Attached files
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EX-31.2 - EX-31.2 - CTI GROUP HOLDINGS INC | w78523exv31w2.htm |
EX-31.1 - EX-31.1 - CTI GROUP HOLDINGS INC | w78523exv31w1.htm |
EX-32.1 - EX-32.1 - CTI GROUP HOLDINGS INC | w78523exv32w1.htm |
EX-32.2 - EX-32.2 - CTI GROUP HOLDINGS INC | w78523exv32w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to _____
Commission file number 0-10560
CTI GROUP (HOLDINGS) INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 51-0308583 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
333 North Alabama Street, Suite 240, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(317) 262-4666
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes
o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 11, 2010, the number of shares of Class A common stock, par value $.01 per share,
outstanding was 29,178,271. As of May 11, 2010, treasury stock constituted 140,250 shares of Class
A common stock.
CTI GROUP (HOLDINGS) INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS
TABLE OF CONTENTS
ITEM | PAGE | |||
NO. | NO. | |||
Forward Looking Statements |
4 | |||
PART I Financial Information |
||||
1. Financial Statements |
||||
Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009 |
5 | |||
Consolidated Statements of Operations (unaudited) for the three months ended
March 31, 2010 and March 31, 2009 |
6 | |||
Consolidated Statements of Cash Flows (unaudited) for the three months ended
March 31, 2010 and March 31, 2009 |
7 | |||
Notes to Consolidated Financial Statements (unaudited) |
8 | |||
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |
16 | |||
3. Quantitative and Qualitative Disclosures about Market Risk |
24 | |||
4(T). Controls and Procedures |
25 | |||
PART II Other Information |
||||
1. Legal Proceedings |
26 | |||
1A. Risk Factors |
26 | |||
2. Unregistered Sales of Equity Securities and Use of Proceeds |
26 | |||
3. Defaults Upon Senior Securities |
26 | |||
4. (Removed and Reserved) |
26 | |||
5. Other Information |
26 | |||
6. Exhibits |
26 | |||
Signatures |
28 |
3
Forward-Looking Statements
This Quarterly Report on Form 10-Q (Form 10-Q) contains forward-looking statements. Examples
of forward-looking statements include, but are not limited to: (a) projections of revenues, capital
expenditures, growth, prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or board of directors; (c)
statements of future economic performance; (d) statements of assumptions underlying other
statements and statements about the Company and its business relating to the future; and (e) any
statements using the words anticipate, expect, may, project, intend, believe, or
similar expressions.
The Companys ability to predict projected results or the effect of certain events on the Companys
operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of
this Quarterly Report to carefully consider the risk factors stated in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, any or all of which have in the past and
could in the future affect the ability of the Company to achieve its anticipated results and could
cause actual results to differ materially from those discussed herein, including, but not limited
to: effects of current economic crisis, ability to attract and retain customers to purchase its
products, ability to develop or launch new software products, technological advances by third
parties and competition, ability to protect the Companys patented technology, and ability to
obtain settlements in connection with its patent enforcement activities. You should not place
any undue reliance on any forward-looking statements. The Company disclaims any intent or
obligations to update forward-looking statements contained in this Form 10-Q.
References herein to the Company mean CTI Group (Holdings) Inc. and its subsidiaries unless context
otherwise requires.
4
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 269,700 | $ | 508,836 | ||||
Trade accounts receivable, less allowance for doubtful accounts of $67,479 and $59,199, respectively |
3,068,231 | 2,381,293 | ||||||
Note and settlement receivable short term |
412,701 | 379,447 | ||||||
Prepaid expenses |
293,997 | 329,720 | ||||||
Deferred financing costs |
53,646 | 71,756 | ||||||
Other current assets |
167,652 | 209,445 | ||||||
Total current assets |
4,265,927 | 3,880,497 | ||||||
Long term settlement receivable net of current portion |
| 24,623 | ||||||
Property, equipment, and software, net |
2,387,504 | 2,198,376 | ||||||
Intangible assets, net |
3,714,509 | 3,882,209 | ||||||
Goodwill |
4,896,990 | 4,896,990 | ||||||
Other assets |
78,452 | 78,499 | ||||||
Total assets |
$ | 15,343,382 | $ | 14,961,194 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Accounts payable |
$ | 445,838 | $ | 670,402 | ||||
Accrued expenses |
1,085,934 | 1,103,533 | ||||||
Accrued wages and other compensation |
415,674 | 298,852 | ||||||
Income tax payable |
278,742 | 62,057 | ||||||
Deferred income tax liability |
53,470 | 256,461 | ||||||
Note payable |
1,304,027 | 918,027 | ||||||
Deferred revenue |
1,929,084 | 1,991,664 | ||||||
Total current liabilities |
5,512,769 | 5,300,996 | ||||||
Lease incentive long term |
246,692 | 193,751 | ||||||
Deferred revenue long term |
232,258 | 127,306 | ||||||
Deferred income tax liability long term |
886,521 | 802,994 | ||||||
Total liabilities |
6,878,240 | 6,425,047 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,178,271 issued and
outstanding at March 31, 2010 and at December 31, 2009 |
291,783 | 291,783 | ||||||
Additional paid-in capital |
25,990,816 | 25,968,526 | ||||||
Accumulated deficit |
(18,193,531 | ) | (17,970,400 | ) | ||||
Other comprehensive income foreign currency translation |
568,217 | 438,381 | ||||||
Treasury stock, 140,250 shares at cost |
(192,143 | ) | (192,143 | ) | ||||
Total stockholders equity |
8,465,142 | 8,536,147 | ||||||
Total liabilities and stockholders equity |
$ | 15,343,382 | $ | 14,961,194 | ||||
See accompanying notes to consolidated financial statements.
5
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Software sales, service fee and license fee revenue |
$ | 3,899,557 | $ | 3,949,288 | ||||
Patent license fee and enforcement revenues |
40,500 | | ||||||
3,940,057 | 3,949,288 | |||||||
Cost and Expenses: |
||||||||
Cost of products and services, excluding depreciation and amortization |
1,202,164 | 1,129,393 | ||||||
Patent license fee and enforcement cost |
61,677 | 244,991 | ||||||
Selling, general and administration |
1,881,138 | 1,974,293 | ||||||
Research and development |
545,918 | 694,136 | ||||||
Depreciation and amortization |
398,670 | 367,060 | ||||||
Loss from operations |
(149,510 | ) | (460,585 | ) | ||||
Other expense |
||||||||
Interest expense, net of interest income of $8,866 and $35,515, respectively |
19,497 | 11,867 | ||||||
Other expense |
51 | | ||||||
Total other expense |
19,548 | 11,867 | ||||||
Loss before income taxes |
(169,058 | ) | (472,452 | ) | ||||
Tax expense |
54,073 | 50,239 | ||||||
Net loss |
(223,131 | ) | (522,691 | ) | ||||
Other comprehensive income / (loss) |
||||||||
Foreign currency translation adjustment |
129,836 | 35,974 | ||||||
Comprehensive loss |
$ | (93,295 | ) | $ | (486,717 | ) | ||
Basic and diluted net loss per common share |
$ | (0.01 | ) | $ | (0.02 | ) | ||
Basic and diluted weighted average common shares outstanding |
29,038,021 | 29,038,021 |
See accompanying notes to consolidated financial statements
6
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (223,131 | ) | $ | (522,691 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
398,670 | 367,060 | ||||||
Provision for doubtful accounts |
19,327 | 18,507 | ||||||
Deferred income taxes |
(50,783 | ) | (70,426 | ) | ||||
Amortization of deferred financing fees |
18,110 | 27,590 | ||||||
Non-cash interest charge |
669 | 223 | ||||||
Recognition of rent incentive benefit |
85,552 | 35,193 | ||||||
Stock option grant expense |
21,621 | 28,917 | ||||||
Loss on disposal of property and equipment |
52 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Trade receivables |
(854,411 | ) | (176,978 | ) | ||||
Note and settlement receivables |
(8,632 | ) | (84,783 | ) | ||||
Prepaid expenses |
24,485 | 32,426 | ||||||
Income taxes |
226,959 | 498 | ||||||
Other assets |
44,053 | (1,013 | ) | |||||
Accounts payable |
(204,944 | ) | 235,719 | |||||
Accrued expenses |
49 | (123,478 | ) | |||||
Accrued wages and other compensation |
125,385 | (111,547 | ) | |||||
Deferred revenue |
177,500 | (20,756 | ) | |||||
Cash used in operating activities |
(199,469 | ) | (365,539 | ) | ||||
Cash flows used in investing activities: |
||||||||
Additions to property, equipment, and software |
(423,298 | ) | (192,666 | ) | ||||
Cash used in investing activities |
(423,298 | ) | (192,666 | ) | ||||
Cash flows provided by financing activities: |
||||||||
Borrowings under credit agreements |
1,160,000 | 1,180,000 | ||||||
Repayments under credit agreements |
(774,000 | ) | (619,000 | ) | ||||
Cash provided by financing activities |
386,000 | 561,000 | ||||||
Effect of foreign currency exchange rates on cash and cash equivalents |
(2,369 | ) | (45,699 | ) | ||||
Decrease in cash and cash equivalents |
(239,136 | ) | (42,904 | ) | ||||
Cash and cash equivalents, beginning of period |
508,836 | 341,936 | ||||||
Cash and cash equivalents, end of period |
269,700 | 299,032 | ||||||
See accompanying notes to consolidated financial statements.
