CTI GROUP HOLDINGS INC - FORM 10-Q

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EX-31.1 - EX-31.1 - CTI GROUP HOLDINGS INC	d802576dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

¨	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 000-10560

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)

(317) 262-4666

(Registrant’s telephone number, including area code)

Not Applicable

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ 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.

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 7, 2014, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,353,938.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS


ITEM NO.	PAGE NO.
Forward Looking Statements		3

PART I – Financial Information
1. Financial Statements - Unaudited
Consolidated Balance Sheets at September 30, 2014 and December 31, 2013		4
Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2014 and September 30, 2013		5
Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2014 and September 30, 2013		6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013		7
Notes to Consolidated Financial Statements		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
3. Quantitative and Qualitative Disclosures about Market Risk		25
4. Controls and Procedures		26

PART II – Other Information

1. Legal Proceedings		27
1A. Risk Factors		27
2. Unregistered Sales of Equity Securities and Use of Proceeds		27
3. Defaults Upon Senior Securities		27
4. Mine Safety Disclosures		27
5. Other Information		27
6. Exhibits		27

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking” statements. Forward-looking statements discuss matters that are not historical facts. 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 such words as “anticipate”, “believe”, “estimate”, “could”, “should”, “would”, “seek”, “plan”, “expect”, “may”, “predict”, “project”, “intend”, “potential”, “continue”, or similar expressions.

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, each reader of this Form 10-Q should carefully consider the risk factors stated in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, 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: economic conditions, risks associated with conducting business outside the United States, ability to obtain a loan facility or receive additional advances from Fairford Holdings Limited, a British Virgin Islands Company, who, as of November 7, 2014, owned beneficially 63.4% of the Company’s Class A common stock, if needed, incurring additional losses, impact of accounting pronouncements, recording additional impairments, ability to maintain an effective system of internal controls over financial reporting and disclosure controls and procedures, effects of the recent U.S. recession and unstable global economy, 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, and ability to protect the Company’s patented technology. You should not place any undue reliance on any forward-looking statements. Except to the extent required by law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions or circumstances or assumptions underlying such statements, or otherwise.

References herein to the Company mean CTI Group (Holdings) Inc. and its subsidiaries unless context otherwise requires.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)


	September 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents	$	5,496,735		$	1,271,514
Trade accounts receivable, less allowance for doubtful accounts of $102,833 and $54,040, respectively		3,610,793			3,236,772
Prepaid expenses		617,474			291,854
Other current assets		207,520			287,123

Total current assets		9,932,522			5,087,263
Property, equipment, and software, net		2,449,920			2,160,592
Intangible assets, net		638,435			1,149,738
Goodwill		2,769,589			2,769,589
Other assets		29,988			152,441

Total assets	$	15,820,454		$	11,319,623

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	318,433		$	205,005
Accrued expenses		1,057,981			1,024,988
Accrued wages and other compensation		796,875			372,634
Income tax payable		407,140			681,136
Deferred tax liability		44,365			81,096
Deferred revenue		6,297,311			2,538,977
Note from shareholders		—			1,409,549
Notes payable		56,865			54,562

Total current liabilities		8,978,970			6,367,947
Lease incentive – long term		236,779			58,542
Deferred revenue – long term		1,453,456			266,615
Deferred tax liability – long term		263,073			312,173
Note payable – long term		44,623			87,202

Total liabilities		10,976,901			7,092,479
Commitments and contingencies
Stockholders’ equity:
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,353,938 and 29,352,271 issued at September 30, 2014 and at December 31, 2013, respectively		293,539			293,523
Additional paid-in capital		26,302,200			26,213,734
Accumulated deficit		(21,962,427	)		(22,445,810	)
Accumulated other comprehensive income		402,384			357,840
Treasury stock, 140,250 shares Class A common stock at September 30, 2014 and December 31, 2013 at cost		(192,143	)		(192,143	)

Total stockholders’ equity		4,843,553			4,227,144

Total liabilities and stockholders’ equity	$	15,820,454		$	11,319,623

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Nine months ended September 30,
	2014			2013
Revenues:
Software sales, service fee and license fee revenue	$	12,139,253		$	11,409,511
Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		3,190,515			2,935,957
Selling, general and administration		5,724,238			5,529,371
Research and development		2,448,800			2,288,751
Depreciation and amortization		1,408,982			1,400,697

Total costs and expenses		12,772,535			12,154,776

Loss from operations		(633,282	)		(745,265	)
Other income / (expense)
Interest (expense) / income		(29,252	)		1,101
Other income / (expense)		1,344,749			—

Total other income / (expense)		1,315,497			1,101

Income / (loss) before income taxes		682,215			(744,164	)
Tax expense		198,832			452,435

Net income / (loss)		483,383			(1,196,599	)
Other comprehensive income / (loss)
Foreign currency translation adjustment		44,544			9,781

Comprehensive income / (loss)	$	527,927		($	1,186,818	)

Basic net income / (loss) per common share	$	0.02		$	(0.04	)

Diluted net income / (loss) per common share	$	0.02		$	(0.04	)

Basic weighted average common shares outstanding		29,212,284			29,038,673
Diluted weighted average common shares outstanding		31,658,977			29,038,673

