10-Q 1 d94133d10q.htm FORM 10-Q Form 10-Q
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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, 2015

OR

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

 

 

 


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APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 1, 2015, the number of shares of Class A common stock, par value $.01 per share, outstanding was 30,020,511.

 

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CTI GROUP (HOLDINGS) INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

 

ITEM

NO.

       PAGE
NO.
 
  Forward Looking Statements      4   
  PART I – Financial Information   
1.  

Financial Statements – Unaudited

  
 

Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

     5   
 

Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2015 and September 30, 2014

     6   
 

Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2015 and September  30, 2014

     7   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014

     8   
 

Notes to Consolidated Financial Statements

     9   
2.  

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

     20   
3.  

Quantitative and Qualitative Disclosures about Market Risk

     29   
4.  

Controls and Procedures

     29   
  PART II – Other Information   
1.  

Legal Proceedings

     30   
1A.  

Risk Factors

     30   
2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     32   
3.  

Defaults Upon Senior Securities

     32   
4.  

Mine Safety Disclosures

     32   
5.  

Other Information

     32   
6.  

Exhibits

     32   

 

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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. Such forward-looking statements include our ability and the ability of Enghouse and Merger Sub to complete the transaction contemplated by the Merger Agreement, including the parties’ ability to satisfy the conditions to the consummation of the Merger, the possibility of any termination of the Merger Agreement and the timing of completion of the Merger. Capitalized terms are defined herein.

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 herein as well as in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, 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. Furthermore, there are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including, but not limited to: uncertainties as to the timing of the Offer and the Merger; uncertainties as to how many stockholders will tender shares in the Offer; the possibility that various closing conditions for the Merger and related transactions may not be satisfied or waived; the effects of disruption from the Merger and related transactions making it more difficult to maintain relationships with employees, customers and other business partners; 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 1, 2015, owned beneficially 62.0% 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 as otherwise required by law, the Company disclaims any intention or obligation to update any forward-looking statements, as a result of developments occurring after the date of this Form 10-Q and promptly disseminate revised information in the event that the existing disclosure materially changes. All forward-looking statements in this Form 10-Q are qualified in their entirety by this cautionary statement. The Company acknowledges that the forward-looking statements made in connection with the Offer are not subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995, as amended. The Company is not waiving any other defense that may be available under applicable law.

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

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     September 30,
2015
    December 31,
2014
 

ASSETS

    

Cash and cash equivalents

   $ 2,914,841      $ 5,278,476   

Trade accounts receivable, less allowance for doubtful accounts of $68,668 and $66,706, respectively

     2,917,194        3,577,866   

Prepaid expenses

     395,528        368,965   

Other current assets

     76,333        243,861   
  

 

 

   

 

 

 

Total current assets

     6,303,896        9,469,168   

Property, equipment, and software, net

     2,330,707        2,280,493   

Intangible assets, net

     110,721        470,566   

Deferred tax asset

     18,222        —     

Goodwill

     2,769,589        2,769,589   

Other assets

     6,274        29,218   
  

 

 

   

 

 

 

Total assets

   $ 11,539,409      $ 15,019,034   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Accounts payable

   $ 174,535      $ 244,335   

Accrued expenses

     1,054,532        1,227,101   

Accrued wages and other compensation

     613,181        633,761   

Income tax payable

     437,102        635,980   

Deferred tax liability

     201,478        191,731   

Deferred revenue

     2,753,118        4,250,433   

Notes payable

     44,866        57,522   
  

 

 

   

 

 

 

Total current liabilities

     5,278,812        7,240,863   

Lease incentive – long term

     167,779        241,276   

Deferred revenue – long term

     177,045        799,559   

Deferred tax liability – long term

     —          45,721   

Note payable – long term

     —          30,138   
  

 

 

   

 

 

 

Total liabilities

     5,623,636        8,357,557   

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,870,511 and 29,388,937 issued at September 30, 2015 and at December 31, 2014, respectively

     298,705        293,889   

Additional paid-in capital

     26,478,799        26,339,410   

Accumulated deficit

     (21,099,031     (20,203,616

Accumulated other comprehensive income

     429,443        423,937   

Treasury stock, 140,250 shares Class A common stock at September 30, 2015 and December 31, 2014 at cost

     (192,143     (192,143
  

 

 

   

 

 

 

Total stockholders’ equity

     5,915,773        6,661,477   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 11,539,409      $ 15,019,034   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

    

Nine months ended

September 30,

 
     2015     2014  

Revenues:

    

Software sales, service fee and license fee revenue

   $ 11,285,749      $ 12,139,253   

Cost and Expenses:

    

Cost of products and services, excluding depreciation and amortization

     3,079,262        3,190,515   

Selling, general and administration

     5,713,463        5,724,238   

Research and development

     2,005,488        2,448,800   

Depreciation and amortization

     1,243,420        1,408,982   
  

 

 

   

 

 

 

Total costs and expenses

     12,041,633        12,772,535   
  

 

 

   

 

 

 

Loss from operations

     (755,884     (633,282

Other income / (expense)

    

Interest income (expense)

     2,076        (29,252

Other (expense) / income

     (202     1,344,749   
  

 

 

   

 

 

 

Total other income

     1,874        1,315,497   
  

 

 

   

 

 

 

Income / (loss) before income taxes

     (754,010     682,215   

Tax expense

     141,405        198,832   
  

 

 

   

 

 

 

Net income / (loss)

     (895,415     483,383   

Other comprehensive income / (loss)

    

Foreign currency translation adjustment

     5,506        44,544   
  

 

 

   

 

 

 

Comprehensive income / (loss)

   $ (889,909   $ 527,927   
  

 

 

   

 

 

 

Basic net income / (loss) per common share

   $ (0.03   $ 0.02   
  

 

 

   

 

 

 

Diluted net income / (loss) per common share

   $ (0.03   $ 0.02   
  

 

 

   

 

 

 

Basic weighted average common shares outstanding

     29,415,430        29,212,284   

Diluted weighted average common shares outstanding

     29,415,430        31,658,977   

See accompanying notes to consolidated financial statements

 

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CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(unaudited)

 

    

Three months ended

September 30,

 
     2015     2014  

Revenues:

    

Software sales, service fee and license fee revenue

   $ 3,491,853      $ 4,109,715   

Cost and Expenses:

    

Cost of products and services, excluding depreciation and amortization

     971,172        1,122,567   

Selling, general and administration

     1,908,002        1,866,798   

Research and development

     638,006        756,938   

Depreciation and amortization

     405,378        480,315   
  

 

 

   

 

 

 

Total costs and expenses

     3,922,558        4,226,618   
  

 

 

   

 

 

 

Loss from operations

     (430,705     (116,903

Other income/(expense)

    

Interest income/(expense)

     5,079        (3,779
  

 

 

   

 

 

 

Total other income/ (expense)

     5,079        (3,779
  

 

 

   

 

 

 

Loss before income taxes

     (425,626     (120,682

Tax expense

     79,099        85,892   
  

 

 

   

 

 

 

Net loss

     (504,725     (206,574

Other comprehensive income / (loss)

    

Foreign currency translation adjustment

     (44,502     51,888   
  

 

 

   

 

 

 

Comprehensive loss

   $ (549,227   $ (154,686
  

 

 

   

 

 

 

Basic and diluted net loss per common share

   $ (0.02   $ (0.01
  

 

 

   

 

 

 

Basic and diluted weighted average common shares outstanding

     29,729,201        29,212,800   

See accompanying notes to consolidated financial statements

 

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CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

    

Nine months ended

September 30,

 
     2015     2014  

Cash flows from operating activities:

    

Net income / (loss)

   $ (895,415   $ 483,383   

Adjustments to reconcile net income / (loss) to net cash (used in) / provided by operating activities:

    

Depreciation and amortization

     1,243,420        1,408,982   

Provision for doubtful accounts

     1,962        59,823   

Deferred income taxes

     (13,109     (80,801

Recognition of rent incentive benefit

     (23,501     285,272   

Stock compensation expense

     268,152        88,108   

Loss on disposal

     202        —     

Changes in operating assets and liabilities:

    

Trade receivables

     575,779        (501,221

Prepaid expenses

     (29,658     (329,953

Income taxes

     (175,301     (270,742

Other assets

     189,197        202,711   

Accounts payable

     18,267        119,630   

Accrued expenses

     (451,742     (57,620

Accrued wages and other compensation

     (12,995     434,461   

Deferred revenue

     (1,993,544     5,132,793   
  

 

 

   

 

 

 

Cash (used in) / provided by operating activities

     (1,298,286     6,974,826   
  

 

 

   

 

 

 

Cash flows used in investing activities:

    

Additions to property, equipment, and software

     (930,527     (1,192,969
  

 

 

   

 

 

 

Cash used in investing activities

     (930,527     (1,192,969
  

 