7
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: Business and Basis of Presentation
CTI Group (Holdings) Inc. and subsidiaries (the Company or CTI) design, develop, market and
support billing and data management software and services. The Company operates in four business
segments: Electronic Invoice Management, Telemanagement, Voice Over Internet Protocol and Patent
Enforcement Activities. The majority of the Companys business is in North America and Europe.
The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of
Delaware in 1988, pursuant to a merger of CTI into a wholly owned subsidiary formed as a Delaware
corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.
The Company is comprised of the following business segments: Electronic Invoice Management (EIM),
Telemanagement (Telemanagement), Voice over Internet Protocol (VoIP) and Patent Enforcement
Activities (Patent Enforcement). EIM designs, develops and provides services and software tools
that enable telecommunication service providers to better meet the needs of their enterprise
customers. EIM software and services are provided and sold directly to telecommunication service
providers who then market and distribute such software to their enterprise customers. Using the
Companys software and services, telecommunication service providers are able to electronically
invoice their enterprise customers in a form and format that enables the enterprise customers to
improve their ability to analyze, allocate and manage their telecommunications expenses while
driving internal efficiencies into their invoice receipt, validation, approval and payment workflow
processes. Telemanagement designs, develops and provides software and services used by enterprise,
governmental and institutional end users to manage their telecommunications service and equipment
usage. VoIP designs, develops and provides software and services that enable managed and hosted
customers of service providers to analyze voice, video, and data usage, record and monitor
communications, and perform administration and back office functions such as cost allocation or
client bill back. These applications are commonly available in the market as enterprise-grade
products. Customers typically purchase the VoIP products when upgrading or acquiring a new
enterprise communications platform. Patent Enforcement involves the licensing, protection,
enforcement and defense of the Companys intellectual property and rights.
The accompanying consolidated financial statements have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and
reflect all adjustments which, in the opinion of management, are necessary for a fair statement of
the results for the interim periods presented. All such adjustments are of a normal recurring
nature.
Certain information in footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of America, has been
condensed or omitted pursuant to the rules and regulations of the SEC, although the Company
believes the disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the consolidated financial statements for
the years ended December 31, 2009 and 2008 and the notes thereto included in the Companys Form
10-K filed with the SEC.
The Company follows accounting standards set by the Financial Accounting Standards Board (FASB).
The FASB establishes accounting principles generally accepted in the United States (GAAP). Rules
and interpretive releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC registrants, which the
Company is required to follow.
The Company realizes patent license fee and enforcement revenues. These revenues are realized once
the Company has received a signed settlement or judgment and the collection of the receivable is
deemed probable. The Company recognized $40,500 and $0 in revenues associated with patent license
fee and enforcement activities in the three months ended March 31, 2010 and March 31, 2009,
respectively.
Amortization expense of developed software amounted to $163,559 and $186,582 for the three months
ended March 31, 2010 and 2009, respectively. Amortization expense of developed software, which
relates to cost of sales, was presented as depreciation and amortization expense.
8
NOTE 2: Supplemental Schedule of Non-Cash Investing and Financing Activities
The Company paid $8,722 and $8,218 in interest related to the Companys notes payable for the three
months ended March 31, 2010 and 2009, respectively.
The Company paid $0 and $128,467 during the three months ended March 31, 2010 and 2009,
respectively, for prior year tax payments. The Company received income tax refunds of $124,914
and $0 during the three months ended March 31, 2010 and 2009, respectively, for prior year tax
payments.
NOTE 3: Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, deferred
finance costs, prepaid expenses and other assets, accounts payable, and other accruals approximate
their fair values because of their nature and expected duration. The fair value of the revolving
credit facility and note payable is equal to its carrying value due to the variable nature of its
interest rate.
NOTE 4: Long-Term Debt Obligations
The Company has available a revolving loan facility with National City Bank (NCB) equal to the
lesser of (a) $3,000,000, (b) the sum of 80% of eligible domestic trade accounts receivable and 90%
of eligible, insured foreign trade accounts receivable or (c) four times the sum of earnings before
interest, taxes, depreciation and amortization for the trailing twelve month period. Outstanding
borrowings under the revolving loan bear interest at LIBOR plus 2.50% payable monthly which
amounted to 2.75% as of March 31, 2010. The Company also must pay an unused revolving loan
commitment fee of 0.25% of the average daily amount by which the revolving loan commitment exceeds
the outstanding principal amount. The amount paid on the unused revolving loan commitment fee
amounted to $1,443 for the three months ended March 31, 2010. The revolving loan expires on
December 30, 2010. All borrowings are collateralized by substantially all assets of the Company.
The outstanding balance on the revolving loan was $1,304,027 at March 31, 2010. Available for
borrowing under the revolving loan on March 31, 2010 was $441,862. The carrying amount of
receivables that served as collateral for borrowings totaled $1,745,889 at March 31, 2010.
The Company has an acquisition loan of $500,000 with NCB (the Acquisition Loan). The Acquisition
Loan was repaid and expired on December 21, 2009. All borrowings under the Acquisition Loan were
collateralized by substantially all assets of the Company. Borrowings under the Acquisition Loan
bore interest at LIBOR plus 2.00% payable monthly. The outstanding balances on the Acquisition
Loan were $0 and $500,000 at March 31, 2010 and March 31, 2009, respectively.
The revolving loan facility is and the Acquisition Loan (the Loan Agreements) was secured by a
guarantee from a wholly-owned subsidiary of Fairford Holdings Limited, a British Virgin Islands
company (Fairford). As of March 31, 2010, Fairford beneficially owned 63.7% of the Companys
outstanding Class A common stock. Mr. Osseiran, the majority holder of the Companys Class A common
stock and director of the Company, is a director of Fairford and a grantor and sole beneficiary of
a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company,
is the director of Fairford.
The Loan Agreements contain certain financial covenants and restrictions on indebtedness,
encumbrances, investments, business combinations, and other related items. As of March 31, 2010,
the Company believes it was in compliance with all covenants. The more significant covenants under
the Loan Agreements, include that, without NCBs prior written consent, the Company shall not, and
shall not permit any of its subsidiaries to: (i) incur or have outstanding any indebtedness in
excess of $20,000 individually or $100,000 in the aggregate; (ii) dispose of all, or any part, of
business or assets; (iii) make any acquisitions, or (iv) issue any additional shares of stock or
other securities and the Company shall not issue more than 10% of the Companys capital stock
pursuant to its stock option plan on a fully-diluted basis.
NOTE 5: New Accounting Pronouncements
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-5 to address concerns
regarding the determination of the fair value of liabilities. Because liabilities are often
not traded, due to restrictions placed on their transferability, there is typically a
very limited amount of trades (if any) from which to draw market
participant data. As such, many entities have had to determine the fair value of a liability
through the use of a hypothetical transaction. The ASU clarifies the valuation techniques that
must be used when the liability subject to the fair value determination is not traded as an asset
in an active market. The ASU was applicable for interim or annual periods beginning after October
1, 2009. The adoption has no impact on the Company.
