses

Costs and operating expenses consist of the following: cost of revenues; research and development expenses; selling and marketing expenses; general and administrative expenses; and depreciation and amortization.

Cost of revenues consist primarily of network, access, termination and transmission costs paid to carriers that we incur when providing services and fixed costs associated with leased transmission lines. The term of our contracts for leased transmission lines is generally one year or less, and either party can terminate with prior notice.

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The following sets forth our cost of revenues per component for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31,
Cost of Revenues per Component	2015		2014
	($ in thousands)
Termination of minutes	$	1,453	$	3,235
Infrastructure		102		100
Internet access		44		112
Licenses fees and support		22		5
Other		70		96
Total Cost of Revenues	$	1,691	$	3,548

Research and development expenses consist primarily of costs associated with establishing our network and the initial testing of our services and compensation expenses of software developers involved in new product development and software maintenance. Since our inception, we have expensed all research and development costs in each of the periods in which they were incurred.

Selling and marketing expenses consist primarily of expenses associated with our direct sales force incurred to attract potential service provider, reseller, and customers. In addition, we expense all sales commissions paid to third parties that sell our products and services pursuant to the terms of our agreements with such third parties.

General and administrative expenses consist primarily of compensation and benefits for management, finance and administrative personnel, insurance premiums, occupancy costs, legal and accounting fees and other professional fees. Additionally, we incur expenses associated with our being a public company, including the costs of directors' and officers' insurance.

Depreciation and amortization consists of the depreciation calculated on our fixed assets.

We have not recorded ~~any~~ any income tax benefit for net losses and credits incurred for any period from inception to ~~September~~March 3031, ~~2014~~2015. The ~~utilization~~ utilization of these losses and credits depends on our ability to generate taxable income in the future. Because of the uncertainty of our generating taxable income going forward, we have recorded a full valuation allowance with respect to these deferred assets.

Net Operating Losses

As of ~~September~~March 3031, ~~2014~~ 2015, we had net operating losses, or NOLs, generated in the U.S. of approximately $23.89 million and Delta Three Israel Ltd., our wholly-owned subsidiary, had NOLs of approximately $43.59 million. Our issuance of common stock to D4 Holdings in February 2009 constituted an an “ownership change” as defined in Section 382 of the Internal Revenue Code. As a result, under Section 382 our ability to utilize NOLs generated in the U.S. prior to February 2009 (equal to approximately $156 million) to offset any income we may generate in the future will be limited to approximately $600,000 per year from February 2009. The NOLs began to expire in 2011 and will continue to expire at various dates until 2029 if not utilized. Our ability to utilize our remaining NOLs could be additionally reduced if we experience any further “ownership change,” as defined under Section 382.

Results of Operations - Three Months Ended March ~~September 30~~31, ~~2014~~2015, Compared to Three Months Ended ~~September~~March 3031, ~~2013~~2014

Revenues

Revenues decreased by approximately $12.03 million, or 2553%, to approximately $32.0 million for the three months ended ~~September~~March 3031, ~~2014~~2015, from approximately $4.03 million for the three months ended ~~September~~March 3031, ~~2013~~2014. During this period the number of minutes carried by our ~~network~~ network decreased by approximately 3046% from approximately 7273.1 million minutes during the three months ended ~~September~~March 3031, ~~2013~~2014, to approximately 50 39.64 million minutes for the corresponding period in ~~2014~~2015. This was caused, in large part, by a decrease of approximately 11 17.5 million minutes utilized by our largest reseller during the three months ended ~~September~~March 3031, ~~2014~~2015, compared to the number of ~~minutes~~ minutes utilized by such reseller during the corresponding period in ~~2013~~2014, due in large part to political instability and unrest in areas in which this reseller operates. We also experienced a decrease of approximately 54.0 million minutes utilized by our ~~second largest~~third largest reseller during the three months ended ~~September~~March 3031, ~~2014~~2015, compared to the number of minutes utilized by such reseller during the corresponding period in ~~2013~~2014. These decreases were partially offset by an increase of 3.0 million minutes utilized by our ~~third~~second largest reseller during the three months ended ~~September~~March 3031, ~~2014~~2015, compared to the number of minutes utilized by such reseller during the corresponding period in ~~2013~~2014. The number of minutes utilized by our direct-to-consumer division decreased by approximately 21.58 million minutes during the three months ended ~~September~~March 3031, ~~2014~~2015, compared to the number of minutes utilized by this division during the corresponding period in ~~2013~~2014.

Revenues generated by our reseller division decreased by approximately $0.9 million, or 27%, to approximately $2.4 million for the three months ended September 30, 2014, from approximately $3.3 million for the three months ended September 30, 2013. Our two largest resellers accounted for approximately $2.1 million, or approximately 90%, of the revenue generated from our reseller division for the three months ended September 30, 2014, which represented approximately 72% of our total revenue for such period. By comparison, for the three months ended September 30, 2013, our two largest resellers accounted for approximately 92% of the revenue generated from our reseller division, or approximately 75% of our total revenue during such period.

Revenues generated by our service provider division increased by approximately $58,000, or 22%, from approximately $268,000 for the three months ended September 30, 2013, to approximately $326,000 for the three months ended September 30, 2014. This increase was primarily due to an increase in revenues generated by one of our affiliates. One of our service provided agreements expired in October 2014, which will cause a decline in revenues from our service provider division in the fourth quarter of 2014 and going forward.

Sales to direct consumers decreased by approximately $209,000 or 47%, to approximately $232,000 for the three months ended September 30, 2014, from approximately $441,000 for the three months ended September 30, 2013. Revenues generated through our iConnectHere offering declined by approximately $24,000 from approximately $107,000 for the three months ended September 30, 2013, to approximately $83,000 for the three months ended September 30, 2014. In addition, the revenues generated by our joip Mobile offering decreased from $298,000 for the three months ended September 30, 2013, to approximately $130,000 for the three months ended March 31, 2014.