 

   

 

 

 

Cash flows (used in) / provided by financing activities:

    

Exercise of stock options

     23,497        375   

Payment on note payable

     (42,794     (40,277

Payment on note from shareholders

     —          (1,400,000
  

 

 

   

 

 

 

Cash used in financing activities

     (19,297     (1,439,902
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (115,525     (116,734
  

 

 

   

 

 

 

Increase / (decrease) in cash and cash equivalents

     (2,363,635     4,225,221   

Cash and cash equivalents, beginning of period

     5,278,476        1,271,514   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 2,914,841      $ 5,496,735   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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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, 2014 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 $700,829 and $598,518 for the nine months ended September 30, 2015 and 2014, respectively. Amortization expense of developed software amounted to $222,061 and $220,786 for the three months ended September 30, 2015 and 2014, respectively.

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

The Company paid $81,384 and $41,415 for current year income tax estimates for the three months ended September 30, 2015 and 2014, respectively, for taxable income in the United Kingdom. The Company paid income taxes of approximately $305,911 and $498,200 during the nine months ended September 30, 2015 and 2014, 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.

 

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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, with the amount advanced bearing interest at 6.5% per annum. On April 17, 2014, the Company repaid in full 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, any one of the other lenders or Enghouse (as defined below).

NOTE 5: New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), which supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for the Company in first quarter of fiscal 2018, with early adoption to fiscal year 2017 permitted. The standard allows entities to apply either of two adoption methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The Company is evaluating the impact of adopting this new standard on its financial statements and the method of adoption.

In August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

 

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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,
 
     2015      2014      2015      2014  

Net income / (loss)

   $ (504,725    $ (206,574    $ (895,415    $ 483,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares of common stock outstanding used to compute basic earnings per share

     29,729,201         29,212,800         29,415,430         29,212,284   

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

     29,729,201         29,212,800         29,415,430         31,658,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic:

           

Net income / (loss) per share

   $ (0.02    $ (0.01    $ (0.03    $ 0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     29,729,201         29,212,800         29,415,430         29,212,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income / (loss) per share

   $ (0.02    $ (0.01    $ (0.03    $ 0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding

     29,729,201         29,212,800         29,415,430         31,658,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015, 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 of the Company (the “Board”), 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”).

 

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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, (the “Compensation Committee”). 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, 2015, there were 5,504,475 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, “Board”, 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. An RSU represents a contingent right to receive shares of Class A common stock, cash and/or other property. Pursuant to the Amendment, the Compensation Committee of the Board may, in its sole discretion, determine (i) the participants, under the Stock Incentive Plan, who will receive RSUs, and (ii) the number of shares of the Company’s Class A common stock 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.

On April 1, 2015, the Board adopted the CTI Group (Holdings) Inc. 2015 Stock Incentive Plan (the “2015 Stock Incentive Plan”).

The 2015 Stock Incentive Plan is administered by the Compensation Committee of the Board. Under the 2015 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 2015 Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the 2015 Stock Incentive Plan.

The following types of awards or any combination of awards may be granted under the 2015 Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, (iv) performance awards, and (v) RSUs.

 

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The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the 2015 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 2015 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 2015 Stock Incentive Plan is 5,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. If any outstanding award is cancelled, forfeited, settled in cash or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the 2015 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 2015 Stock Incentive Plan. No stock option granted under the 2015 Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

The Compensation Committee of the Board, as administrator of the 2015 Stock Incentive Plan, is permitted to issue RSUs to certain eligible participants under the 2015 Stock Incentive Plan. The Compensation Committee of the Board may, in its sole discretion, determine (i) the participants under the 2015 Stock Incentive Plan who will receive RSUs, and (ii) the number of shares of the Company’s Class A common stock 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 2015 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 Compensation Committee of the Board is also permitted to grant awards under the 2015 Stock Incentive Plan in substitution for stock and stock-based awards of 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.

Through March 31, 2015, the Company treated all RSUs as equity awards as it was the Company’s intent to redeem these awards via transfer of stock. On April 20, 2015, the Board of Directors consented to allow RSUs that had vested at April 1, 2015 to be redeemed for their cash or stock value. As a result of this decision, the remaining RSUs outstanding were deemed tainted, and were modified to be treated as liability awards. The Company now records a liability for restrictive stock units and re-measures the liability on each reporting date and the associated compensation cost is adjusted to reflect the re-measurement of the fair value at the reporting date. There were 172,805 shares exercised and 308,869 RSU’s vested for the nine months ended September 30, 2015. In addition, there were 85,243 shares or $44,584 redeemed for cash and accounted for as a reduction in stockholders equity. The stock compensation expense for the nine month period ended September 30, 2015 was $268,152.