9
In September 2009, the FASB issued ASU 2009-12 to address diversity in practice with respect to
how entities calculate net asset value per share or (NAV) of investments considered
alternative investments, such as hedge funds, private equity funds, or funds of funds. Many
times, these types of investments do not have readily determinable fair values. Historically,
some believed that the NAV of a particular investment equaled its fair value without the need to
consider such attributes as the inability to transfer the investment to a party other than the
fund, calls for additional investment, etc. This ASU amends ASC 820 and provides a practical
expedient for measuring the fair value of investments in a limited number of entities that
calculate NAV. The ASU also provides enhanced disclosure requirements. This ASU is effective for
interim and annual periods ending after December 15, 2009. The adoption has no impact on the
Company.
FASB ASU No. 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements -
a consensus of the FASB Emerging Issues Task Force applies to multiple-deliverable revenue
arrangements that are currently within the scope of Topic 605-25. This ASU also provides principles
and application guidance on whether multiple deliverables exist, how the arrangement should be
separated, and the consideration allocated, requires an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling price, eliminates the use of
the residual method and requires an entity to allocate revenue using the relative selling price
method. The consensus significantly expands the disclosure requirements for multiple-deliverable
revenue arrangements. This ASU should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. Alternatively, an entity can elect to adopt this ASU on a
retrospective basis. The Company has not yet determined the effect of the adoption of this ASU on
the Companys results of operations or financial position.
FASB ASU No. 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software
Elements a consensus of the FASB Emerging Issues Task Force was issued concurrently with ASU
No. 2009-13 and focuses on determining which arrangements are within the scope of the software
revenue guidance in Topic 985 and which are subject to the guidance in ASU No. 2009-13. This
ASU removes tangible products from the scope of the software revenue guidance and provides
guidance on determining whether software deliverables in an arrangement that includes a tangible
product are within the scope of the software revenue model or the guidance in revenue
arrangements with multiple deliverables model, ASU No. 2009-13. Generally, if the software
contained in or part of the arrangement with the tangible product is essential to the tangible
products functionality, then the software is excluded from the software revenue guidance. The ASU
also provides factors to consider in evaluating whether the software was essential to the tangible
product or not. The disclosure requirements, effective date, and transition methods for this ASU
are the same as those for ASU No. 2009-13. An entity must adopt both ASUs in the same period using
the same transition method. The Company has not yet determined the effect of the adoption of this
ASU on the Companys results of operations or financial position.
NOTE 6: Basic and Diluted Net Income Per Common Share
Basic earnings per share amounts are computed by dividing reported earnings available to common
stockholders by the weighted average shares outstanding for the period. Diluted earnings per share
amounts are computed by dividing reported earnings available to common stockholders by weighted
average common shares outstanding for the period giving effect to securities considered to be
potentially dilutive common shares such as stock options.
10
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (223,131 | ) | $ | (522,691 | ) | ||
Weighted average shares of common stock outstanding used to
compute basic earnings per share |
29,038,021 | 29,038,021 | ||||||
Additional common shares to be issued assuming exercise of
stock options and stock warrants |
| | ||||||
Weighted average shares of common and common equivalent stock
outstanding used to compute diluted earnings per share |
29,038,021 | 29,038,021 | ||||||
Basic: |
||||||||
Net loss per share |
$ | (0.01 | ) | $ | (0.02 | ) | ||
Weighted average common shares outstanding |
29,038,021 | 29,038,021 | ||||||
Diluted: |
||||||||
Net loss per share |
$ | (0.01 | ) | $ | (0.02 | ) | ||
Weighted average common and common equivalent shares outstanding |
29,038,021 | 29,038,021 | ||||||
There were no additional common shares to be issued, assuming exercise of stock options and
stock warrants, since all options and warrants had an exercise price higher than the average stock
price for the three months ended March 31, 2010 and March 31, 2009.
NOTE 7: Stock Based Compensation
The Companys Amended and Restated Stock Option and Restricted Stock Plan (the Plan) provides for
the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants
of, shares of the Companys Class A common stock. Individuals eligible for participation in the
Plan include designated officers and other employees (including employees who also serve as
directors), non-employee directors, independent contractors and consultants who perform services
for the Company. The terms of each grant under the Plan are determined by the Board of Directors,
or a committee of the board administering the Plan, in accordance with the terms of the Plan.
Outstanding stock options become immediately exercisable upon a change of control of the Company as
in accordance with the terms of the Plan. Stock options granted under the Plan typically become
exercisable over a one to five year period. Generally, the options have various vesting periods,
which include immediate and term vesting periods.
On December 8, 2005, the Companys stockholders approved the CTI Group (Holdings) Inc. Stock
Incentive Plan (the Stock Incentive Plan). The Stock Incentive Plan replaced the Plan. No new
grants will be granted under the Plan. Grants that were made under the Plan prior to stockholders
approval of the Stock Incentive Plan will continue to be administered under the Plan.
The Stock Incentive Plan is administered by the Compensation Committee of the board of directors.
Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to
non-employee directors, executive officers and other employees of, and consultants and advisors to,
the Company or any of its subsidiaries and to determine the number and types of such awards and the
terms, conditions, vesting and other limitations applicable to each such award. In addition, the
Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules
and regulations as it considers necessary or appropriate for purposes of administering the Stock
Incentive Plan.
The following types of awards or any combination of them may be granted under the Stock Incentive
Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv)
performance awards.
The maximum number of shares of Class A common stock with respect to which awards may be granted or
measured to any individual participant under the Stock Incentive Plan during each of the Companys
fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain
adjustments.
The aggregate number of shares of Class A common stock that are reserved for awards, including
shares of Class A common stock underlying stock options, to be granted under the Stock Incentive
Plan is 6,000,000 shares, subject to
11
adjustments for stock splits, recapitalizations and other
specified events. Such shares may be treasury shares or authorized but unissued shares. As of
March 31, 2010, there were 1,553,468 awards available for grant under the Stock Incentive Plan. If
any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A
common stock allocable to such award may again be available for awards under the Stock Incentive
Plan. Incentive stock options may be granted only to participants who are executive officers and
other employees of the Company or any of its subsidiaries on the day of the grant, and
non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No
stock option granted under the Stock Incentive Plan will be exercisable later than ten years after
the date it is granted.
At March 31, 2010, there were options to purchase 5,892,782 shares of Class A common stock
outstanding consisting of 5,642,782 Plan and Stock Incentive Plan options and 250,000 outside plan
stock options. There were exercisable options to purchase an aggregate of 4,142,782 shares of Class
A common stock under the Plan and Stock Incentive Plan and options to purchase 250,000 shares of
Class A common stock that were outside plan stock options as of March 31, 2010.
Information with respect to options is as follows:
Exercise | Weighted | |||||||||||
Options | Price Range | Average | ||||||||||
Shares | Per Share | Exercise Price | ||||||||||
Outstanding, January 1, 2010 |
5,892,782 | $ | 0.08 $0.49 | $ | 0.27 | |||||||
Granted |
| | | |||||||||
Exercised |
| | | |||||||||
Cancelled |
| | | |||||||||
Outstanding, March 31, 2010 |
5,892,782 | $ | 0.08 - $0.49 | $ | 0.27 | |||||||
The following table summarizes options exercisable at March 31, 2010:
Exercise Price | Weighted | Aggregate | Weighted | |||||||
Option | Range | Average | Intrinsic | Remaining | ||||||
Shares | Per Share | Exercise Price | Value | Contractual Term | ||||||
March 31, 2010 |
4,392,782 | $0.21 $0.49 | $0.33 | | 5.90 years |
The following table summarizes non-vested options:
Option | ||||
Shares | ||||
January 1, 2010 |
2,133,340 | |||
Granted |
| |||
Cancelled |
| |||
Vested |
(633,340 | ) | ||
March 31, 2010 |
1,500,000 | |||
The fair value of each option award is estimated on the date of grant using a closed-form option
valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the following
table
2009 | ||
Risk-free interest rate |
1.76% | |
Dividend yield |
0.00% | |
Volatility factor |
157.43% | |
Expected lives |
5 years |
The fair value of each option award is estimated on the date of grant using a closed-form
option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the
following table. Because closed-form
valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected
volatilities are based on implied volatilities from historical volatility of the Companys stock.