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Three months ended September 30,
	2014			2013
Revenues:
Software sales, service fee and license fee revenue	$	4,109,715		$	3,640,209
Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		1,122,567			883,990
Selling, general and administration		1,866,798			1,750,184
Research and development		756,938			769,910
Depreciation and amortization		480,315			422,525

Total costs and expenses		4,226,618			3,826,609

Loss from operations		(116,903	)		(186,400	)
Other (expense) / income
Interest (expense) / income		(3,779	)		(1,269	)

Total other (expense) / income		(3,779	)		(1,269	)

Loss before income taxes		(120,682	)		(187,669	)
Tax expense		85,892			105,223

Net loss		(206,574	)		(292,892	)
Other comprehensive income / (loss)
Foreign currency translation adjustment		51,888			(100,734	)

Comprehensive loss	$	(154,686	)	$	(393,626	)

Basic and diluted net loss per common share	$	(0.01	)	$	(0.01	)

Basic weighted average common shares outstanding		29,212,800			29,039,021
Diluted weighted average common shares outstanding		29,212,800			29,039,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended September 30,
	2014			2013
Cash flows from operating activities:
Net income / (loss)	$	483,383		$	(1,196,599	)
Adjustments to reconcile net income / (loss) to net cash (used in) / provided by operating activities:
Depreciation and amortization		1,408,982			1,400,697
Provision for doubtful accounts		59,823			(14,821	)
Deferred income taxes		(80,801	)		(81,251	)
Recognition of rent incentive benefit		285,272			(17,277	)
Stock compensation expense		88,108			46,586
Changes in operating assets and liabilities:
Trade receivables		(501,221	)		410,011
Prepaid expenses		(329,953	)		84,944
Income taxes		(270,742	)		42,247
Other assets		202,711			115,995
Accounts payable		119,630			62,993
Accrued expenses		(57,620	)		168,567
Accrued wages and other compensation		434,461			(12,161	)
Deferred revenue		5,132,793			(1,629,233	)

Cash (used in) / provided by operating activities		6,974,826			(619,302	)

Cash flows used in investing activities:
Additions to property, equipment, and software		(1,192,969	)		(883,144	)

Cash used in investing activities		(1,192,969	)		(883,144	)

Cash flows (used in) / provided by financing activities:
Exercise of stock options		375			210
Payment on note payable		(40,277	)		(15,341	)
Payment on note from shareholders		(1,400,000	)		—

Cash (used in) / provided by financing activities		(1,439,902	)		(15,131	)

Effect of foreign currency exchange rates on cash and cash equivalents		(116,734	)		(80,211	)

Increase / (decrease) in cash and cash equivalents		4,225,221			(1,597,788	)
Cash and cash equivalents, beginning of period		1,271,514			2,345,390

Cash and cash equivalents, end of period	$	5,496,735		$	747,602

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: Business and Basis of Presentation

The Company designs, develops, markets and supports billing and data management software and services. The Company operates in two business segments: Electronic Invoice Management (“EIM”) and Call Accounting Management and Recording (“CAMRA”). The majority of the Company’s business is in Europe and North America.

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.

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. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative 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 CAMRA products when upgrading or acquiring a new enterprise communications platform.

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 (“GAAP”), 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 year ended December 31, 2013 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow.

Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense. Amortization expense of developed software amounted to $598,518 and $600,875 for the nine months ended September 30, 2014 and 2013, respectively. Amortization expense of developed software amounted to $220,786 and $145,019 for the three months ended September 30, 2014 and 2013, respectively.

NOTE 2: Supplemental Schedule of Non-Cash Investing and Financing Activities

The Company paid $41,415 and $0 for current year income tax estimates for the nine months ended September 30, 2014 and 2013, respectively, for taxable income in the United Kingdom. The Company paid income taxes of approximately $498,200 and $492,000 during the nine months ended September 30, 2014 and 2013, respectively, for taxes on prior year income in the United Kingdom.

NOTE 3: Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and other accruals approximate their fair values because of their nature and expected duration.

NOTE 4: Debt Obligations and Liquidity

In October 2013, in order to supplement the Company’s liquidity, Fairford Holdings Limited (“Fairford”), Michael Reinarts and John Birbeck (collectively, Fairford and Messrs. Reinarts and Birbeck, the “Lenders”) agreed to advance to the Company up to $1,400,000. In connection with the advancement, the Company issued to the Lenders a promissory note, for the amount advanced bearing interest at 6.5% per annum. On April 17, 2014, the Company paid off the promissory note.

The Company believes that the primary sources of liquidity over the next twelve months will be cash on hand and cash from operations. If the Company is unable to generate adequate cash from operations, the Company may seek funds from Fairford or any one of the other Lenders.