Costs and Operating Expenses

Cost of revenues. Cost of revenues decreased by approximately $0.9 million, or 27%, from approximately $3.3 million for the three months ended September 30, 2013, to approximately $2.4 million for the three months ended September 30, 2014. Our network rent cost decreased by approximately $59,000 from approximately $253,000 for the three months ended September 30, 2013, to approximately $194,000 for the three months ended September 30, 2014. Our termination cost decreased by approximately $0.8 million, or 28%, from approximately $2.9 million for the three months ended September 30, 2013, to approximately $2.1 million for the three months ended September 30, 2014. The decrease in termination cost was primarily caused by a decline of revenues generated by our largest reseller, which generated approximately $1.6 million of termination costs for the three months ended September 30, 2014 compared to $2.5 million during the three months ended September 30, 2013. Cost of revenues also include software cost as licenses paid for reselling them to our service providers. For the three months ended September 30, 2014 we recorded approximately $57,000 as licenses fees and support.

Research and development expenses. Research and development expenses decreased by approximately $110,000, or 36%, from approximately $303,000 for the three months ended September 30, 2013, to approximately $193,000 for the three months ended September 30, 2014. As a percentage of revenues, research and development expenses for the three months ended September 30, 2014, was approximately 7% compared to approximately 8% for the three months ended September 30, 2013.

Selling and marketing expenses. Selling and marketing expenses decreased by approximately $148,000 or 51%, to approximately $143,000 for the three months ended September 30, 2014, from approximately $291,000 for the three months ended September 30, 2013. The main reason for the decrease was a decline in commissions we were required to pay ACN, ACN Europe and Momentis pursuant to our respective agreements with them. As a percentage of revenues, selling and marketing expenses decreased to approximately 5% for the three months ended September 30, 2014, from approximately 7% for the three months ended September 30, 2013.

General and administrative expenses. General and administrative expenses decreased by approximately $43,000 or 13%, to approximately $279,000 for the three months ended September 30, 2014, from approximately $322,000 for the three months ended September 30, 2013. As a percentage of revenues, selling and marketing expenses increased to approximately 9% for the three months ended September 30, 2014, from approximately 8% for the three months ended September 30, 2013.

Depreciation and amortization. Depreciation and amortization decreased by approximately $24,000, from approximately $42,000 for the three months ended September 30, 2013, to approximately $18,000 for the three months ended September 30, 2014.

Loss from Operations

For the three months ended September 30, 2014, we recorded a loss from operations of approximately $124,000 compared to a loss from operations of approximately $228,000 for the three months ended September 30, 2013, due to the factors set forth above.

Interest Expense, Net

We recorded interest expense of approximately $416,000 for the three months ended September 30, 2014, compared to approximately $279,000 for the three months ended September 30, 2013. Interest expense consisted of interest recorded under our loan agreements with D4 Holdings of approximately $175,000, and $138,000 which we recorded as the aggregate amount for both the warrant we issued to D4 Holdings in connection with the Second Loan Agreement and the warrant and Convertible Note we issued to D4 Holdings in connection with the Third Loan Agreement. In addition, we have recorded as an interest expense the $50,000 we are required to pay in connection with our entering into the amendment to the ACN Forbearance Agreement on or before December 15, 2014 .

Income Taxes, Net

We recorded net income tax expenses of $1,000 for the three months ended September 30, 2014.

~~Net~~Revenues generated ~~Loss~~by our reseller division decreased by approximately $2.0 million, or 54%, to approximately $1.7 million for the three months ended March 31, 2015, from approximately $3.7 million for the three months ended March 31, 2014. Our two largest resellers accounted for approximately $1.5 million, or approximately 89%, of the revenue generated from our reseller division for the three months ended March 31, 2015, which represented approximately 74% of our total revenue for such period. By comparison, for the three months ended March 31, 2014, our two largest resellers accounted for approximately 86% of the revenue generated from our reseller division, or approximately 73% of our total revenue during such period.

~~For~~Revenues ~~the~~generated ~~three~~by ~~months~~our ~~ended~~service ~~September~~provider ~~30,~~division ~~2014,~~decreased weby ~~recorded~~approximately a$129,000, ~~net~~or ~~loss~~44%, offrom approximately $~~541~~295,000 ~~compared~~for tothe athree ~~net~~months ~~loss~~ended ofMarch 31, 2014, to approximately $~~510~~166,000 for the three months ended ~~September~~March 3031, ~~2013,~~2015. This decrease was primarily due to a decline in revenues generated from our service agreement with ACN Pacific as a result of the ~~factors~~expiration ~~set~~of ~~forth~~the ~~above~~applicable service agreement in October 2014.

~~Results~~Sales to ofdirect ~~Operations~~consumers -decreased ~~Nine~~by ~~Months~~approximately $157,000 or 50%, to approximately $159,000 for the three months ended March ~~Ended~~31, ~~September~~2015, 30from approximately $316,000 for the three months ended March 31, 2014. Revenues generated through our iConnectHere offering declined by approximately $22,000 ~~Compared~~from approximately $94,000 for the three months ended March 31, 2014, to ~~Nine~~approximately ~~Months~~$72,000 for ~~Ended~~the ~~September~~three 30months ended March 31, ~~2013~~2015. In addition, the revenues generated by our joip Mobile offering decreased from $198,000 for the three months ended March 31, 2014, to approximately $71,000 for the three months ended March 31, 2015.