The Company uses historical data to estimate option exercise and employee termination within the
valuation model; separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options granted is
12
derived from
general practices used by other companies in the software industry and estimates by the Company of
the period of time that options granted are expected to be outstanding. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
On February 16, 2007, the Company and Fairford Holdings Scandinavia AB (Fairford Scandinavia), a
wholly-owned subsidiary of Fairford, entered into the Securities Purchase Agreement (the
Agreement), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company
issued to Fairford Scandinavia a Class A common stock Purchase Warrant (the Original Warrant) to
purchase shares of Class A Common Stock of the Company in consideration for securing the issuance
of a $2.6 million letter of credit (the Letter of Credit) from SEB bank to National City Bank.
Due to National City Banks receipt of the Letter of Credit, the Company was able to obtain the
Acquisition Loan at a favorable cash-backed interest rate. Effective April 14, 2008, the Company
entered into the Securities Purchase Agreement with Fairford Scandinavia and issued an additional
warrant to Fairford Scandinavia to purchase shares of Class A common stock based on the interest
rate savings (the Additional Warrant).
Pursuant to the Original Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of
Class A common stock at the exercise price of $0.34 per share, subject to adjustments as described
in the Original Warrant, at any time prior to the 10th anniversary of the date of issuance.
Pursuant to the Additional Warrant, Fairford Scandinavia is entitled to purchase 620,675 shares of
Class A common stock at the exercise price of $0.22 per share, subject to adjustments as described
in the Additional Warrant, at any time prior to the 10th anniversary of the date of issuance. As
of March 31, 2010, Fairford beneficially owned 63.7% of the Companys outstanding Class A common
stock and Fairford Scandinavia owned warrants to purchase 1,040,170 shares of the Companys Class A
common stock. Mr. Osseiran, the majority holder of the Companys Class A common stock and a
director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a
grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr.
Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford
Scandinavia. The Original Warrant and Additional Warrant vested immediately upon grant.
Included within selling, general and administrative expense for the three months ended March 31,
2010 and March 31, 2009 was $21,621 and $28,917, respectively, of stock-based compensation.
Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts
are not included in internal measures of segment operating performance.
NOTE 8: Indemnification to Customers
The Companys agreements with customers generally require the Company to indemnify the customer
against claims that the Companys software infringes third party patent, copyright, trademark or
other proprietary rights. Such indemnification obligations are generally limited in a variety of
industry-standard provisions including our right to replace the infringing product. As of March
31, 2010, the Company did not experience any material losses related to these indemnification
obligations and no material claims with respect thereto were outstanding. The Company does not
expect significant claims related to these indemnification obligations, and consequently, the
Company has not established any related accruals.
NOTE 9: Contingencies
The Company is, from time to time, subject to claims and administrative proceedings in the ordinary
course of business that are unrelated to Patent Enforcement.
NOTE 10: Income Taxes
The Company records a valuation allowance against its net deferred tax asset to the extent
management believes, it is more likely than not, that the asset will not be realized. As of March
31, 2010, the Companys valuation allowance related only to net deferred tax assets in the United
States.
The Company recognizes a tax position as a benefit only if it is more likely than not that the
tax position would be sustained in a tax examination, with a tax examination being presumed to
occur. As of March 31, 2010 and March 31, 2009, the Company had $67,549 and $52,555 of
unrecognized tax benefits, respectively, all of which would
favorably affect the Companys effective tax rate if recognized. The Company and its subsidiaries
are subject to U.S. federal income tax as well as income tax of the state of Indiana and foreign
income tax in the United Kingdom. The Company is no longer subject to examination by taxing
authorities for years before 2002. The Company does not expect the total amount of unrecognized
tax benefits to significantly increase in the next twelve months.
The Company recognizes interest and/or penalties related to income tax matters in income tax
expense. The Company did not have any amounts accrued for interest and penalties as of March 31,
2010.
13
For the three months ended March 31, 2010 and March 31, 2009, the Company had $54,073 and
$50,239, respectively, of income tax expense primarily related to the United Kingdom operations.
NOTE 11: Segment Information
The Company has four reportable segments, EIM, Telemanagement, VoIP, and Patent Enforcement. These
segments are managed separately because the services provided by each segment require different
technology and marketing strategies.
Electronic Invoice Management: EIM designs, develops and provides electronic invoice
presentment and analysis software that enables internet-based customer self-care for wireline,
wireless and convergent providers of telecommunications services. EIM software and services are
used primarily by telecommunications services providers to enhance their customer relationships
while reducing the providers operational expenses related to paper-based invoice delivery and
customer support relating to billing inquiries. The Company provided these services primarily
through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom.
Telemanagement: Through its operations in the United Kingdom and Indianapolis and the
utilization of the Proteus® products, the Company offers telemanagement software and
services for end users to manage their usage of multi-media communications services and equipment.
Voice Over Internet Protocol: VoIP designs, develops and provides software and services that
enable managed and hosted customers of service providers to analyze voice, video, and data usage,
record and monitor communications, and perform administration and back office functions such as
cost allocation or client bill back. These applications are commonly available in the market as
enterprise-grade products. Customers typically purchase these products when upgrading or acquiring
a new enterprise communications platform.
Patent Enforcement: Patent Enforcement involves the licensing, protection, enforcement and defense
of the Companys intellectual property and rights.
Reconciling items for operating income (loss) in the table below represent corporate expenses and
depreciation all of which are in the United States.
The accounting policies for segment reporting are the same as those described in Note 1 of the
Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
Summarized financial information concerning the Companys reportable segments for the three months
ended March 31, 2010 and 2009 is shown in the following table.
14
For Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
Electronic Invoice | Patent | Corporate | ||||||||||||||||||||||
Management | Telemanagement | VoIP | Enforcement | Allocation | Consolidated | |||||||||||||||||||
Revenues |
$ | 2,652,920 | $ | 1,126,491 | $ | 120,146 | $ | 40,500 | $ | | $ | 3,940,057 | ||||||||||||
Gross profit/(loss)
(Revenues less cost of
products and patent license
cost, excluding depreciation
and amortization) |
2,088,626 | 587,078 | 21,689 | (21,177 | ) | | 2,676,216 | |||||||||||||||||
Depreciation and amortization |
237,350 | 4,262 | 149,083 | 353 | 7,622 | 398,670 | ||||||||||||||||||
Income (loss) from operations |
676,990 | 89,922 | (580,191 | ) | (21,530 | ) | (314,701 | ) | (149,510 | ) | ||||||||||||||
Long-lived assets |
9,973,926 | 33,847 | 1,049,145 | | 20,537 | 11,077,455 | ||||||||||||||||||
For Three Months Ended March 31, 2009 | ||||||||||||||||||||||||
Electronic | ||||||||||||||||||||||||
Invoice Management | Telemanagement | VoIP | Patent Enforcement | Corporate Allocation | Consolidated | |||||||||||||||||||
Revenues |
$ | 2,874,757 | $ | 1,002,898 | $ | 71,633 | $ | | $ | | $ | 3,949,288 | ||||||||||||
Gross profit/(loss)
(Revenues less cost of
products and patent license
cost, excluding depreciation
and amortization) |
2,353,865 | 477,990 | (11,960 | ) | (244,991 | ) | | 2,574,904 | ||||||||||||||||
Depreciation and amortization |
226,617 | 8,733 | 117,191 | 5,748 | 8,771 | 367,060 | ||||||||||||||||||
Income (loss) from operations |
969,870 | (107,245 | ) | (771,520 | ) | (250,739 | ) | (300,951 | ) | (460,585 | ) | |||||||||||||
Long-lived assets |
10,094,667 | 26,314 | 1,026,188 | 398,975 | 84,378 | 11,630,522 |
The following table presents net revenues by geographic location.