NOTE 5: New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 Revenue from Contracts with Customers a new standard on revenue recognition that supersedes previously issued revenue recognition guidance. This guidance provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. This new standard is effective for us beginning in fiscal year 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method therefore we are evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

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.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014		2013
Net income / (loss)	$	(206,574	)	$	(292,892	)	$	483,383	$	(1,196,599	)

Weighted average shares of common stock outstanding used to compute basic earnings per share		29,212,800			29,039,021			29,212,284		29,038,673
Additional common shares to be issued assuming exercise of stock options and stock warrants		—			—			2,446,693		—

Weighted average shares of common and common equivalent stock outstanding used to compute diluted earnings per share		29,212,800			29,039,021			31,658,977		29,038,673

Basic:
Net income / (loss) per share	$	(0.01	)	$	(0.01	)	$	0.02	$	(0.04	)

Weighted average common shares outstanding		29,212,800			29,039,021			29,212,284		29,038,673

Diluted:
Net income / (loss) per share	$	(0.01	)	$	(0.01	)	$	0.02	$	(0.04	)

Weighted average common and common equivalent shares outstanding		29,212,800			29,039,021			31,658,977		29,038,673

For the three months ended September 30, 2013 and September 30, 2014, and the nine months ended September 30, 2013, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss.

Note 7: Stock Based Compensation

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provided for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan included 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 were 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.

In 2002, the Company’s stockholders authorized an additional 2,000,000 shares available for grant under the Plan. In addition, the Company filed a registration statement on Form S-8 with the SEC. Such registration statement also covered certain options granted prior to the merger in 2001, which were not granted under the Plan (“Outside Plan Stock Options”).

On December 8, 2005, the Company’s stockholders ratified the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”) at the Company’s 2005 Annual Meeting of Stockholders. In addition, the Company filed a registration statement on Form S-8 with the SEC. 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 the 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 awards may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, (iv) performance awards, and (v) restricted stock units.

The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments described in the Stock Incentive Plan.

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 adjustments for stock splits, recapitalizations and other specified events. As of September 30, 2014, there were 1,480,838 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.

On April 1, 2014, the board of directors (the “Board”) of the Company adopted Amendment No. 1 (the “Amendment”) to the CTI Group (Holdings) Inc. Stock Incentive Plan. The Amendment amended the Stock Incentive Plan to, among other things, permit the Compensation Committee of the Board, as administrator of the Stock Incentive Plan, to issue restricted stock units (each an “RSU”) to certain eligible participants under the Stock Incentive Plan (each a “Participant”). Pursuant to the Amendment, the Compensation Committee of the Board may, in its sole discretion, determine (i) the Participants who will receive RSUs, and (ii) the number of shares of the Company’s Class A common stock, par value $0.01 per share, and/or the amount of cash or other property underlying each RSU. Further, each RSU will be subject to such terms and conditions consistent with the Stock Incentive Plan as are determined by the Compensation Committee of the Board and as set forth in the award agreement relating to such RSU. The Amendment also amended the Stock Incentive Plan to permit the Compensation Committee of the Board to grant awards under the Stock Incentive Plan in substitution for stock and stock-based awards of another entity (an “Acquired Entity”) held by such Acquired Entity’s former employees if such individuals become employees of the Company as a result of the Company’s merger or consolidation with or acquisition of the Acquired Entity.

At September 30, 2014, there were options to purchase 4,719,925 shares of Class A common stock outstanding consisting of 4,469,925 Plan and Stock Incentive Plan options and 250,000 Outside Plan Stock Options. There were exercisable options to purchase an aggregate of 4,219,913 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 September 30, 2014.

At September 30, 2014, there were RSUs outstanding representing the right, subject to satisfaction of vesting conditions, to receive an aggregate of 1,129,820 shares of Class A common stock (or their value in cash) at a future date without payment of a purchase price.

Information with respect to options was as follows:


	Options Shares			Exercise Price Range Per Share		Weighted Average Exercise Price
Outstanding, January 1, 2014		5,252,100		$	0.08 - $ 0.40	$	0.26
Granted		—			—		—
Exercised		(1,667	)	$	0.225	$	0.225
Expired		(530,508	)	$	0.08 - $ 0.34	$	0.23

Outstanding, September 30, 2014		4,719,925		$	0.08 - $ 0.40	$	0.26

Information with respect to RSUs was as follows:


	RSU Shares
Unvested outstanding, January 1, 2014		—
Granted		1,129,820
Vested		—
Forfeited or cancelled		—

Unvested outstanding, September 30, 2014		1,129,820

The future compensation costs related to non-vested options and RSUs at September 30, 2014 is $228,327. The future costs will be recognized over the weighted average period of approximately 2.50 years.

The following table summarizes options exercisable at September 30, 2014:


	Option Shares		Exercise Price Range Per Share		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Remaining Contractual Term
September 30, 2014		4,469,913	$	0.08-$ 0.40	$	0.27	$	506,033		3.46 years

The following table summarizes non-vested options:


	Option Shares
January 1, 2014		662,543
Granted		—
Expired		(66,560	)
Vested		(345,971	)

September 30, 2014		250,012

The fair value of each RSU or 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:


	2014
Risk-free interest rate		1.20	%
Dividend yield		0.00	%
Volatility factor		88.84	%
Expected lives		1.5 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). Expected volatilities are based on implied volatilities from historical volatility of the Company’s 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 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 Bank’s receipt of the Letter of Credit, the Company was able to obtain the loan at a favorable cash-backed interest rate. Effective April 14, 2008, the Company entered into a new 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. On December 31, 2009, Fairford Scandinavia sold all of its owned Class A shares, or 355,099 shares to Fairford for SEK 2.80362 ($0.39) per share. As of September 30, 2014, Fairford beneficially owned 63.4% of the Company’s outstanding Class A common stock and Fairford Scandinavia owned warrants to purchase 1,040,170 shares of the Company’s Class A common stock. Mr. Osseiran, the majority holder of the Company’s 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 September 30, 2014 and September 30, 2013 was $8,142 and $15,528, respectively, of stock-based compensation. Included within selling, general and administrative expense for the nine months ended September 30, 2014 and September 30, 2013 was $88,108 and $46,586, 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 Company’s agreements with customers generally require the Company to indemnify the customer against claims that the Company’s 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 September 30, 2014, 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 subject to claims and lawsuits arising primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of any such pending claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company realized other income of $1,344,749 for the nine months ended September 30, 2014 and $0 for the three months ended September 30, 2014. The other income of $1,344,749 was the net amount of a $3,100,000 patent settlement less legal fees related to the settlement of $1,755,251.

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 September 30, 2014, the Company’s valuation allowance related only to net deferred tax assets in the United States. Prior to October 1, 2013, the Company considered its cumulative earnings related to non-U.S. subsidiaries to be permanently reinvested. Due to the Company transferring cash from its non-U.S. subsidiaries to the U.S. in both 2012 and 2013, the Company no longer considers earnings related to non-U.S. subsidiaries to be permanently reinvested. The impact of adoption of this policy has not had a material impact on the Company’s results of operations, financial position or cash flows.

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 September 30, 2014 and September 30, 2013, the Company had $156,502 and $138,655 of unrecognized tax benefits, respectively, all of which would favorably affect the Company’s effective tax rate if recognized. The Company and its subsidiaries are subject to U.S. federal and state income taxes as well as foreign income tax in the United Kingdom. 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 had no amounts accrued for interest and penalties as of September 30, 2014.

For the nine months ended September 30, 2014 and September 30, 2013, the Company had $198,832 and $452,435, respectively, of income tax expense and for the three months ended September 30, 2014 and September 30, 2013, the Company had $85,892 and $105,223 of income tax expense, respectively. The income tax benefit and expense were primarily related to the United Kingdom operations. The difference between the statutory rate and the actual rate is primarily due to the valuation allowance related to the net deferred tax assets in the United States.

NOTE 11: Segment Information

The Company has two reportable segments: EIM and CAMRA. 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.

Call Accounting Management and Recording: CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative 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 CAMRA products when upgrading or acquiring a new enterprise communications platform.

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Summarized financial information concerning the Company’s reportable segments for the nine and three months ended September 30, 2014 and 2013 is shown in the following tables.


	For Nine Months Ended September 30, 2014
	Electronic Invoice Management			Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	7,034,084		$	5,105,169		$	—		$	12,139,253
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		5,722,445			3,226,293			—			8,948,738
Depreciation and amortization		956,318			444,497			8,167			1,408,982
Income (loss) from operations		572,367			(46,309	)		(1,159,340	)		(633,282	)
Long-lived assets		4,394,319			1,405,581			88,032			5,887,932

	For Nine Months Ended September 30, 2013
	Electronic Invoice Management			Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	7,209,415		$	4,200,096		$	—		$	11,409,511
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		5,851,021			2,622,533			—			8,473,554
Depreciation and amortization		1,020,374			376,738			3,585			1,400,697
Income (loss) from operations		1,164,059			(602,383	)		(1,306,941	)		(745,265	)
Long-lived assets		5,174,902			1,151,764			10,426			6,337,092

	For Three Months Ended September 30, 2014
	Electronic Invoice Management			Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,199,560		$	1,910,155		$	—		$	4,109,715
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		1,749,148			1,238,000			—			2,987,148
Depreciation and amortization		312,489			164,789			3,037			480,315
Income (loss) from operations		(10,985	)		160,931			(266,849	)		(116,903	)
Long-lived assets		4,394,319			1,405,581			88,032			5,887,932

	For Three Months Ended September 30, 2013
	Electronic Invoice Management			Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,195,318		$	1,444,891		$	—		$	3,640,209
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		1,805,648			950,571			—			2,756,219
Depreciation and amortization		305,306			115,884			1,335			422,525
Income (loss) from operations		182,616			(55,332	)		(313,684	)		(186,400	)
Long-lived assets		5,174,902			1,151,764			10,426			6,337,092

The following table presents net revenues by geographic location.


	For Nine Months Ended September 30, 2014
	United States			United Kingdom		Consolidated
Revenues	$	3,121,197		$	9,018,056	$	12,139,253
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		2,101,967			6,846,771		8,948,738
Depreciation and amortization		433,720			975,262		1,408,982
Income (loss) from operations		(1,435,596	)		802,314		(633,282	)
Long-lived assets		4,865,994			1,021,938		5,887,932

	For Nine Months Ended September 30, 2013
	United States			United Kingdom		Consolidated
Revenues	$	2,660,824		$	8,748,687	$	11,409,511
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		1,800,585			6,672,969		8,473,554
Depreciation and amortization		377,293			1,023,404		1,400,697
Income (loss) from operations		(1,994,664	)		1,249,399		(745,265	)
Long-lived assets		5,438,785			898,307		6,337,092