As of September 30, 2015, no awards had been issued under the 2015 Stock Incentive Plan.

At September 30, 2015, there were options to purchase 2,960,921 shares of Class A common stock. There were exercisable options to purchase an aggregate of 2,960,921 shares of Class A common stock under the Plan, Stock Incentive Plan and 2015 Stock Incentive Plan as of September 30, 2015.

At September 30, 2015, there were RSUs outstanding representing the right, subject to satisfaction of vesting conditions, to receive an aggregate of 3,098,614 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 &
RSU Shares
    

Exercise

Price Range

Per Share

   Weighted
Average
Exercise Price
 

Outstanding, January 1, 2015

     5,811,746       $ 0.00 - $ 0.40    $ 0.21   

Granted

     2,519,507       $ 0.00 – $ 0.52    $ 0.351   

Exercised

     (481,574    $ 0.09 - $ 0.52    $ 0.382   

Expired

     (1,790,144    $ 0.00 – $ 0.52    $ 0.373   
  

 

 

    

 

  

 

 

 

Outstanding, September 30, 2015

     6,059,535       $ 0.00 - $0.52    $ 0.206   
  

 

 

    

 

  

 

 

 

The future compensation costs related to non-vested options at September 30, 2015 is $283,235. The Company records a liability for restrictive stock units (RSU’s) and re-measures the liability on each reporting date and the associated compensation cost is adjusted to reflect the re-measurement of the fair value at the reporting date.

The future compensation cost of the RSU’s valued at September 30, 2015 will be $728,458. The future costs will be recognized over the weighted average period of approximately 2.50 years

 

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The following table summarizes options exercisable at September 30, 2015:

 

     Option
Shares
     Exercise Price
Range
Per Share
   Weighted Average
Exercise Price
     Aggregate
Intrinsic
Value
     Weighted Remaining
Contractual Term
 

September 30, 2015

     2,960,921       $ 0.08 – $ 0.52    $ 0.226       $ 304,334         3.50 years   

The following table summarized non vested options and RSU’s:

 

    

Option/RSU

Shares

 

Unvested outstanding, January 1, 2015

     1,376,832   

Granted

     2,519,507   

Expired

     (260,623

Vested

     (537,102
  

 

 

 

Unvested outstanding, September 30, 2015

     3,098,614   
  

 

 

 

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:

 

     2014     2015  

Risk-free interest rate

     0.50     1.00

Dividend yield

     0.00     0.00

Volatility factor

     91.00     85.00

Expected lives

     5 years        5 years   

RSU’s value is the value of the Company’s stock on the reporting date and expense is recognized on a straight line basis taking into account an estimated forfeiture.

For the three and nine months ended September 30, 2015 and the three months ended September 30, 2014, 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.

The fair value of each option and RSU 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 Europe AB, formerly known as Fairford Holdings Scandinavia AB (“Fairford Europe”), 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 Europe 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 Europe and issued an additional warrant to Fairford Europe purchase shares of Class A common stock based on the interest rate savings (the “Additional Warrant”).

 

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Pursuant to the Original Warrant, Fairford Europe 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 Europe 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 Europe 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, 2015, Fairford beneficially owned 62.0% of the Company’s outstanding Class A common stock and Fairford Europe 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 Europe 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 Europe. The Original Warrant and Additional Warrant vested immediately upon grant.

Selling, general and administrative expense includes stock based compensation of $135,052 and $8,142 for the three months ended September 30, 2015 and September 30, 2014, respectively. Selling, general and administrative expense includes stock based compensation of $268,152 and $88,108, for the nine months ended September 30, 2015 and September 30, 2014, respectively. 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, 2015, 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 $0 and $1,344,749 for the three and nine months ended September 30, 2014, respectively. 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.The Company did not have any corresponding settlement in the period ended September 30, 2015.

On June 1, 2015, the Company entered into an Employment Agreement (the “Employment Agreement”) with Manfred Hanuschek, which amended and restated a prior agreement with Mr. Hanuschek. The terms of the Employment Agreement include, but are not limited to, compensation, non-competition, severance and change in control clauses. As of September 30, 2015 all relevant amounts have been accrued for under the Employment Agreement.