Revenues

Revenues decreased by approximately $0.3 million, or 3%, to approximately $11.7 million for the nine months ended September 30, 2014, from approximately $12.0 million for the nine months ended September 30, 2013. During this period the number of minutes carried by our network decreased by approximately 12% from approximately 226 million minutes during the nine months ended September 30, 2013, to approximately 198 million minutes for the corresponding period in 2014. This was caused, in large part, by a decrease of approximately 21 million minutes utilized by our third-largest reseller during the nine months ended September 30, 2014, compared to the number of minutes utilized by such reseller during the corresponding period in 2013, due in large part to political instability and unrest in areas in which this reseller operates. In addition, it was caused by a decrease of approximately 5 million minutes utilized by our largest reseller during the nine months ended September 30, 2014, compared to the number of minutes utilized by such reseller during the corresponding period in 2013. The decrease in minutes utilized was offset by an increase of 15 million minutes generated by our second largest reseller during the nine months ended September 30, 2014, compared to the number of minutes utilized by such reseller during the corresponding period in 2013.The number of minutes utilized by our direct-to-consumer division decreased by approximately 10 million minutes during the nine months ended September 30, 2014, compared to the number of minutes utilized by this division during the corresponding period in 2013

Revenues generated by our reseller division increased by approximately $0.5 million, or 5%, to approximately $9.8 million for the nine months ended September 30, 2014, from approximately $9.3 million for the nine months ended September 30, 2013. Our two largest resellers accounted for approximately $8.7 million, or approximately 89%, of the revenue generated from our reseller division for the nine months ended September 30, 2014, which represented approximately 75% of our total revenue for such period. By comparison, for the nine months ended September 30, 2013, our two largest resellers accounted for approximately 90% of the revenue generated from our reseller division, or approximately 70% of our total revenue during such period.

Revenues generated by our service provider division increased by approximately $125,000, or 16%, from approximately $799,000 for the nine months ended September 30, 2013, to approximately $924,000 for the nine months ended September 30, 2014. This increase was primarily due to an increase of revenues generated by one of our affiliates. One of our service provided agreements expired in October 2014, which will cause a decline in revenues from our service provider division in the fourth quarter of 2014 and going forward.

Sales to direct consumers decreased by approximately $827,000, or 50%, to approximately $816,000 for the nine months ended September 30, 2014, from approximately $1.6 million for the nine months ended September 30, 2013. Revenues generated through our iConnectHere offering declined by approximately $76,000 from approximately $338,000 for the nine months ended September 30, 2013, to approximately $262,000 for the nine months ended September 30, 2014. In addition, the revenues generated by our joip Mobile offering decreased from $1.2 million for the nine months ended September 30, 2013, to approximately $490,000 for the nine months ended September 30, 2014.

Costs and Operating Expenses

Cost of revenues. Cost of revenues ~~increased~~decreased by approximately $01.28 million, or 251%, from approximately $93.5 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014, to approximately $91.7 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015. Our network rent cost ~~decreased~~ decreased by approximately $~~157~~49,000 from approximately $~~772~~213,000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014, to approximately $~~615~~164,000 for the three ~~nine~~ months ended ~~September~~March 3031, ~~2014~~2015. Our termination cost ~~increased~~decreased by approximately $01.37 million, or 456%, from approximately $83.4 2 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014, to approximately $81.74 million for the ~~nine~~three months ended ~~September~~ 30March 31, ~~2014~~2015. The decrease ~~increase~~ in termination cost was primarily caused by ~~our~~a ~~second~~decline of revenues generated by our largest reseller, which generated approximately $01.71 million of termination costs for the ~~nine~~three months ended ~~September~~March 3031, ~~2014,~~2015 ~~partially~~compared ~~offset~~to by$2.6 amillion ~~decline~~during in the ~~termination~~three months ~~costs~~ended ofMarch ~~our~~31, ~~third-largest reseller of approximately $0~~2014.3 ~~million~~Cost ~~during this period. Costs~~ of revenues also include software cost as licenses paid for reselling them to our service providers. For the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015 we recorded approximately $9522,000 as licenses fees and support.

20Research and development expenses. Research and development expenses decreased by approximately $130,000, or 47%, from approximately $275,000 for the three months ended March 31, 2014, to approximately $145,000 for the three months ended March 31, 2015. As a percentage of revenues, research and development expenses for the three months ended March 31, 2015, was approximately 7% compared to approximately 6% for the three months ended March 31, 2014.

~~Research~~Selling and ~~development~~ marketing expenses. ~~Research~~ Selling and ~~development~~marketing expenses decreased by approximately $~~0.2 million~~135,000 or 2160%, ~~from~~to approximately $~~0.9~~89,000 ~~million~~ for the ~~nine~~ three months ended ~~September~~March 3031, ~~2013~~2015, tofrom approximately $~~0.7~~224,000 ~~million~~ for the ~~nine~~three months ended ~~September~~March 3031, 2014. The main reason for the decrease was a decline in commissions we were required to pay ACN, ACN Europe and Momentis pursuant to our respective agreements with them. As a percentage of revenues, ~~research~~selling and ~~development~~marketing expenses decreased to approximately 4% for the ~~nine~~three months ended March ~~September 30~~31, ~~2014~~2015, ~~was~~from approximately 65% ~~compared to approximately 7%~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014.

~~Selling~~General and ~~marketing~~administrative expenses. ~~Selling~~General and ~~marketing~~administrative expenses ~~decreased~~increased by approximately $~~0.5 million~~73,000 or 5022%, to approximately $~~0.5~~403,000 ~~million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, from approximately $~~1.0~~330,000 ~~million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014. The ~~main~~increase in ~~reason~~general ~~for~~and ~~the~~administrative ~~decrease~~expenses was apartially ~~decline~~caused inby ~~commissions~~a weprovision ~~were~~for ~~required~~doubtful todebt ~~ACN,~~of ~~ACN~~approximately ~~Europe~~$35,000 ~~and~~for ~~Momentis~~the ~~pursuant to our~~three ~~respective~~months ~~agreements~~ended ~~with~~March ~~them~~31, 2015. As a percentage of revenues, ~~selling~~general and ~~marketing~~administrative expenses ~~decreased~~increased to approximately 520% for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, from approximately 8% for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014.