	For Three Months Ended September 30, 2014
	United States			United Kingdom		Consolidated
Revenues	$	954,013		$	3,155,702	$	4,109,715
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		571,124			2,416,024		2,987,148
Depreciation and amortization		161,948			318,367		480,315
Income (loss) from operations		(472,491	)		355,588		(116,903	)
Long-lived assets		4,865,994			1,021,938		5,887,932

	For Three Months Ended September 30, 2013
	United States			United Kingdom		Consolidated
Revenues	$	903,645		$	2,736,564	$	3,640,209
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		624,976			2,131,243		2,756,219
Depreciation and amortization		115,763			306,762		422,525
Income (loss) from operations		(503,206	)		316,806		(186,400	)
Long-lived assets		5,438,785			898,307		6,337,092

NOTE 12 – Related Party Transactions

On October 30, 2013, the Company, issued to Fairford, Michael Reinarts and John Birbeck (collectively, the “Lenders”) a Promissory Note (the “Note”) in the aggregate principal amount of $1,400,000 (the “Principal Amount”). As of August 1, 2014, Fairford beneficially owned 63.4% of the Company’s outstanding Class A common stock. Pursuant to the Note, the Company promised to pay to the Lenders, on demand made at any time following April 30, 2014, or if demand is not sooner made, on May 31, 2014 (such date, or if earlier, the date demand is made under the Note, the “Maturity Date”), the unpaid balance under the Note plus all interest accrued thereunder as of the Maturity Date in the following proportions: 80% to Fairford Holdings, Ltd., 10% to Michael Reinarts and 10% to John Birbeck. Advances as of December 31, 2013, totaled $1,400,000 under the Note. In February 2014, the Company paid the Lenders principal of $700,000 and all interest accrued to date. On April 17, 2014, the Company repaid all remaining principal and accrued interest under the Note.

On March 7, 2013, a proposal was made by Fairford, Michael Reinarts and John Birbeck (the “Buying Group”), to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $0.29 per share (the “Proposal”). On December 30, 2013, the purchase price on the offer was increased to $0.40 per share (the “Revised Offer”). On June 14, 2014, the Special Committee of the Board rejected the Revised Offer. Upon being informed of the Special Committee’s rejection of the Revised Offer, the Buying Group informed the Company on June 14, 2014 that it would not be increasing and formally withdrew the Revised Offer. Accordingly, the Board disbanded the Special Committee effective immediately.

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

Overview

The Company is comprised of two business segments: EIM and CAMRA. 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. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative 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 CAMRA products when upgrading or acquiring a new enterprise communications platform.

The Company generates its revenues and cash from several sources: software sales, license fees, processing fees, implementation fees, and training and consulting services.

The Company’s 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 the Company believes will provide the greatest returns on investment. The EIM segment, as compared to the other business segment, provides the predominant share of income from operations and cash flow from operations. The majority of CAMRA segment revenues are derived from its United Kingdom operations but the Company believes that most of the growth in the CAMRA segment will occur in the United States.

The Company reported revenue in the EIM segment of $7.0 million and $7.2 million for the nine months ended September 30, 2014 and 2013, respectively, and $2.2 million and $2.2 million for the three months ended September 30, 2014 and 2013, respectively. For the CAMRA segment, the Company recorded revenues of $5.1 million and $4.2 million for the nine months ended September 30, 2014 and 2013, respectively, and $1.9 million and $1.4 million for the three months ended September 30, 2014 and 2013, 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. The Company has seen what it believes to be positive trends in its CAMRA segment; however, the recent unstable global economy may unfavorably impact continued growth in the CAMRA segment.

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 Company’s CAMRA 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. The Company markets two applications: emPulse, a web-based communications traffic analysis solution, and SmartRecord^® IP which enables service providers to selectively intercept communications on behalf of their hosted and managed service customers. These applications 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 are released as

enterprise-grade products. The Company typically sells CAMRA offerings when customers are 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.

Financial Condition

In the nine months ended September 30, 2014, stockholders’ equity increased $616,409 from $4,227,144 as of December 31, 2013 to $4,843,553 as of September 30, 2014 primarily as a result of net income of $483,383. The Company realized an increase in working capital (current assets, less current liabilities) of $2,234,236 which was primarily attributable to an increase in cash due to advanced payments on a large invoice in the EIM segment and two large invoices to the same CAMRA customer in the CAMRA segment generated in the first and third quarter of 2014. One of the three large invoices has a significant balance in long-term deferred revenue, thus contributing to the working capital increase.

At September 30, 2014, cash and cash equivalents were $5,496,735 compared to $1,271,514 at December 31, 2013, and such increase was primarily attributable to cash provided by operating activities for the nine months ended September 30, 2014 of $6,974,826 offset by cash used in investing activities of $1,192,969 and cash flows used in financing activities of $1,439,902. The cash provided in operating activities in the nine months ended September 30, 2014 of $6,974,826 was primarily attributable to an increase in advanced customer payments and corresponding deferred revenue of $5,132,793 and a net income of $483,383. The increase in deferred revenue is primarily related to a large invoice payment in the EIM segment and two large invoice payments in the first and third quarters of 2014 to the same CAMRA customer in the CAMRA segment and the increase in net income. The increase in net income is primarily attributable to the patent settlement with net proceeds of $1,344,749 recognized in other income for the nine months ended September 30, 2014. The cash used in investing activities for the nine months ended September 30, 2014 of $1,192,969 related to additions to property, equipment and software. The cash used in financing activities for the nine months ended September 30, 2014 of $1,439,902 was due primarily to the reduction of short-term debt. The Company generates approximately 74.3% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has weakened by 0.6% in relation to the United States dollar during the nine month period ended September 30, 2014.