For Three Months Ended March 31, 2010 | ||||||||||||
United | United | |||||||||||
States | Kingdom | Consolidated | ||||||||||
Revenues |
$ | 1,037,541 | $ | 2,902,516 | $ | 3,940,057 | ||||||
Gross profit (Revenues less
cost of products and patent
license cost, excluding
depreciation and
amortization) |
713,135 | 1,963,081 | 2,676,216 | |||||||||
Depreciation and amortization |
179,638 | 219,032 | 398,670 | |||||||||
Income (loss) from operations |
(353,909 | ) | 204,399 | (149,510 | ) | |||||||
Long-lived assets |
9,933,083 | 1,144,372 | 11,077,455 | |||||||||
For Three Months Ended March 31, 2009 | ||||||||||||
United | United | |||||||||||
States | Kingdom | Consolidated | ||||||||||
Revenues |
$ | 1,083,490 | $ | 2,865,798 | $ | 3,949,288 | ||||||
Gross profit (Revenues less
cost of products and patent
license cost, excluding
depreciation and
amortization) |
596,831 | 1,978,073 | 2,574,904 | |||||||||
Depreciation and amortization |
164,600 | 202,460 | 367,060 | |||||||||
Income (loss) from operations |
(650,672 | ) | 190,087 | (460,585 | ) | |||||||
Long-lived assets |
11,163,803 | 466,719 | 11,630,522 |
15
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
The Company is comprised of four business segments: Electronic Invoice Management (EIM),
Telemanagment (Telemanagement), Voice Over Internet Protocol (VoIP) and Patent Enforcement
Activities (Patent Enforcement). EIM designs, develops and provides services and software tools
that enable telecommunication service providers to better meet the needs of their enterprise
customers. EIM software and services are provided and sold directly to telecommunication service
providers who then market and distribute such software to their enterprise customers. Using the
Companys software and services, telecommunication service providers are able to electronically
invoice their enterprise customers in a form and format that enables the enterprise customers to
improve their ability to analyze, allocate and manage telecommunications expenses while driving
internal efficiencies into their invoice receipt, validation, approval and payment workflow
processes. Telemanagement designs, develops and provides software and services used by enterprise,
governmental and institutional end users to manage their telecommunications service and equipment
usage. VoIP designs, develops and provides software and services that enable managed and hosted
customers of service providers to analyze voice, video, and data usage, record and monitor
communications, and perform administration and back office functions such as cost allocation or
client bill back. These applications are commonly available in the market as enterprise-grade
products. Customers typically purchase the VoIP products when upgrading or acquiring a new
enterprise communications platform. Patent Enforcement involves the licensing, protection,
enforcement and defense of the Companys intellectual property and rights.
The Company generates its revenues and cash from several sources: software sales, license fees,
processing fees, implementation fees, training and consulting services, and enforcement revenues.
The Companys software products and services are subject to changing technology and evolving
customer needs which require the Company to continually invest in research and development in order
to respond to such demands. The limited financial resources available to the Company require the
Company to concentrate on those business segments and product lines which provide the greatest
returns on investment. The EIM segment, as compared to the other business segments, provides the
predominant share of income from operations and cash flow from operations. The majority of
Telemanagement segment revenues are derived from its United Kingdom operations.
The Company reported revenue in the EIM segment of $2.7 million and $2.9 million for the three
months ended March 31, 2010 and 2009, respectively. For the Telemanagement segment, the Company
recorded revenues of $1.1 million and $1.0 million for the three months ended March 31, 2010 and
2009, respectively. The Patent Enforcement segment recorded revenue of $41 thousand and $0 for the
three months ended March 31, 2010 and 2009, respectively. In the VoIP segment, revenue of $120
thousand and $72 thousand was recorded in the three months ended March 31, 2010 and 2009,
respectively.
The Company believes that as voice and data services continue to commoditize, service providers
will seek alternative business models to replace revenue lost as a result of pricing pressures.
One such business model is the delivery of managed or hosted voice and video services.
Traditionally, organizations that required advanced voice and video services would purchase
enabling communications hardware and software, operate and maintain this equipment, and depreciate
the associated capital expense over time. This approach had two major disadvantages for such
organizations. The first being that organizations would experience significant capital and
operational expenditures related to acquiring these advanced services. The second being that the
capabilities of the acquired equipment would not materially improve as voice and video service
technology evolved.
Service providers recognized these challenges and began, as part of their next generation network
(NGN) strategies, to deliver managed and hosted service offerings that do not require the
customer to purchase expensive equipment up-front and virtually eliminate the operational
expenditures associated with managing and maintaining an enterprise-grade communications network.
Service providers incrementally improve revenue by enabling competitive voice and video features
while reducing costs by delivering these services on high-capacity, low-cost NGNs.
Due to the profitability and average revenue per user advantage possible by delivering such
managed and hosted service offerings, providers not only look at acquiring new customers but
converting legacy customers onto the NGN platform. The Company believes that this conversion
process is significant. Many legacy features and functions are not available on NGN platforms,
primarily due to the immaturity of the service delivery model.
The Companys VoIP applications will help eliminate customer resistance to conversion to next
generation platforms, while creating new revenue opportunities for service providers through the
delivery of compelling value added services. In 2007, the Company marketed two applications,
emPulse, web-based communications traffic analysis
16
solution, and SmartRecord® IP, which enable service providers to selectively intercept
communications on behalf of their hosted and managed service customers. These applications will
also enable managed and hosted service customers of service providers to analyze voice, video, and
data usage, record and monitor communications, and perform administration and back office functions
such as cost allocation or client bill back. These applications were released as enterprise-grade
products. The Company anticipates that customers will purchase these products when upgrading or
acquiring a new enterprise communications platform. The Company has taken the business benefits of
these enterprise-grade applications and has delivered provider-grade managed and hosted service
applications, enabling service providers to create a new recurring revenue stream, while ensuring
that enterprise customers have the tools necessary and relevant to their particular line of
business or vertical. The Companys future success in the VoIP segment is directly related to the
successful market penetration of emPulse and SmartRecord® IP.
Financial Condition
In the three months ended March 31, 2010, the stockholders equity decreased $71,005 from
$8,536,147 as of December 31, 2009 to $8,465,142 as of March 31, 2010 primarily as a result of the
first quarter 2010 net loss of $223,131. The Company realized an increase in net current
assets (current assets less current liabilities) of approximately $173,607 which was primarily
attributable to the increase in receivables as of March 31, 2010.
At March 31, 2010, cash and cash equivalents were $269,700 compared to $508,836 at December 31,
2009, and such decrease was primarily attributable to cash used in operating and investing
activities offset by cash provided by financing activities. Cash used in the three months ended
March 31, 2010 by operating activities amounted to $199,469 which was primarily related to the net
operating loss of $223,131. Cash provided by financing activities related to net borrowings of
$386,000 under the Companys revolving loan facility during the three months ended March 31, 2010.
Cash utilized in investing activities of $423,298 related to additions to property, equipment and
software. The Company generates approximately 74% of its revenues from operations in the United
Kingdom where the functional currency, the UK pound, has deteriorated by 6.6% in relation to the US
dollar in the three months ended March 31, 2010.
Results of Operations (Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009)
Revenues
Revenues from operations for the three months ended March 31, 2010 decreased $9,231, or 0.2%, to
$3,940,057 as compared to $3,949,288 for the three months ended March 31, 2009. Revenues derived
from the UK operations represent 73.7% and 72.6% of total revenues for the three months ended March
31, 2010 and 2009, respectively. The US revenues decreased by $45,949, or 4.2%, to $1,037,541 for
the three months ended March 31, 2010 compared to $1,083,490 for the three months ended March 31,
2009. The decrease in US revenues was primarily related to a decrease in the revenue recognized
from the largest EIM customer in the United States due to decreased processing for that customer.
The Company earns a substantial portion of its revenue from a single EIM customer. This customer
represented 15.9% of the total revenues for the three months ended March 31, 2010 and 19.4% for the
three months ended March 31, 2009. The Company believes that the portion of revenue from the
single largest EIM customer will decline due to the erosion of the customers customer base while
the revenue from its second largest customer will remain consistent with prior periods.
Cost of Products and Services Excluding Depreciation and Amortization
Cost of products and services, excluding depreciation and amortization, for the three months ended
March 31, 2010, increased $72,771, or 6.4%, to $1,202,164 as compared to $1,129,393 for the three
months ended March 31, 2009. The increase was primarily due to an increase in hours spent on
professional service projects charged to cost of sales. For software sales, service fee and
license fee revenues, the cost of products and services, excluding depreciation and amortization,
was 30.5% of revenue for the three months ended March 31, 2010 as compared to 28.6% of revenue for
the three months ended March 31, 2009.
Patent License Fee and Enforcement Cost
Patent license fee and enforcement cost for the three months ended March 31, 2010 decreased by
$183,314, or 74.8%, to $61,677 as compared to $244,991 for the three months ended March 31, 2009.
The decrease was primarily due to decreased professional fees associated with additional cost
absorption of certain out-of-pocket expenses by the Companys attorneys in connection with certain
patent enforcement activities.