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, 2015, the Company’s valuation allowance related only to net deferred tax assets in the United States. The Company does not expect 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, 2015 and September 30, 2014, the Company had $160,818 and $156,502 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.

 

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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, 2015.

For the nine months ended September 30, 2015 and September 30, 2014, the Company had $141,405 and $198,832, of income tax expense, respectively. For the three months ended September 30, 2015 and September 30, 2014, the Company had $79,099 and $85,892 of income tax expense, respectively. 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. The lower actual rate in the United Kingdom for the three months ended September 30, 2015 is a result of increased capital allowances and research and development credits that are permanent differences.

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, legal costs for patent enforcement 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, 2014.

 

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Summarized financial information concerning the Company’s reportable segments for the nine and three months ended September 30, 2015 and 2014 is shown in the following tables.

 

     For Nine Months Ended September 30, 2015  
     Electronic
Invoice
Management
     Call Accounting
Management and
Recording
     Corporate
Allocation
     Consolidated  

Revenues

   $ 6,261,627       $ 5,024,122       $ —         $ 11,285,749   

Gross profit Revenues less cost of products, excluding depreciation and amortization

     5,064,863         3,141,624         —           8,206,487   

Depreciation and amortization

     716,444         514,530         12,446         1,243,420   

Income (loss) from operations

     841,038         (421,656      (1,175,266      (755,884

Long-lived assets

     3,607,637         1,548,149         79,727         5,235,513   

 

     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 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 Three Months Ended September 30, 2015  
     Electronic
Invoice
Management
     Call Accounting
Management and
Recording
     Corporate
Allocation
     Consolidated  

Revenues

   $ 2,026,935       $ 1,464,918       $ —         $ 3,491,853   

Gross profit Revenues less cost of products, excluding depreciation and amortization

     1,655,405         865,276         —           2,520,681   

Depreciation and amortization

     238,755         162,363         4,260         405,378   

Income (loss) from operations

     69,297         (274,874      (225,128      (430,705

Long-lived assets

     3,607,637         1,548,149         79,727         5,235,513   

 

     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 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

     (10,895      160,931         (266,849      (116,903

Long-lived assets

     4,394,319         1,405,581         88,032         5,887,932   

 

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The following table presents summarized financial information by geographic location.

 

     For Nine Months Ended September 30, 2015  
     United
States
     United
Kingdom
     Consolidated  

Revenues

   $ 2,648,688       $ 8,637,061       $ 11,285,749   

Gross profit (Revenues less cost of products, excluding depreciation and amortization)

     1,540,853         6,665,634         8,206,487   

Depreciation and amortization

     506,121         737,299         1,243,420   

Income (loss) from operations

     (1,400,490      644,606         (755,884

Long-lived assets

     4,485,333         750,180         5,235,513   

 

     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 Three Months Ended September 30, 2015  
     United
States
     United
Kingdom
     Consolidated  

Revenues

   $ 685,146       $ 2,806,707       $ 3,491,853   

Gross profit (Revenues less cost of products, excluding depreciation and amortization)

     333,938         2,186,743         2,520,681   

Depreciation and amortization

     160,061         245,317         405,378   

Income (loss) from operations

     (704,872      274,167         (430,705

Long-lived assets

     4,485,333         750,180         5,235,513   

 

     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   

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 September 30, 2015, Fairford beneficially owned 62.0% 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 paid all remaining principal and accrued interest under the Note.

 

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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 September 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 September 14, 2014 that it would not be increasing and formally withdrew the Revised Offer. Accordingly, the Board disbanded the Special Committee effective immediately.

NOTE 13 – Subsequent Event

Agreement and Plan of Merger

On October 18, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Enghouse Systems Limited, an Ontario corporation (“Enghouse”), and New Acquisitions Corporation, a Delaware corporation and a wholly owned subsidiary of Enghouse (“Merger Sub”). Pursuant to the Merger Agreement, upon the terms and subject to the terms thereof:

 

    Merger Sub has agreed to commence a tender offer (the “Offer”), subject to certain conditions, no later than November 6, 2015, to purchase all the outstanding shares of the Company’s Class A common stock, par value $0.01 per share (“Shares”), at a cash purchase price of $0.61 per Share (the “Offer Price”); and

 

    as soon as practicable after the consummation of the Offer and satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger” and together with the Offer, the “Transactions”), and the Company will become a direct or indirect wholly owned subsidiary of Enghouse. In the Merger, each Share remaining outstanding following the consummation of the Offer, other than Shares held by the Company or Enghouse or their respective subsidiaries (including, with respect to Enghouse, Merger Sub), or by stockholders of the Company who have properly exercised their appraisal rights in accordance with Section 262 of the Delaware General Corporation Law, as amended (the “DGCL”), will be converted into the right to receive, cash in an amount equal to the Offer Price.