~~General~~Depreciation and ~~administrative~~ ~~expenses~~amortization. Depreciation ~~General~~ and ~~administrative~~amortization ~~expenses~~decreased ~~remained~~by ~~constant of~~ approximately $~~1.0 million for the nine months ended September 30~~7, ~~2014 and 2013. As a percentage of revenues~~000, ~~general~~from ~~and~~approximately ~~administrative expenses~~ $25,000 for the ~~nine~~three months ended ~~September 30~~March 31, 2014, ~~was approximately 8% compared~~ to approximately 9%$18,000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2015. During the nine months ended September 30, 2014 we recorded a provision for the complaint filed against us filed against us, ACN, and ACN Communication Services by Telinit Technology LLC claiming infringement of a patent claimed to be owned by Telinit.

Depreciation and amortization. Depreciation and amortization decreased by approximately $50,000, or 42%, from approximately $118,000 for the nine months ended September 30, 2013, to approximately $68,000 for the nine months ended September 30, 2014.

Loss from Operations

For the ~~nine~~three months ended March ~~September 30~~31, ~~2014~~2015, we recorded a loss from operations of approximately $~~289~~304,000 compared to a loss from operations of approximately $~~576~~83,000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2013~~2014, due to the factors set forth above.

Interest Expense, Net

We recorded interest ~~expense~~ expense of approximately $~~1.0~~318,000 ~~million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, compared to approximately $~~0.7~~242,000 ~~million~~ for the ~~nine~~three months ended March ~~September 30~~31, ~~2013~~2014. Interest expense consisted of interest recorded under our loan agreements with D4 Holdings of approximately $~~505~~180,000, and $~~317~~76,000 which we recorded as the aggregate amount for both the warrant we issued to D4 Holdings in connection with the Second Loan Agreement and the warrant and Convertible Note we issued to D4 Holdings in connection with the Third Loan Agreement. In addition, we have recorded as an interest expense $50,000 we are required to pay in connection with our entering into the amendment to the ACN Forbearance Agreement on or before December 15, 2014 due to our forbearance agreement with ACN as discussed above.

Income Taxes, Net

We recorded net income tax expenses of $126,000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015.

Net Loss

For the ~~nine~~three months ended March ~~September~~31, 302015, ~~2014~~we ~~and~~recorded ~~2013~~a net loss of approximately $628,000 wecompared ~~recorded~~to a net loss of approximately $~~1.3~~331,000 ~~million~~for the three months ended March 31, 2014, due to the factors set forth above.

Liquidity and Capital Resources

Since our inception in June 1996, we have incurred significant operating and net losses due in large part to the start-up and development of our operations and our losses from operations. For the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2015, we recorded net loss from ~~operations~~ operations of approximately $~~289~~304,000 compared to a net loss from operations of approximately $~~576~~83,000 for the ~~nine~~three months ended ~~September~~ March 30, ~~2013~~ 2014. To date, we have an accumulated deficit of approximately $8187.13 million.

As of ~~September~~March 3031, ~~2014~~2015, we had cash and cash equivalents of approximately $~~189~~163,000 and restricted cash and short-term investments of of approximately $4,000, or a total of cash, cash equivalents and restricted cash of $~~193~~168,000, ana ~~increase~~decrease of approximately $1123,000 from December 31, ~~2013~~2014. The ~~increase~~decrease in cash and cash equivalents was ~~primarily~~ caused by net cash used in operating activities of approximately $23123,000 during the ~~nine~~three months ended ~~September~~March 3031, ~~2014,~~2015. Our ~~and~~cash management is influenced by ~~net~~fluctuations ~~cash~~in ~~provided~~collections byfrom ~~investing~~our ~~activity~~clients, which in turn affects the timing of ~~approximately~~our payments to our vendors and suppliers. However, we estimate our monthly cash burn ranges between $5320,000 ~~during~~and $50,000, based on the ~~nine~~assumption ~~months~~that ~~ended~~our ~~September~~revenues 30remain at their current level. We expect our cash and cash on hand will be sufficient to support our operations for the period of between four and eight months, ~~2014~~unless we receive additional funding or raise additional capital.

21Cash used in or provided by operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities. We had negative cash flow from operating activities of approximately $123,000 during the three months ended March 31, 2015.

~~Cash~~Net cash used in or provided by ~~operating~~investing activities is ~~net~~generally ~~loss~~driven ~~adjusted~~by ~~for~~our ~~certain~~capital ~~non-cash~~expenditures ~~items~~ and changes in ~~assets~~our ~~and~~short ~~liabilities. We had negative cash flow from operating activities of approximately $23,000 during the nine months ended September 30, 2014~~ and ~~negative~~long-term ~~cash~~investments. For ~~flow from operating activities of approximately $152,000 during~~ the ~~nine~~three months ended ~~September~~March 3031, ~~2013. The decrease in our cash used in operating activities was primarily due to accumulated interest on short-term loan of $505~~2015,~~000~~ ~~and~~we ~~amortization related~~did tonot ~~convertible~~purchase ~~notes~~any offixed ~~$317,000, offset by an increase in accounts payable of $331,000~~assets.

Net cash used in or provided by ~~investing~~ financing activities is generally driven by drawing down amounts available under lines of credit available to us, issuing shares of our capital ~~expenditures~~stock and ~~changes~~receiving incash that we had previously pledged or otherwise deposited as security for our ~~short~~lenders and ~~long-term investments~~creditors. For the ~~nine~~ three months ended ~~September~~March 3031, 2015 and 2014, we did not draw down any amounts under our loan agreements with D4 Holdings, although on April 23, 2015 we received $64200,000 from D4 Holdings pursuant to a notice of ~~previously~~borrowing ~~restricted~~under ~~cash~~the Fourth Loan Agreement, as amended, as discussed below.