17
Selling, General and Administrative Costs
Selling, general and administrative expenses for the three months ended March 31, 2010 decreased
$93,155, or 4.7%, to $1,881,138 compared to $1,974,293 for the three months ended March 31, 2009.
The decrease in Selling, general and administrative expenses was primarily due to decreased selling
costs.
Research and Development Expense
Research and development expense for the three months ended March 31, 2010 decreased $148,218, or
21.4%, to $545,918 as compared to $694,136 for the three months ended March 31, 2009. The decrease
was primarily due to an increase in research and development being capitalized in the three months
ended March 31, 2010. Research and development costs that were capitalized during the three months
ended March 31, 2010 and March 31, 2009 amounted to $294,829 and $122,041, respectively.
Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2010 increased $31,610, or 8.6%,
to $398,670 from $367,060 in the three months ended March 31, 2009. The increase was primarily
associated with depreciation and amortization fixed assets acquired and software capitalized in
2009.
Amortization expense of developed software amounted to $163,559 and $186,582 for the three months
ended March 31, 2010 and 2009, respectively. Amortization expense of developed software, which
relates to cost of sales, was presented as depreciation and amortization expense.
Other Income and Expense
Net interest expense increased $7,630, or 64.3%, to $19,497 for the three months ended March 31,
2010 compared to $11,867 for the three months ended March 31, 2009. The increase in net interest
expense was primarily associated with the lower interest income derived from notes receivable as
they near maturity, which offset interest expense.
The Company realized a loss on disposal of equipment of $51 and $0 for the three months ended March
31, 2010 and March 31, 2009, respectively.
Taxes
The Company records a valuation allowance against its net deferred tax asset to the extent
management believes that it is more likely than not that the asset will not be realized. As of
March 31, 2010, the Companys valuation allowance related only to the net deferred tax assets in
the United States.
The tax expense for the three months ended March 31, 2010 and March 31, 2009 of $54,073 and
$50,239, respectively, was due to the pre-tax income in the United Kingdom of $203,938 and
$188,595, respectively.
Net Loss
Net loss decreased $299,560 to $223,131 for the three months ended March 31, 2010 compared to a net
loss of $522,691 for the three months ended March 31, 2009. The decrease in net loss was primarily
associated with the decrease in patent enforcement costs and an increase in the patent enforcement
revenues.
Liquidity and Capital Resources
Historically, the Companys principal needs for funds have been for operating activities (including
costs of products and services, patent enforcement activities, selling, general and administrative
expenses, research and development, and working capital needs) and capital expenditures, including
software development. Cash flows from operations and existing cash and cash equivalents have been
adequate to meet the Companys business objectives. Cash and cash equivalents, decreased $239,136
to $269,700 as of March 31, 2010 compared to $508,836 as of December 31, 2009. The decrease in
cash, cash equivalents, and short-term investments during the three months ended March 31, 2010 was
predominately related to cash flows used in operations of $199,469 along with cash spent on
property, equipment, and software of $423,298 partially off-set by cash provided by financing
activities of $386,000. The effect of foreign currency exchange rates on cash and cash equivalents
was a loss of $2,369.
Cash is generated from (or utilized in) the income/(loss) from operations for each segment (see
Note 11 to the Consolidated Financial Statements (unaudited) of Part I, Item 1 of this Form 10-Q).
The EIM, Telemanagement, VoIP,
18
and Patent Enforcement segments represented income / (loss) from operations for the three months
ended March 31, 2010 of $676,990, $89,922, $(580,191) and $(21,530), respectively. The Corporate
Allocation expense generated an operating loss of $(314,701) for the three months ended March 31,
2010. The United States location generated a loss from operations for the three months ended March
31, 2010 of $(353,909) which was primarily associated with loss generated in the VoIP segment and
the Corporate Allocations expense. The United Kingdom location generated income from operations
for the same period of $204,399. For the three months ended March 31, 2009, the EIM,
Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations
of $969,870, $(107,245), $(771,520) and $(250,739), respectively. The Corporate Allocation expense
generated an operating loss of $(300,951) for the three months ended March 31, 2009. The United
States location generated a loss from operations for the three months ended March 31, 2009 of
$(650,672) which was primarily associated with corporate expenses and a loss from the VoIP segment.
The United Kingdom location generated income from operations for the three months ended March 31,
2009 of $190,087.
The Company has available a revolving loan facility with National City Bank (NCB) equal to the
lesser of (a) $3,000,000, (b) the sum of 80% of eligible domestic trade accounts receivable and 90%
of eligible, insured foreign trade accounts receivable or (c) four times the sum of earnings before
interest, taxes, depreciation and amortization for the trailing twelve month period. Outstanding
borrowings under the revolving loan bear interest at LIBOR plus 2.50% payable monthly which
amounted to 2.75% as of March 31, 2010. The Company also must pay an unused revolving loan
commitment fee of 0.25% of the average daily amount by which the revolving loan commitment exceeds
the outstanding principal amount. The amount paid on the unused revolving loan commitment fee
amounted to $1,443 for the three months ended March 31, 2010. The revolving loan expires on
December 30, 2010. All borrowings are collateralized by substantially all assets of the Company.
The outstanding balance on the revolving loan was $1,304,027 at March 31, 2010. Available for
borrowing under the revolving loan on March 31, 2010 was $441,862. The carrying amount of
receivables that served as collateral for borrowings totaled $1,745,889 at March 31, 2010.
The Company has an acquisition loan of $500,000 with NCB (the Acquisition Loan). The Acquisition
Loan was repaid and expired on December 21, 2009. All borrowings under the Acquisition Loan were
collateralized by substantially all assets of the Company. Borrowings under the Acquisition Loan
bore interest at LIBOR plus 2.00% payable monthly. The outstanding balances on the Acquisition
Loan were $0 and $500,000 at March 31, 2010 and March 31, 2009, respectively.
The revolving loan facility is and Acquisition Loan (the Loan Agreements) was secured by a
guarantee from a wholly-owned subsidiary of Fairford Holdings Limited, a British Virgin Islands
company. As of March 31, 2010, Fairford beneficially owned 63.7% of the Companys outstanding
Class A common stock. Mr. Osseiran, the majority holder of the Companys Class A common stock and
director of the Company, is a director of Fairford and a grantor and sole beneficiary of a
revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is
the director of Fairford.
The Loan Agreements contain certain financial covenants and restrictions on indebtedness,
encumbrances, investments, business combinations, and other related items. As of March 31, 2010,
the Company was in compliance with all covenants. The more significant covenants under the Loan
Agreements, include that, without NCBs prior written consent, the Company shall not, and shall not
permit any of its subsidiaries to: (i) incur or have outstanding any indebtedness in excess of
$20,000 individually or $100,000 in the aggregate; (ii) dispose of all, or any part, of business or
assets; (iii) make any acquisitions, or (iv) issue any additional shares of stock or other
securities and the Company shall not issue more than 10% of the Companys capital stock pursuant to
its stock option plan on a fully-diluted basis.
The Company derives a substantial portion of its revenues from a single EIM customer. This single
customer generated approximately $625,000 and $766,000 in the three months ended March 31, 2010 and
March 31, 2009, respectively (15.9% of revenue for the three months ended March 31, 2010 and 19.4%
or revenue for the three months ended March 31, 2009). This customers contract includes an
automatic annual renewal provision; however, the contract can be terminated at any time by either
party with four months advanced notice. The Company has experienced significant decreases in the
processing for this customer and anticipates additional decreased processing revenue. The loss of
this customer would have a substantial negative impact on the Companys financial condition and
results of operations.
The Companys primary sources of liquidity over the next twelve months will be cash on hand,
anticipated increased cash generated from future operating activities and the cash available to the
Company under the revolving loan facility.