The consummation of the Offer is subject to several closing conditions, including (i) that 67% of the issued and outstanding Shares be validly tendered and not withdrawn prior to the expiration of the Offer (the “Minimum Condition”), and (ii) certain other customary closing conditions. The Transactions are not subject to any financing condition.

Pursuant to the terms of the Merger Agreement, the Company has granted Merger Sub an option (the “Top-Up Option”) to purchase from the Company, at a price per Share equal to the Offer Price, the number of newly issued Shares (the “Top-Up Shares”) equal to the lowest number of Shares that, when added to the number of Shares directly or indirectly owned by Enghosue and Merger Sub at the time of such exercise, constitutes one Share more than 90% of the outstanding Shares on a fully diluted basis. Merger Sub may only exercise the Top-Up Option, in whole and not in part, at such time when the Minimum Condition is satisfied. Additionally, the number of Top-Up Shares cannot exceed the Shares authorized and unissued or held by the Company in the treasury at the time of the exercise of the Top-Up Option (giving effect to Shares reserved for issuance under any securities convertible into Shares as if such Shares were outstanding).

The Company has agreed to customary covenants governing the conduct of its business, including the operation of its business in the ordinary course until the date the Shares are accepted by Merger Sub. The Company has agreed not to solicit or initiate discussions with third parties regarding other proposals to acquire the Company and to certain restrictions on its ability to respond to any such proposal, subject to fulfillment of certain fiduciary requirements of the Board. The Merger Agreement also includes customary termination provisions for both the Company and Enghouse and provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company will be required to pay Enghouse a termination fee of $800,000.

The Merger Agreement provides that each stock option to purchase Shares (“Stock Options”) and each warrant to purchase shares (“Warrants”) that is outstanding immediately prior to the effective time of the Merger, (the “Effective Time”), whether or not then vested or exercisable, automatically will be cancelled by virtue of the Merger. In consideration for the cancellation of such Stock Options and Warrants and in settlement therefor, the Merger Agreement provides that each holder of such Stock Options and Warrants will be entitled to receive an amount in cash

 

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(without interest and subject to any applicable withholding of taxes required by applicable law in accordance with the Merger Agreement) equal to (i) the excess, if any, of (a) the Merger consideration per Share over (b) the exercise price per Share previously subject to such Stock Option or Warrant, as applicable, multiplied by (ii) the total number of Shares previously subject to such Stock Options or Warrants, as applicable. The Merger Agreement also provides that each RSU that is outstanding immediately prior to the Effective Time, whether or not then vested or exercisable, automatically will be cancelled by virtue of the Merger. In consideration of the cancellation of such RSUs and in settlement therefor, the Merger Agreement provides that each holder of such RSUs will be entitled to receive an amount in cash (without interest and subject to any applicable withholding of taxes required by applicable law in accordance with the Merger Agreement) equal to the product of (x) the aggregate number of Shares previously subject to such RSU multiplied by (y) the Merger consideration per Share. Payment of the consideration described in this paragraph will be payable to the holders of cancelled Stock Options, Warrants and RSUs, as applicable, no later than twenty-five calendar days thereafter.

 

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, software support and maintenance 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.

Overall revenues decreased as a primary result of decrease in the EIM segment of $772,457 which represented a 11.0% decrease for the nine month period ended September 30, 2015 over the prior comparable period. Revenues derived from the United Kingdom operations represented 76.5% and 74.3 % of total revenues for the nine months ended September 30, 2015 and 2014, respectively. The decrease was attributable to a decrease in US EIM revenue. The United States revenues decreased by $472,509, or 15.1%, to $2,648,688 for the nine months ended September 30, 2015 compared to $3,121,197 for the nine months ended September 30, 2014. Such decrease was primarily related to a decrease in revenue in the EIM segment sales in the United States due to a loss of a customer. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 23.5% and 21.7% of total revenues for the nine months ended September 30, 2015 and September 30, 2014, respectively.

The Company reported revenue in the EIM segment of $6.3 million and $7.0 million for the nine months ended September 30, 2015 and 2014, respectively. For the CAMRA segment, the Company recorded revenues of $5.0 million and $5.1 million for the nine months ended September 30, 2015 and 2014, 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. Although the Company has seen what it believes to be positive indications of demand and interest in its CAMRA segment, due to the unstable global economy, the growth has been slower than anticipated but the Company continues to see improvement in the CAMRA segment.