Net cash used in or provided by financing activities is generally driven by drawing down amounts available under lines of credit available to us, issuing shares of our capital stock and receiving cash that we had previously pledged or otherwise deposited as security for our lenders and creditors. For the nine months ended September 30, 2014 and 2013, we did not draw down any amounts under our loan agreements with D4 Holdings.

Financing cash flows have historically consisted primarily of payments of capital leases and proceeds from the exercise of options we have granted to our employees and directors. In February 2009 we consummated a transaction with D4 Holdings pursuant to which we sold to D4 Holdings an aggregate of 39,000,000 shares of our common stock and a warrant to purchase up to an additional 30,000,000 shares of our common stock for an aggregate purchase price of $1,200,000. In addition, on March 1, 2010, we and our subsidiaries entered into the First Loan Agreement with D4 Holdings pursuant to which D4 Holdings agreed to provide us and our subsidiaries a line of credit in a principal amount of $1,200,000. On August 10, 2010, we and our subsidiaries entered into the Second Loan Agreement with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and subsidiaries an additional line of credit in a principal amount of $1,000,000. In connection with the Second Loan Agreement, we issued to D4 Holdings a warrant to purchase up to 4,000,000 shares of our common stock at an exercise price of $0.1312 per share. We have drawn down all amounts available to be borrowed under the two lines of credit.

On March 2, 2011, we and our subsidiaries entered into the Third Loan Agreement with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and its subsidiaries an additional line of credit in a principal amount of $1,600,000. Pursuant to the terms of the Convertible Note issued by us in connection with the Third Loan Agreement, D4 Holdings may elect to convert all or any portion of the outstanding principal amount under the Convertible Note into that number of shares of our common stock determined by dividing such principal amount by $0.08 (as may be adjusted under the terms of the Convertible Note). Simultaneous with our entering into the Third Loan Agreement, D4 Holdings and we entered into an amendment of the First Loan Agreement, pursuant to which (among other things) the maturity date for repayment of principal under the First Loan Agreement was extended from March 1, 2011, to March 1, 2012, and then subsequently extended by oral agreement of the parties to July 1, 2012, and then subsequently orally extended again to January 2, 2014, pending the parties’ finalizing and entering into a formal amendment. In connection with the Third Loan Agreement, we issued D4 Holdings a warrant to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.096 per share. We have drawn down the aggregate principal amount available under the Third Loan Agreement, the principal amount of which can be converted by D4 Holdings into an aggregate of 20,000,000 shares of our common stock.

On September 12, 2011, we and our subsidiaries entered into the Fourth Loan Agreement with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and our subsidiaries an additional line of credit in a principal amount of $300,000. We have drawn down all amounts available to be borrowed under the Fourth Loan Agreement.

On November 13, 2012, we and our subsidiaries entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment", and the Amendment to Warrant Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment and the Warrants Amendment:

· the maturity date for repayment of principal and interest under the First Loan Agreement was extended to January 2, 2014; · the maturity date for repayment of principal and interest under the Second Loan Agreement was extended to January 2, 2015; · the maturity date for repayment of principal and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016; · all interest outstanding under each of the loan agreements was added to the principal amount outstanding under the respective loan agreement and the promissory notes issued pursuant to each respective loan agreement was increased by such amount; and · the exercise price under each of the Warrant Agreements entered into by us and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02 per share.

	·	the maturity date for repayment of principal and interest under the Second Loan Agreement was extended to January 2, 2015;

the maturity date for repayment of principal and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016;

the exercise price under each of the Warrant Agreements entered into by us and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02 per share.

In connection with the extension of the maturity dates under the Third Amendment, we issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.02 per share.

22During the three months ended March 31, 2015, no options to purchase shares of our common stock were exercised by our employees and directors.

During the third quarter of 2014 we granted to our employees and directors options to purchase an aggregate of 3,140,000 shares of our common stock under our 2009 Stock Incentive Plan. During the nine months ended September 30, 2014, options to purchase 37,500 shares of our common stock were exercised by our then-current employees and directors.

On January 2, 2014, we did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings. On March 28, 2014, we and our subsidiaries entered into the D4 Holdings Forbearance Agreement with D4 Holdings. Pursuant to the terms and conditions of the D4 Holdings Forbearance Agreement, D4 Holdings agreed to forbear from taking any action with respect to the events of default until the earlier of (i) December 31, 2014, (ii) the occurrence of a breach or default by us or our subsidiaries under the D4 Holdings Forbearance Agreement (which, in the event of certain undertakings of ours under the D4 Holdings Forbearance Agreement, are not cured within three days) or (iii) the occurrence of any new or additional event of default under our loan agreements with D4 Holdings. In addition, to the extent not yet perfected we and our subsidiaries pledged and granted as a security interest to D4 Holdings all of our right, title and interest in the collateral described in the D4 Holdings Forbearance Agreement. In connection with the D4 Holdings Forbearance Agreement we also issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.02 per share.

On July 5, 2011, we received a notice from the New York City Department of Finance that claimed that we had not paid commercial rent tax required under the New York City Administrative Code from June 1998 through May 2008 for the two offices that we had leased during that time. The notice stated that we are obligated to pay the outstanding tax amounts, as well as significant interest and penalties that were assessed on the unpaid amounts as well as for the failure to file the applicable tax returns. We engaged outside counsel, which began discussions with the Department of Finance, and contested the assessment and simultaneously attempted to negotiate a significant reduction in the amounts to be paid. Our appeal was rejected in July 2012 by an examiner in the Department of Finance, and we ~~have~~ subsequently engaged and begun discussions with a manager in the Department of Finance and submitted additional supporting materials. The final outcome of this assessment and our negotiations with the New York City Department of Finance cannot be determined at this time. In the event that we are required to pay all or most of the amounts claimed by the New York City Department of Finance this would have a material adverse effect on our financial condition and liquidity. During 2011 we recorded $300,000 as a provision for commercial rent tax.