The Company expects to continue to require funds to meet debt service obligations, capital
expenditures and other non-operating expenses. The Companys future capital requirements will
depend on many factors, including revenue growth, expansion of service offerings and business
strategy. The Company believes that expected future earnings from operations, available funds,
together with existing revolving credit facility, will be adequate to satisfy its planned
operations for the next 12 months. There can be no assurances that they Company will be successful
in generating
19
increased cash from future operating activities. If the Company is not successful in generating
increased cash from operating activities, it would need to undertake, amongst other measures, cost
containment and cost cutting activities, extend or seek a new revolving loan agreement or seek
other additional capital resources.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of the Companys financial condition and results of operations are
based upon the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates, including those related
to revenue recognition, bad debts, depreciation and amortization, investments, income taxes,
capitalized software, goodwill, restructuring costs, accrued compensation, contingencies and
litigation. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
The Company believes the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the consolidated financial statements. For the
description of other critical accounting policies used by the Company, see Item 8. Financial
Statements and Supplementary Date Notes to Consolidated Financial Statements Note 1 in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Income Taxes. The Company is required to estimate its income taxes. This process involves
estimating the Companys actual current tax obligations together with assessing differences
resulting from different treatment of items for tax and accounting purposes which result in
deferred income tax assets and liabilities.
The Company accounts for income taxes using the liability method. Under the liability method, a
deferred tax asset or liability is determined based on the difference between the financial
statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to
be in effect when these differences are expected to reverse.
The Companys deferred tax assets are assessed for each reporting period as to whether it is more
likely than not that they will be recovered from future taxable income, including assumptions
regarding on-going tax planning strategies. To the extent the Company believes that recovery is
uncertain, the Company has established a valuation allowance for assets not expected to be
recovered. Changes to the valuation allowance are included as an expense or benefit within the tax
provision in the statement of operations. As of March 31, 2010, the Companys valuation allowance
related only to net deferred tax assets in the United States. As a result, the Companys tax
expense relates to the UK operations and the Company does not anticipate recording significant tax
charges or benefits related to operating gains or losses for the Companys US operations.
The Company recognizes a tax position as a benefit only if it is more likely than not that the
tax position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the more likely than not test,
no tax benefit is recorded.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of
the state of Indiana and foreign income tax in the United Kingdom. The Company is no longer
subject to examination by taxing authorities for years before 2002. The Company does not expect
the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
The Company recognizes interest and/or penalties related to income tax matters in income tax
expense. The Company did not have any amounts accrued for interest and penalties at March 31,
2010.
The Companys tax filings are subject periodically to regulatory review and audit.
Research and Development and Software Development Costs. Research and development costs are
charged to operations as incurred. Software Development Costs are considered for capitalization
when technological feasibility is established. The Company bases its determination of when
technological feasibility is established based on the
20
development teams determination that the Company has completed all planning, designing, coding and
testing activities that are necessary to establish that the product can be produced to meet its
design specifications including, functions, features, and technical performance requirements.
Goodwill and Intangible Assets. The Company considers the goodwill and related intangible assets
related to CTI Billing Solutions Limited to be the premium the Company paid for CTI Billing
Solutions Limited. For accounting purposes, these assets are maintained at the corporate level and
the Company considers the functional currency with respect to these assets the U.S. dollar.
Goodwill is tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired. There were no impairments in 2010 and 2009.
Purchased intangible assets other than goodwill are amortized over their useful lives unless these
lives are determined to be indefinite. Purchased intangible assets are carried at cost, less
accumulated amortization. Amortization is computed over the estimated useful lives of the
respective assets, generally 3-15 years. Intangible assets consist of patents, purchased
technology, trademarks and trade names, and customer lists.
The Company has allocated goodwill and a significant component of its intangible assets to CTI
Billing Solutions Limited, as that entity is considered a separate reporting unit. The Company
performed its annual impairment analysis on goodwill as of the October 1, 2009, to coincide with
the calendar date set in past years for this analysis. The Companys analysis considered the
projected cash flows of the reporting unit and gave consideration to appropriate factors in
determining a discount rate to be applied to these cash flows. The Company engaged the same
outside firm as was used in past years to assist in this analysis. The Company is satisfied as to
the qualifications and independence of this firm with respect to their ability to assist in this
analysis. The results of this analysis indicated that there was no Step One impairment as of the
date of our annual impairment determination.
The Companys Class A common stock dropped significantly in the fourth quarter of 2008 and has
remained at low levels. As of May 10, 2010, the Companys Class A common stock closed at $0.07 per
share and the market cap for the Companys stock was approximately $2.0 million which was well
below the Companys reported book value at March 31, 2010 of approximately $8.5 million.
Because of the Companys continued low market cap, the Company reviewed the assumptions utilized
in the impairment determination and again found that there existed no impairment. The Companys
operations of the business unit are primarily based on recurring revenues and have not experienced
an adverse change in anticipated performance considered in the impairment analysis. The business
units operating performance subsequent to the goodwill impairment analysis has exceeded anticipated
performance through the most recent period that information is available.
The Company recognizes that the market for our stock is significantly below our book value which
the Company attributes to a number of factors including very limited trading in the Companys Class
A common stock; a significant portion of the Companys Class A common stock (approximately 75%) is
beneficially owned by a majority stockholder, an overall flight to quality by investors in which
many penny stocks such as CTIs have been significantly downgraded in terms of pricing and an
overall lack of public awareness of its operations. While the Company cannot quantify the impacts
of these factors in terms of how they impact the difference between book value and our stocks
market cap The Company does not believe that the market in its Class A common stock is
sufficiently sophisticated to make a proper determination of the value of the Companys Class A
common stock such that it should drive the Company to reach a conclusion that impairment of its
goodwill has occurred when the Company believes that generally accepted valuation techniques using
its most recent assessments as to the future performance of our business indicate that is not
impaired. The Company will continue in the future to be aware of the market cap in our assessment
of its goodwill and may more frequently update its analysis of goodwill impairment in light of this
situation. The Company believes the year-end analysis is sufficiently current and no formal
analysis has been performed at March 31, 2010. If the Company assesses market condition changes in
our business, it may be required to reflect goodwill impairment in the future.
Long-Lived Assets. The Company reviews the recoverability of the carrying value of its long-lived
assets on an annual basis. Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
When such events occur, the Company compares the carrying amount of the assets to the undiscounted
expected future cash flows. If this comparison indicates there is impairment, the amount of the
impairment is typically calculated using discounted expected future cash flows.
Revenue Recognition and Accounts Receivable Reserves. The Company records revenue when
it is realized, or realizable, and earned. Revenues from software licenses are recognized upon
shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined
in the sales agreement provided there are no
21
significant remaining vendor obligations to be fulfilled and collectability is reasonably assured. Software sales revenue
is generated from licensing software to new customers and from licensing additional users and new
applications to existing customers.
The Companys sales arrangements typically include services in addition to software. Service
revenues are generated from support and maintenance, processing, training, consulting, and
customization services. For sales arrangements that include bundled software and services, the
Company accounts for any undelivered service offering as a separate element of a multiple-element
arrangement. Amounts deferred for services are determined based upon vendor-specific objective
evidence of the fair value of the elements. Support and maintenance revenues are recognized on a
straight-line basis over the term of the agreement. Revenues from processing, training,
consulting, and customization are recognized as provided to customers. If the services are
essential to the functionality of the software, revenue from the software component is deferred
until the essential service is complete.
If an arrangement to deliver software or a software system, either alone or together with other
products or services, requires significant production, modification, or customization of software,
the service element does not meet the criteria for separate accounting set forth in the guidance
related software revenue recognition. If the criteria for separate accounting are not met, the
entire arrangement is accounted for in with conformity guidance related to contract accounting.
The Company carefully evaluates the circumstances surrounding the implementations to determine
whether the percentage-of-completion method or the completed-contract method should be used. Most
implementations relate to the Companys Telemanagement products and are completed in less than 30
days once the work begins. The Company uses the completed-contract method on contracts that will
be completed within 30 days since it produces a result similar to the percentage-of-completion
method. On contracts that will take over 30 days to complete, the Company uses the
percentage-of-completion method of contract accounting.
The Company also realizes patent license fee and enforcement revenues. These revenues are realized
once the Company has received a signed settlement or judgment and the collection of the receivable
is deemed probable.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company continuously monitors collections
and payments from its customers and the allowance for doubtful accounts is based on historical
experience and any specific customer collection issues that the Company has identified. If the
financial condition of its customers were to deteriorate resulting in an impairment of their
ability to make payments, additional allowances may be required. Where an allowance for doubtful
accounts has been established with respect to customer receivables, as payments are made on such
receivables or if the customer goes out of business with no chance of collection, the allowances
will decrease with a corresponding adjustment to accounts receivable as deemed appropriate.