 

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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’s call recording product SmartRecord® enables service providers to selectively intercept communications on behalf of their hosted and managed service customers. This application also enables managed and hosted service customers of service providers to analyze voice, video, screen and data usage, record and monitor communications, and perform administration and back office functions such as quality assurance and voice-of-customer analytics.

The Company call accounting product Proteus® provides firms with a premise-based application that imports call detail records form many enterprise-class telephone systems and financial trading voice platforms. The information is used by firms to perform cost allocation, client bill back, telephony cost analysis, telephone network optimization, telephone fraud detection, key performance indicator analysis and trader voice analysis. These applications are released as enterprise-grade products. The Company typically sells the 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.

Agreement and Plan of Merger

On October 18, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Enghouse Systems Limited, an Ontario corporation (“Enghouse”), and New Acquisitions Corporation, a Delaware corporation and a wholly owned subsidiary of Enghouse (“Merger Sub”). Pursuant to the Merger Agreement, upon the terms and subject to the terms thereof:

 

  Merger Sub has agreed to commence a tender offer (the “Offer”), subject to certain conditions, no later than November 6, 2015, to purchase all the outstanding shares of the Company’s Class A common stock, par value $0.01 per share (“Shares”), at a cash purchase price of $0.61 per Share (the “Offer Price”); and

 

  as soon as practicable after the consummation of the Offer and satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger” and together with the Offer, the “Transactions”), and the Company will become a direct or indirect wholly owned subsidiary of Enghouse. In the Merger, each Share remaining outstanding following the consummation of the Offer, other than Shares held by the Company or Enghouse or their respective subsidiaries (including, with respect to Enghouse, Merger Sub), or by stockholders of the Company who have properly exercised their appraisal rights in accordance with Section 262 of the Delaware General Corporation Law, as amended (the “DGCL”), will be converted into the right to receive, cash in an amount equal to the Offer Price.

The consummation of the Offer is subject to several closing conditions, including (i) that 67% of the issued and outstanding Shares be validly tendered and not withdrawn prior to the expiration of the Offer (the “Minimum Condition”), and (ii) certain other customary closing conditions. The Transactions are not subject to any financing condition.

For additional information regarding the Merger Agreement and the Merger, please see Note 13 to the Company’s Financial Statements included in Part I to this Quarterly Report on Form 10-Q.

 

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Financial Condition

In the nine months ended September 30, 2015, stockholders’ equity decreased $745,704 from $6,661,477 as of December 31, 2014 to $5,915,773 as of September 30, 2015 primarily as a result of net loss of $895,415. The Company realized a decrease in net current assets (current assets, less current liabilities) of $1,203,221 which was primarily attributable to a decrease in cash due to advanced payments on a large invoice in the EIM segment generated in the first quarter of 2014.

At September 30, 2015, cash and cash equivalents were $2,914,841 compared to $5,278,476 at December 31, 2014, and such decrease was primarily attributable to cash used by operating activities for the nine months ended September 30, 2015 of $1,298,286 in conjunction with cash used in investing activities of $930,527 and cash flows used in financing activities of $19,297. The cash used in operating activities in the nine months ended September 30, 2015 of $1,298,286 was primarily attributable to a net loss of $895,415 and a decrease in deferred revenue of $1,993,544. The decrease in deferred revenue is primarily related to a customer prepayment in the EIM segment that was partially realized and the net loss is primarily attributable to the loss in the US CAMRA segment. The cash used in investing activities for the nine months ended September 30, 2015 of $930,527 related to additions to property, equipment and software.

The cash used in financing activities for the nine months ended September 30, 2015 of $19,297 was due primarily to payment on lease and partially offset by exercising of stock options. The Company generates approximately 76.5% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has weakened by 3.0% in relation to the United States dollar during the nine month period ended September 30, 2015.