In June 2013 we submitted a settlement offer, which the Department of Finance did not accept, and discussions continued. In November 2013 we filed a request for a conciliation conference with the Department of Finance, which was held in February 2014. Following the conference the parties continued to engage in discussions. The parties met again in September 2014 and the Department of Finance made a counter-offer, which we did not accept. On February 24, 2015, we received a notice of conciliation decision from the Department of Finance, which stated that at as a result of our failure to accept the Department of Finance's settlement offer the statutory notice issued by the Department of Finance on July 5, 2011 was affirmed. We intend to file a petition on or before May 22, 2015 to request a hearing with the New York City Tax Appeals Tribunal.

The final outcome of this assessment and our negotiations with the New York City Department of Finance cannot be determined at this time. In the event that we are required to pay all or most of the amounts claimed by the New York City Department of Finance this would have a material adverse effect on our financial condition and liquidity. During 2011 we recorded $300,000 as a provision for commercial rent tax. We have determined that $300,000 is the minimum amount that would settle the claim according to ASC 450-20. The amount claimed by the Department of Finance was approximately $912,000; as a result, there is a reasonable possibility that a loss in excess of the $300,000 would be incurred.

We experience fluctuations in our cash cycle, as we generally make payments to our termination suppliers more frequently (often on a weekly basis) than we receive payments from our customers (often on a monthly basis). In the event one of our customers did not pay us, we would experience a direct loss of the amounts we had already paid to our termination suppliers. We maintain our free cash in accounts with major banks located in the United States, and generally do not invest such cash in short or long-term investments. As a way to try to offset our declining cash position we generally seek to extend payment terms to our suppliers other than our termination providers.

We have historically obtained our funding from our utilization of the remaining proceeds from our initial public offering, offset by positive or negative cash flow from our operations, and most recently from the sale of shares of our common stock to D4 Holdings in February 2009 and borrowings under our loan agreements with D4 Holdings. These proceeds are maintained as cash, restricted cash, and short and long term investments. We have sustained significant operating losses in recent periods, which have led to a significant reduction in our cash reserves.

On April 3, 2012, we entered into an amendment to our sales agency agreement with ACN and our introducer agreement with ACN Europe. Pursuant to the terms of the amendment, beginning April 1, 2012, we are required to pay all current commissions on a timely basis as required under the agreements and a late fee in the amount of one percent per month of any past-due, unpaid commissions (which, as of ~~September~~March 3031, ~~2014~~2015, was equal to approximately $1,~~568~~742,000). In addition, beginning July 15, 2012, we are required to to pay down any unpaid past due amounts in an amount equal to at least $15,000 per month through June 15, 2013, and at least $25,000 per month thereafter until such time as the unpaid balance is paid in full, and are required to pay in full any unpaid, past due amounts upon 30 days' notice.

In July 2012 we began making the $15,000 monthly payment, however due to our financial condition we suspended making the monthly payments of the unpaid commissions and the current commissions in April 2013 with the oral consent of ACN and ACN Europe. On June 12, 2014, each of us and our wholly-owned subsidiaries Delta Three Israel, Ltd., or "Delta Three Israel", and DME Solutions, Inc., or "DME", and together with us and Delta Three Israel, the "deltathree Entities", and ACN, Inc., or "ACN", ACN Europe B.V., or "ACN Europe", ACN Digital Phone Service, LLC, or "DPS", and together with ACN, Inc. and ACN Europe, the "ACN Entities", entered into the Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement, or the "ACN Forbearance Agreement". The ACN Forbearance Agreement amends that certain letter amendment, dated as of April 3, 2012, to each of the Sales Agency Agreement dated as of September 27, 2010, and amended as of January 26, 2011, or the "Sales Agency Agreement", between the deltathree Entities and ACN, and the Introducer Agreement, dated as of April 13, 2011, between the deltathree Entities and ACN Europe B.V., or the "Introducer Agreement", in regards to outstanding commissions due to be paid by us to ACN and ACN Europe under those agreements. The ACN Forbearance Agreement also amends that certain License Assignment entered into on February 7, 2013 between us and DPS and the outstanding license assignment payment due to be paid by us to DPS.

The terms of the ACN Forbearance Amendment provide as follows:

in addition, commencing on July 15, 2014, and continuing on the 15^th day of each month thereafter, the deltathree Entities are required (i) pay down any outstanding obligations, provided that the amount of each monthly payment will be equal to at least $114,000, and (ii) pay all then-current commissions under the Sales Agency Agreement and Introducer Agreement and any cure periods provided for under the respective agreements for non-payment will no longer apply;

so long as the deltathree Entities fulfill the terms of the ACN Forbearance Agreement, the ACN Entities will forbear from exercising any rights they may have for any breach by the deltathree Entities under the Sales Agency Agreement and the Introducer Agreement and permit us to pay the license assignment payment over time in accordance with the terms and conditions of the ACN Forbearance Agreement until July 31, 2014, or the "Initial Forbearance Period". Following the expiration of the Initial Forbearance Period, the ACN Entities' obligation to forbear automatically renewed on a monthly basis unless terminated by either party under the terms of the ACN Forbearance Agreement until July 15, 2015, following which such the ACN Entities' obligation to forbear will not automatically renew;

each of Delta Three Israel and DME guaranteed the payment and performance of our obligations under the license assignment and under the ACN Forbearance Agreement;

We did not make the payments we were required to make to the ACN Entities on July 15, 2014, described in the first and second bullet points above, and are currently in default under the ACN Forbearance Agreement. On September 29, 2014 ACN and we entered into the Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance Agreement to December 15, 2014 and provided that we are obligated to pay a fee of $50,000 on or before December 15, 2014. We have not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment penalty fee of one percent (1%) of such amount is accruing on a monthly basis.