Results of Operations (Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013)

Revenues

Revenues from operations for the nine months ended September 30, 2014 increased $729,742, or 6.4%, to $12,139,253 as compared to $11,409,511 for the nine months ended September 30, 2013. Overall revenues increased primarily as a result of increased sales in the CAMRA segment of $905,073 which represented a 21.5% increase over the prior comparable period. Revenues derived from the United Kingdom operations represented 74.3% and 76.7% of total revenues for the nine months ended September 30, 2014 and 2013, respectively. The decrease in the percentage of total revenues attributable to United Kingdom operations was primarily related to the growth experienced in the CAMRA segment in the U.S. The United States revenues increased by $460,373, or 17.3%, to $3,121,197 for the nine months ended September 30, 2014 compared to $2,660,824 for the nine months ended September 30, 2013. Such increase was primarily related to an increase in revenue in the CAMRA segment sales in the United States due to an increase in license fees. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 21.7% of total revenues for the nine months ended September 30, 2014 and approximately 24.4% for the nine months ended September 30, 2013.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the nine months ended September 30, 2014, increased $254,558, or 8.7%, to $3,190,515, as compared to $2,935,957 for the nine months ended September 30, 2013. The increase was primarily related to costs associated with increased revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $301,313 to $1,878,876 for the nine months ended September 30, 2014 from $1,577,563 for the nine months ended September 30, 2013. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $46,755 to $1,311,639 for the nine months ended September 30, 2014 compared to $1,358,394 for the nine months ended September 30, 2013. The cost of products and services, excluding depreciation and amortization, was 26.3% of revenue for the nine months ended September 30, 2014, as compared to 25.7% of revenue for the nine months ended September 30, 2013.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the nine months ended September 30, 2014 increased $194,867, or 3.5%, to $5,724,238 compared to $5,529,371 for the nine months ended September 30, 2013. The increase was primarily due to increased selling costs in the CAMRA segment in the United States due to an increased focus and activity involved in increasing licenses sold in this segment and increased payroll costs. Selling, general and administrative costs related to the CAMRA segment increased by $106,794 to $1,983,741 for the nine months ended September 30, 2014 compared to $1,876,947 for the nine months ended September 30, 2013. The increase in the CAMRA selling costs of $133,274 was partially offset by a decrease in the CAMRA general and administrative costs of $26,480. Selling, general and administrative costs related to the EIM segment increased by $240,256 to $2,589,324 for the nine months ended September 30, 2014 compared to $2,349,068 for the nine months ended September 30, 2013. Selling, general and administrative costs related to the corporate allocation decreased by $152,183 to $1,151,173 for the nine months ended September 30, 2014 compared to $1,303,356 for the nine months ended September 30, 2013 which was primarily due to a decrease in professional fees related to the evaluation of the Proposal which was rejected in 2014.

Research and Development Expense

Research and development expense for the nine months ended September 30, 2014 increased $160,049, or 7.0%, to $2,448,800 as compared to $2,288,751 for the nine months ended September 30, 2013. Research and development costs related to the CAMRA segment decreased $126,867 to $844,364 for the nine months ended September 30, 2014 compared to $971,231 for the nine months ended September 30, 2013. Research and development expense related to the EIM segment increased $286,916 to $1,604,436 for the nine months ended September 30, 2014 compared to $1,317,520 for the nine months ended September 30, 2013. Research and development costs that were capitalized during the nine months ended September 30, 2014 and September 30, 2013 amounted to $797,428 and $694,918, respectively. Research and development costs allocated to cost of goods sold during the nine months ended September 30, 2014 and September 30, 2013 amounted to $342,585 and $327,502, respectively.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2014 increased $8,285 to $1,408,982 from $1,400,697 in the nine months ended September 30, 2013.

Other Income and Expense

The Company realized interest expense of $29,252 for the nine months ended September 30, 2014 compared to interest income of $1,101 for the nine months ended September 30, 2013. The increase in interest expense was primarily due to the Company adding new debt during the third quarter of 2013 which impacted 2014.

The Company realized other income of $1,344,749 for the nine months ended September 30, 2014. The other income of $1,344,749 was the net amount of a $3,100,000 patent settlement less legal fees related to the settlement of $1,755,251.

Taxes

The tax expense for the nine months ended September 30, 2014 decreased $253,603, or 56.1%, to $198,832 as compared to $452,435 for the nine months ended September 30, 2013. The tax expense for the nine months ended September 30, 2014 and September 30, 2013 was due to the pre-tax income in the United Kingdom of $793,862 and $1,250,500, respectively. The effective tax rates for the nine months ended September 30, 2014 and September 30, 2013 for the United Kingdom were 25.0% and 36.2%, respectively. The higher effective tax rate in 2013 was caused by a true-up of the prior year’s tax provision related to a book to tax difference on fixed asset depreciation.

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 September 30, 2014, the Company’s valuation allowance related to the net deferred tax assets in the United States.