Legal Costs Related to Patent Enforcement Activities. Hourly legal costs incurred while
pursuing patent license fee and enforcement revenues are expensed as incurred. Legal fees that are
contingent on the successful outcome of an enforcement claim are recorded when the patent license
fee and enforcement revenues are realized.
Stock Based Compensation. The Company recognizes the cost of employee services received in
exchange for awards of equity instruments, such as stock options and restricted stock, based on the
fair value of those awards at the date of grant. The Company uses the Black-Scholes-Merton formula
and the modified prospective method and, as such, results for prior periods have not been restated.
The Company recognizes compensation cost net of a forfeiture rate and recognizes the compensation
cost for only those awards expected to vest on a straight-line basis over the requisite service
period of the award, which is generally the vesting term. The Company estimated the forfeiture
rate based on its historical experience and its expectations about future forfeitures.
Included within selling, general and administrative expense for the three months ended March 31,
2010 and March 31, 2009 was $21,621 and $28,917, respectively, of stock-based compensation.
Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts
are not included in internal measures of segment operating performance.
The Company estimates it will recognize approximately $68,000, $38,000, $24,000 and $0 for the
fiscal years ending December 31, 2010, 2011, 2012 and 2013, respectively, of compensation costs for
nonvested stock options previously granted to employees.
New Accounting Pronouncements
22
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-5 to address concerns
regarding the determination of the fair value of liabilities. Because liabilities are often
not traded, due to restrictions placed on their transferability, there is typically a very limited amount of trades (if any) from
which to draw market participant data. As such, many entities have had to determine the fair value
of a liability through the use of a hypothetical transaction. The ASU clarifies the valuation
techniques that must be used when the liability subject to the fair value determination is not
traded as an asset in an active market. The ASU was applicable for interim or annual periods
beginning after October 1, 2009. The adoption has no impact on the Company.
In September 2009, the FASB issued ASU 2009-12 to address diversity in practice with respect to
how entities calculate net asset value per share or (NAV) of investments considered
alternative investments, such as hedge funds, private equity funds, or funds of funds. Many
times, these types of investments do not have readily determinable fair values. Historically,
some believed that the NAV of a particular investment equaled its fair value without the need to
consider such attributes as the inability to transfer the investment to a party other than the
fund, calls for additional investment, etc. This ASU amends ASC 820 and provides a practical
expedient for measuring the fair value of investments in a limited number of entities that
calculate NAV. The ASU also provides enhanced disclosure requirements. This ASU is effective for
interim and annual periods ending after December 15, 2009. The adoption has no impact on the
Company.
FASB ASU No. 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements -
a consensus of the FASB Emerging Issues Task Force applies to multiple-deliverable revenue
arrangements that are currently within the scope of Topic 605-25. This ASU also provides principles
and application guidance on whether multiple deliverables exist, how the arrangement should be
separated, and the consideration allocated, requires an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling price, eliminates the use of
the residual method and requires an entity to allocate revenue using the relative selling price
method. The consensus significantly expands the disclosure requirements for multiple-deliverable
revenue arrangements. This ASU should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. Alternatively, an entity can elect to adopt this ASU on a
retrospective basis. The Company has not yet determined the effect of the adoption of this ASU on
the Companys results of operations or financial position.
FASB ASU No. 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software
Elements a consensus of the FASB Emerging Issues Task Force was issued concurrently with ASU
No. 2009-13 and focuses on determining which arrangements are within the scope of the software
revenue guidance in Topic 985 and which are subject to the guidance in ASU No. 2009-13. This
ASU removes tangible products from the scope of the software revenue guidance and provides
guidance on determining whether software deliverables in an arrangement that includes a tangible
product are within the scope of the software revenue model or the guidance in revenue
arrangements with multiple deliverables model, ASU No. 2009-13. Generally, if the software
contained in or part of the arrangement with the tangible product is essential to the tangible
products functionality, then the software is excluded from the software revenue guidance. The ASU
also provides factors to consider in evaluating whether the software was essential to the tangible
product or not. The disclosure requirements, effective date, and transition methods for this ASU
are the same as those for ASU No. 2009-13. An entity must adopt both ASUs in the same period using
the same transition method. The Company has not yet determined the effect of the adoption of this
ASU on the Companys results of operations or financial position.
23
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Not Applicable.
24
Item 4. | Controls and Procedures. |
The Company, under the supervision and with the participation of its management, including its
principal executive officer and principal financial officer, evaluated the effectiveness of the
Companys disclosure controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal financial officer concluded
that as of March 31, 2010, the Companys disclosure controls and procedures were effective in
reaching a reasonable level of assurance that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms and that such information is accumulated and communicated
to the Companys management, including its principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
The Companys principal executive officer and principal financial officer also conducted an
evaluation of internal control over financial reporting (Internal Control) to determine whether
any changes in Internal Control occurred during the quarter covered by this report that have
materially affected or which are reasonably likely to materially affect Internal Control. Based on
that evaluation, there has been no such change during the quarter covered by this report.
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected. The Company conducts periodic evaluations to enhance, where necessary its
procedures and controls.
25
PART II OTHER INFORMATION
Item 1 | Legal Proceedings. |
The Company is from time to time subject to claims and administrative proceedings that are
filed in the ordinary course of business and are unrelated to Patent Enforcement.
Qwest Corporation
The Company previously disclosed that on May 11, 2004, an action was brought against the Company in
the United States District Court for the Western District of Washington by Qwest Corporation
seeking a declaratory judgment of non-infringement and invalidity of the Companys Patent
No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications
Corporation to that action. The Company filed a motion with the United States District Court for
the Western District of Washington seeking to dismiss that action or, in the alternative, to
transfer it to the United States District Court for the Southern District of Indiana.
On November 12, 2004, the United States District Court for the Western District of Washington
granted the Companys motion to the extent of transferring the action to the United States District
Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent
infringement and the United States District Court for the Southern District of Indiana then
consolidated the transferred action with the pending patent infringement lawsuit disclosed above
under BellSouth Corporation et al.
On January 9, 2008, the United States District Court for the Southern District of Indiana issued
its claim construction for U.S. Patent No. 5,287,270. On January 18, 2008, the Qwest entities filed
a motion for stay and a summary judgment motion of invalidity based on the construction of one of
the claim terms. The motions were fully briefed on an expedited basis and on February 26, 2008, the
court denied the motions. Fact discovery closed on December 23, 2008. Expert discovery was
completed on April 1, 2009. On April 15, 2009, the parties filed various summary judgment motions
related to patent infringement and invalidity and immunity from suit concerning the Networx
government contracts. On September 22, 2009, the Court granted the Qwest entities motion for
summary judgment of immunity from suit concerning the Networx government contracts, thereby
requiring the Company to sue the Government in the Court of Federal Claims. On October 29, 2009,
the Court ruled on the parties patent invalidity and noninfringement summary judgment motions. The
Court held that the Companys U.S. Patent No. 5,287,270 was valid but not infringed by the Qwest
entities. In November 2009, the Company filed a Notice of Appeal to the United States Court of
Appeals for the Federal Circuit (Federal Circuit). The Qwest entities subsequently cross appealed.
Briefing before the Federal Circuit commenced February 19, 2010 and is expected to be completed in
June 2010. Oral argument before the Federal Circuit is expected to occur in the Fall of 2010.
Item 1A Risk Factors.
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2009, which could materially affect our
business, financial condition or future results. The risk factors in our Annual Report on
Form 10-K have not materially changed. The risks described in our Annual Report on Form
10-K are not the only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds. |
None. |
Item 3 | Defaults Upon Senior Securities. |
None. |
Item 4 | (Removed and Reserved) |
Item 5 | Other Information. |
None. |
Item 6 Exhibits.
Exhibit 11.1 Statement re computation of per share earnings, incorporated by reference to Note 6 to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q | |||
Exhibit 31.1-Chief Executive Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
Exhibit 31.2-Chief Financial Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / |
26
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
Exhibit 32.1- Section 1350 Certification of the Chief Executive Officer | |||
Exhibit 32.2- Section 1350 Certification of the Chief Financial Officer |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ John Birbeck | ||||
John Birbeck | Date: May 14, 2010 | |||
Chief Executive Officer (Principal Executive Officer) |
||||
/s/ Manfred Hanuschek | ||||
Manfred Hanuschek | Date: May 14, 2010 | |||
Chief Financial Officer (Principal Financial Officer) |
||||
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