AsWe ofdo ~~September~~not ~~30,~~know ~~2014,~~when we ~~had~~will ~~negative~~resume ~~working~~making ~~capital~~such ~~equal~~payments toagain, ~~approximately~~and ~~$8.3~~there ~~million~~is asno ~~well~~assurance asthat ~~negative~~we ~~stockholders’ equity~~will ~~equal~~be able to ~~approximately~~do ~~$8.2~~so ~~million.~~in Wethe ~~believe~~near future it(if isat ~~probable~~all) or that weuntil ~~will~~such ~~continue~~time toACN ~~experience~~and ~~losses~~ACN ~~and~~Europe ~~increased negative~~will ~~working~~continue ~~capital~~to ~~and~~consent ~~negative~~to ~~stockholders’~~our ~~equity~~not inmaking ~~the~~any ~~near~~such ~~future~~required payments and ~~will~~ not beexercise ~~able~~any torights ~~return~~they tomay ~~positive cash~~have ~~flow~~under ~~before~~our werespective ~~require~~agreements ~~additional~~with ~~cash~~them inor ~~the~~under ~~immediate~~applicable ~~term~~law. WeIn addition, ~~may~~in ~~experience~~the ~~difficulties~~event ~~accessing~~of ~~the~~certain ~~equity~~insolvency-related ~~and debt~~events ~~markets~~defined ~~and~~in ~~raising~~the ~~additional capital~~agreements, ~~and~~all ~~there~~unpaid ~~can~~amounts bewill nobecome ~~assurance~~immediately due ~~that~~and wepayable ~~will~~effective beimmediately ~~able~~prior to ~~raise~~ such ~~additional capital on favorable terms or at all~~event. If ~~additional~~Such ~~funds~~events ~~are~~include ~~raised through~~ the ~~issuance~~filing of ~~equity~~any ~~securities,~~petition ~~our~~or ~~existing~~action for ~~stockholders~~relief ~~will~~under ~~experience~~law ~~significant~~relating ~~further~~to ~~dilution.~~debtors; ~~Because~~application ofor ~~our~~consent ~~significant~~for ~~losses~~the toappointment ~~date~~of ~~and~~a ~~our~~receiver, ~~limited tangible assets~~trustee, we door ~~not~~the ~~fit~~like ~~traditional~~over ~~credit~~substantial assets; ~~lending~~execution ~~criteria,~~of ~~which~~a ~~could~~general ~~make~~assignment ~~it difficult for us~~ to ~~obtain~~creditors; ~~loans~~general orinability to ~~access~~pay ~~the~~debts ~~capital markets.~~as Ifthey wecome ~~issue~~due; ~~additional equity~~ or ~~convertible debt securities to raise funds,~~ the ~~ownership~~filing ~~percentage~~ of ~~our~~any ~~existing~~involuntary ~~stockholders~~petition ~~would~~against bea ~~reduced~~party ~~and~~that ~~they~~is ~~may~~not ~~experience~~dismissed ~~significant~~within ~~dilution.~~60 ~~New~~days ~~investors may demand rights, preferences or privileges senior to those~~ of ~~existing~~its ~~holders of our common stock~~filing.

~~We believe~~On ~~that~~February 25, ~~unless~~2015, D4 weHoldings ~~are~~sent ~~able~~a letter to ~~increase~~our ~~revenues~~board ~~and~~of ~~generate~~directors ~~additional~~that ~~cash,~~indicated ~~our~~that ~~current~~within ~~cash~~three ~~and~~to ~~cash~~four ~~equivalents~~weeks ~~will~~of the date of the letter D4 ~~not~~Holdings ~~satisfy~~intended ~~our~~to ~~current~~initiate ~~projected~~a ~~cash~~tender ~~requirements~~offer ~~beyond~~to purchase all of the ~~immediate~~outstanding ~~future.~~shares Asof our common stock not owned by D4 Holdings at a ~~result,~~purchase ~~there~~price of $0.01 per share in cash. D4 Holdings stated that it is ~~substantial~~not ~~doubt~~willing ~~about~~to enter into further forbearance arrangements ~~our~~with ~~ability~~us or to ~~continue~~provide us additional financing. Finally, D4 Holdings indicated that, in its capacity as our majority stockholder, it is presently not interested in either selling its shares or voting in favor of any alternative transaction, including a ~~going~~merger or ~~concern~~sale of our assets or business or similar transaction.

On March 26, 2015, D4 Holdings sent a letter to our board of directors that indicated that D4 Holdings withdraws its previous offer and instead proposes to acquire the company through a merger of us with a newly-formed acquisition subsidiary of D4 Holdings. The transaction will be structured as a stock purchase, pursuant to which D4 Holdings will purchase all of the outstanding shares of our common stock not owned by D4 Holdings. D4 Holdings restated its previous offer of $0.01 per share, to be paid in cash from its own funds, and accordingly there will be no financing contingency. In addition, D4 Holdings will assume all of our outstanding debt, currently valued at approximately $7.9 million. The completion of the transaction will be conditioned upon, among other things, approval by a special committee of our board of directors consisting of independent directors. If the transaction is completed, our common stock will no longer be registered under Section 12 of the Exchange Act.