Net Income / (Loss)

The Company realized net income for the nine months ended September 30, 2014 of $483,383 compared to net loss of $1,196,599 for the nine months ended September 30, 2013. The improvement in net income was primarily associated with the other income of $1,344,749 related to the patent enforcement settlement.

Results of Operations (Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013)

Revenues

Revenues from operations for the three months ended September 30, 2014 increased $469,506, or 12.9%, to $4,109,715 as compared to $3,640,209 for the three months ended September 30, 2013. Overall revenues increased as a result of increased CAMRA segment sales of $465,264, or 32.2%, to $1,910,155 as compared to $1,444,891 for the three months ended September 30, 2013. The increase in the CAMRA segment was primarily associated with an increase in the sale of perpetual licenses. The EIM segment increased $4,242, or 0.2%, to $2,199,560 for the three months ended September 30, 2014 as compared to $2,195,318 for the three months ended September 30, 2013. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 21.1% of the total revenues for the three months ended September 30, 2014 and approximately 24.2% for the three months ended September 30, 2013.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended September 30, 2014, increased $238,577, or 27.0%, to $1,122,567, as compared to $883,990 for the three months ended September 30, 2013. The increase was primarily related to costs associated with increased revenue in the CAMRA segment. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $177,835, or 36.0%, to $672,155 for the three months ended September 30, 2014 from $494,320 for the three months ended September 30, 2013. The increase was due to an increase in revenue in the CAMRA segment of 32.2% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The costs of products and services, excluding depreciation and amortization, related to the EIM segment increased by $60,742, or 15.6%, to $450,412 for the three months ended September 30, 2014 compared to $389,670 for the three months ended September 30, 2013. The cost of products and services, excluding depreciation and amortization, was 27.3% of revenue for the three months ended September 30, 2014, as compared to 24.2% of revenue for the three months ended September 30, 2013. The increase in percentage is primarily due to the loss of an EIM customer in the United States with no significant corresponding reduction of EIM costs in the United States.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended September 30, 2014 increased $116,614, or 6.7%, to $1,866,798 compared to $1,750,184 for the three months ended September 30, 2013. Selling, general and administrative costs related to the CAMRA segment increased by $31,731, or 5.4%, to $622,799 for the three months ended September 30, 2014 compared to $591,068 for the three months ended September 30, 2013. Selling, general and administrative costs related to the EIM segment increased by $133,420, or 15.8%, to $980,187 for the three months ended September 30, 2014 compared to $846,767 for the three months ended September 30, 2013. Selling, general and administrative cost increases were primarily associated with increased payroll costs. Selling, general and administrative costs related to the corporate allocation decreased by $48,537, or 15.5%, to $263,812 for the three months ended September 30, 2014 compared to $312,349 for the three months ended September 30, 2013.

Research and Development Expense

Research and development expense for the three months ended September 30, 2014 decreased $12,972, or 1.7%, to $756,938 as compared to $769,910 for the three months ended September 30, 2013. Research and development costs related to the CAMRA segment decreased $9,470 to $289,481 for the three months ended September 30, 2014 compared to $298,951 for the three months ended September 30, 2013. Research and development expense related to the EIM segment decreased $3,502, or 0.7%, to $467,457 for the three months ended September 30, 2014 compared to $470,959 for the three months ended September 30, 2013. Research and development costs for software with established technological feasibility that were capitalized during the three months ended September 30, 2014 and September 30, 2013 amounted to $259,832 and $207,385, respectively. Research and development costs allocated to cost of goods sold during the three months ended September 30, 2014 and September 30, 2013 amounted to $127,443 and $74,409, respectively.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2014 increased $57,790 to $480,315 from $422,525 in the three months ended September 30, 2013.

Other Income and Expense

The Company realized interest expense of $3,779 for the three months ended September 30, 2014 compared to interest expense of $1,269 for the three months ended September 30, 2013. The increase in interest expense was primarily due to the Company adding new debt during 2013.

Taxes

The tax expense for the three months ended September 30, 2014 decreased $19,331, or 18.4%, to $85,892 as compared to an expense of $105,223 for the three months ended September 30, 2013. The tax expense for the three months ended September 30, 2014 and September 30, 2013 was due to the pre-tax income in the United Kingdom of $351,809 and $315,537, respectively. The effective tax rates for the three months ended September 30, 2014 and September 30, 2013 for the United Kingdom were 24.4% and 33.3%, respectively. The higher effective tax rate in 2013 was caused by a true-up of the prior year’s tax provision related to a book to tax difference on fixed asset depreciation.

Net Income / (Loss)

The Company realized net loss for the three months ended September 30, 2014 of $206,574 compared to net loss of $292,892 for the three months ended September 30, 2013. The net loss was primarily associated with the loss generated from the corporate allocation segment.