On April 23, 2015, each of the Deltathree Entities entered into the Amendment to Fourth Loan and Security Agreement and Promissory Note, dated as of April 23, 2015 (the “Amendment”) with D4 Holdings. The Amendment amended the Fourth Loan Agreement and the promissory note executed in connection therewith and the D4 Holdings Forbearance Agreement. Pursuant to the terms of the Amendment, the maximum principal amount under the Fourth Loan Agreement was increased from $300,000 to $500,000 and the principal sum in the related promissory note was amended from $300,000 to $500,000. On April 23, 2015, we received $200,000 from D4 Holdings pursuant to a notice of borrowing under the Fourth Loan Agreement, as amended.

In addition, unless we are able to increase revenues and generate additional cash, based on currently projected cash flows we believe that we will be unable to pay future scheduled interest and/or principal payments under the various loan agreements with D4 Holdings as these obligations become due, and beginning January 2013 we suspended making scheduled interest payments. On January 2, 2014, we did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings, following which we and our subsidiaries entered into the D4 Holdings Forbearance Agreement. In the event we are unable to resume making interest payments and to pay the outstanding principal when due following the termination of the D4 Holdings Forbearance Agreement, if D4 Holdings is not willing to waive compliance or otherwise modify our obligations such that we are able to avoid defaulting on such obligations, because D4 Holdings has a lien on all of our assets to secure our obligations under the loan agreements it could take actions under the loan agreements and seek to take possession of or sell our assets to satisfy our obligations thereunder. Any of these actions would likely have an immediate material adverse effect on our business, financial condition or results of operations.

Due to our ongoing ~~losses~~ losses and reduction in cash, we initiated restructuring activities beginning in the second quarter of 2011 in an effort to cut ~~operating~~ operating costs significantly and better align our operations with our current business model. In accordance with the restructuring, we instituted a reduction in force and decreased the number of five employees from approximately 53 to 32, reduced the salaries of all remaining employees by five percent, and decreased non-material expenses as well as payments to be made to vendors and other third parties. In addition, in December 2013 we instituted an additional, smaller reduction in force. As of ~~September 30~~March 31, ~~2014~~2015, we had 1211 full time employees. During March 2014, as an incentive for our remaining employees we reversed the five-percent ~~reduction~~ reduction in salaries that we instituted in 2011.

Off-Balance Sheet Arrangements

None.

Contingencies

For a discussion of contingencies, see Note 3 of the Notes to the Condensed Consolidated Financial Statements of this report, which is incorporated herein by reference.

Item 4.

Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

Each of our principal ~~executive~~ executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, has concluded that, based on such evaluation, our disclosure controls and procedures as of ~~September~~March 3031, ~~2014~~2015, were adequate and effective to ensure that material information required to be disclosed by us in the reports that we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls.

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

On ~~May~~April 126, ~~2014~~2015, we ~~were~~ were informed that a complaint had been filed in the United States District Court for the Eastern District Court of Texas by ~~Telinit Technologies~~UrgenSync, LLC against us, ~~ACN, and ACN Communication Services~~ claiming infringement of a patent claimed to be owned by ~~Telinit~~UrgenSync. ~~During~~ ~~the~~We ~~second~~are ~~quarter~~currently ofinvestigating ~~2014~~ the ~~Company~~matter ~~recorded a provision for the complaint.~~and ~~The~~reviewing ~~total amounts we expect to pay in connection with~~ the ~~license~~alleged complaint and ~~settlement~~intend ~~agreement is expected~~ to bedefend ~~less~~ourself ~~than, or approximately equal to, the amount that we recorded as a provision for the complaint~~vigorously.

25On February 24, 2015, we received a notice of conciliation decision from the Department of Finance, which stated that at as a result of our failure to accept the Department of Finance's settlement offer the statutory notice issued by the Department of Finance on July 5, 2011 was affirmed. We intend to file a petition on or before May 22, 2015 to request a hearing with the New York City Tax Appeals Tribunal.

Except as set forth above, there have been no material changes to our Legal Proceedings as described in Item 3 of our Annual Report on Form 10-K for the year ended December 31, ~~2013~~2014, as filed with the SEC on March 31, ~~2014, as updated by our Quarterly Report on Form 10-Q filed with the SEC on August 13, 2014~~2015.

We are not a party to any other material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we are a party or of which any of our property is the subject.

Item 6.

Exhibits.

See the Exhibit Index immediately following the signature page hereto for a description of the documents that are filed as exhibits to this Quarterly Report on Form 10-Q or incorporated by reference herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	DELTATHREE, INC.
Date: November 17, 2014	By:	/s/ Effi Baruch
Date: May 12, 2015	By:	/s/ Effi Baruch
		Name: Effi Baruch
		Title: Chief Executive Officer, President, Senior Vice President of Operations and Technology and Secretary (Principal Executive Officer)

Date: November 17, 2014	By:	/s/ Yochai Ozeri
Date: May 12, 2015	By:	/s/ Yochai Ozeri
		Name: Yochai Ozeri
		Title: Director of Finance and Treasurer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibit Number		Description
10.1		~~Second~~ Amendment to ~~the~~Fourth ~~Amended~~Loan and ~~Restated~~Security Agreement ~~Concerning Outstanding/Future Commissions~~ and ~~Security~~Promissory ~~Agreement~~Note, dated as of ~~June~~April 1223, ~~2014~~2015, by and among deltathree, Inc., Delta Three Israel, Ltd., DME Solutions, Inc., ~~ACN,~~and ~~Inc.~~D4 Holdings, ~~ACN~~LLC ~~Europe~~(incorporated ~~B.V.~~by ~~and~~reference ~~ACN~~from ~~Digital~~our ~~Phone~~Curent ~~Service~~Report on Form 8-K filed on April 27, ~~LLC~~2015).
31.1		Certification of the Principal Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of the Principal Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of the Principal Executive Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of the Principal Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document.*
101.SCH		XBRL Taxonomy Extension Schema Document.*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

Filed herewith.

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