Liquidity and Capital Resources

Historically, the Company’s 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 in the past have usually been adequate to meet the Company’s business objectives. Cash and cash equivalents increased $4,225,221 to $5,496,735 as of September 30, 2014 compared to $1,271,514 as of December 31, 2013. The increase in cash and cash equivalents, during the nine months ended September 30, 2014 was predominately related to cash flows provided by operations of $6,974,826. The cash provided in operating activities in the nine months ended September 30, 2014 of $6,974,826 was primarily attributable to an increase in advanced customer payments and corresponding deferred revenue of $5,132,793 and net income of $483,383. The increase in deferred revenue is primarily related to a large invoice in the EIM segment and a two large invoices to the same CAMRA customer in the CAMRA segment generated in the first and third quarters of 2014 and the net income is primarily attributable to the patent settlement with net proceeds of $1,344,749 recognized in other income for the nine months ended September 30, 2014. Cash used in investing activities for the nine months ended September 30, 2014 of $1,192,969 was primarily related to capitalization of internally developed software of $797,428 and the purchase of equipment. The cash used in financing activities for the nine months ended September 30, 2014 of $1,439,902 primarily related to the pay down of debt. The effect of foreign currency exchange rates on cash and cash equivalents was a loss of $116,734.

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 and CAMRA segments represented income / (loss) from operations for the nine months ended September 30, 2014 of $572,367 and $(46,309), respectively and for the three months ended September 30, 2014 of $(10,985) and $160,931, respectively. The Corporate Allocation expense was $(1,159,340) for the nine months ended September 30, 2014 and $(266,849) for the three months ended September 30, 2014. The United States location generated a loss from operations for the nine and

three months ended September 30, 2014 of $(1,435,596) and $(472,491), respectively, which was primarily associated with losses generated in the CAMRA segment and the Corporate Allocations expense. The United Kingdom location generated income from operations for the same periods of $802,314 and $355,588, respectively.

In October 2013, in order to supplement the Company’s liquidity, Fairford, Michael Reinarts and John Birbeck (the “Lenders”) agreed to advance to the Company up to $1,400,000. In connection with the advance, the Company issued to the Lenders a promissory note, for the amount advanced bearing interest at 6.5% per annum. On April 17, 2014, the Company repaid the promissory note.

The Company anticipates that its cash needs will be met during the next twelve months primarily through cash from operations of the Company and, if necessary, from the cash balance at September 30, 2014. If the Company is unable to generate adequate cash from operations, the Company may seek funds from Fairford or any one of the other Lenders. There can be no assurance that the Company will be successful in such efforts. As of September 30, 2014, the Company did not and as of the date of this Form 10-Q does not have an operating line credit facility in place.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s 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, 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 Data – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Income Taxes. The Company is required to estimate its income taxes. This process involves estimating the Company’s 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 Company’s 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 September 30, 2014, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense relates to the United Kingdom operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company’s United States operations. Due to the Company transferring cash from its non-U.S. subsidiaries to the U.S. in both 2012 and 2013, the Company no longer considers earnings related to non-U.S. subsidiaries to be permanently reinvested. The impact of adoption of this policy has not had a material impact on the Company’s results of operations, financial position or cash flows.

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 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 September 30, 2014.

The Company’s 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 development team’s 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 as the United States dollar.

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. No impairment was identified in 2013. 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 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 last annual impairment analysis on goodwill as of October 1, 2013, to coincide with the calendar date set in past years for this analysis. The Company’s 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 results of this analysis indicated that there was no impairment as of the date of our annual impairment determination and that further impairment analysis was not required.

The Company recognizes that the market for our stock can be below our book value which the Company attributes to a number of factors including very limited trading in the Company’s Class A common stock, a significant portion of the Company’s Class A common stock (approximately 64%) is beneficially owned by a majority stockholder, an overall “flight to quality” by investors in which many “penny stocks” such as CTI’s 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 stock’s “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 Company’s Class A common stock.

Because of the Company’s continued relatively low “market cap”, the Company reviewed the assumptions utilized in the impairment determination and again found that there existed no impairment. As of November 7, 2014, the Company’s “market cap” was above the Company’s book value. The Company’s 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 Company believes that the year-end analysis is sufficiently current and no formal analysis has been performed at September 30, 2014. If the Company assesses market condition changes in our business, it may be required to reflect additional 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 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 Company’s 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 to software revenue recognition. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with 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 Company’s 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 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.

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 units, based on the fair value of those awards at the date of grant. The Company uses the Black-Scholes-Merton formula to calculate the fair value of the stock options and restricted stock units.

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.

The Company estimates it will recognize approximately $121,000, $102,000, $69,000 and $24,000 for the fiscal years ending December 31, 2014, 2015, 2016 and 2017, respectively, of compensation costs for non-vested stock options previously granted to employees.

New Accounting Pronouncements

fiscal year 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method therefore we are evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

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 Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, the principal executive officer and principal financial officer concluded that as of September 30, 2014, the Company’s 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 SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s 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 Form 10-Q.

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.

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.

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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed. The risks in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s 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 – Mine Safety Disclosure

Not applicable.

Item 5 – Other Information.

None.

Item 6 –


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) / 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

Exhibit 101 -		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for each of the nine and three months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for each of the nine months ended September 30, 2014 and 2013, and (iv) Notes to Consolidated Financial Statements.

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.


CTI Group (Holdings) Inc.

/s/ John Birbeck
John Birbeck				Date: November 14, 2014
Chief Executive Officer
(Principal Executive Officer)

/s/ Manfred Hanuschek
Manfred Hanuschek				Date: November 14, 2014
Chief Financial Officer
(Principal Financial Officer)

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