Results of Operations (Nine months ended September 30, 2015 Compared to Nine months ended September 30, 2014)

Revenues

Revenues from operations for the nine months ended September 30, 2015 decreased $853,504, or 7.0%, to $11,285,749 as compared to $12,139,253 for the nine months ended September 30, 2014. Overall revenues decreased primarily as a result of decreased sales in the EIM segment, due to loss of a customer in the US EIM segment and a 8.3% negative foreign currency impact when compared to the exchange rate for the nine months ended September 30, 2015. Revenues derived from the United Kingdom operations represented 76.5% and 74.3% of total revenues for the nine months ended September 30, 2015 and 2014, respectively. The increase in the percentage of total revenues attributable to United Kingdom operations was primarily related to decreased sales in the United States EIM segment due to a loss of a customer. The United States revenues decreased by $472,509, or 15.1%, to $2,648,688 for the nine months ended September 30, 2015 compared to $3,121,197 for the nine months ended September 30, 2014. Such decrease was primarily related to a decrease in revenue in the EIM segment sales in the United States. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 23.5% of total revenues for the nine months ended September 30, 2015 and approximately 21.7% for the nine months ended September 30, 2014.

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, 2015, decreased $111,253, or 3.5%, to $3,079,262, as compared to $3,190,515 for the nine months ended September 30, 2014. The decrease was primarily related to decrease in revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $3,622, or 0.2%, to $1,882,498 for the nine months ended September 30, 2015 from $1,878,876 for the nine months ended September 30, 2014. The increase was primarily due to an increase in hosting fees. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $114,875, or 8.8%, to $1,196,764 for the nine months ended September 30, 2015 compared to $1,311,639 for the nine months ended September 30, 2014. The decrease is primarily related to the decrease in personnel costs due to the loss of US EIM customer. The cost of products and services, excluding depreciation and amortization, was 27.3% of revenue for the nine months ended September 30, 2015, as compared to 26.3% of revenue for the nine months ended September 30, 2014. The increase in percentage relates to payment of referral fees in the nine months ended September 30, 2015 without any payment for the nine month period ended September 30, 2014.

 

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Selling, General and Administrative Costs

Selling, general and administrative expenses for the nine months ended September 30, 2015 decreased $10,775, or 0.2%, to $5,713,463 compared to $5,724,238 for the nine months ended September 30, 2014. The decrease was primarily due to a decrease in general and administrative compensation expense in the United States which was partially offset by increased professional fees. Selling, general and administrative costs related to the CAMRA segment increased by $172,046, or 8.7%, to $2,155,787 for the nine months ended September 30, 2015 compared to $1,983,741 for the nine months ended September 30, 2014. The increase in the CAMRA selling costs of $171,495 was primarily as a result of a reallocation of personnel to the CAMRA segment. Selling, general and administrative costs related to the EIM segment decreased by $194,468, or 7.5%, to $2,394,856 for the nine months ended September 30, 2015 compared to $2,589,324 for the nine months ended September 30, 2014. The decrease in Selling, general and administrative costs related to the reallocation of personnel to the CAMRA segment. The corporate allocation increased by $11,647, or 1.0%, to $1,162,820 for the nine months ended September 30, 2015 compared to $1,151,173 for the nine months ended September 30, 2014 which was primarily due to increased stock option expense and partially offset by decreased personnel costs.

Research and Development Expense

Research and development expense for the nine months ended September 30, 2015 decreased $443,312, or 18.1%, to $2,005,488 as compared to $2,448,800 for the nine months ended September 30, 2014. This is primarily due to a decrease in personnel costs with reduction in personnel in the UK. Research and development costs related to the CAMRA segment increased $8,599, or 0.9%, to $892,963 for the nine months ended September 30, 2015 compared to $884,364 for the nine months ended September 30, 2014. Research and development expense related to the EIM segment decreased $491,911, or 30.6%, to $1,112,525 for the nine months ended September 30, 2015 compared to $1,604,436 for the nine months ended September 30, 2014. Research and development costs that were capitalized during the nine months ended September 30, 2015 and September 30, 2014 amounted to $821,827 and $797,428, respectively. Research and development costs allocated to cost of goods sold during the nine months ended September 30, 2015 and September 30, 2014 amounted to $219,400 and $342,585, respectively.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2015 decreased $165,562 or 11.8% to $1,243,420 from $1,408,982 in the nine months ended September 30, 2014. This decrease is primarily related to reduction of amortization of acquired intangible assets.

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 $700,829 and $598,518 for the nine months ended September 30, 2015 and 2014, respectively.

Other Income and Expense

The Company realized interest income of $2,076 for the nine months ended September 30, 2015 compared to interest expense of ($29,252) for the nine months ended September 30, 2014. The decrease in interest expense was primarily due to the Company’s pay off of debt during 2014.

The Company realized other (expense) income of ($202) and $1,344,749 for the nine months ended September 30, 2015 and 2014, respectively. 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, 2015 decreased $57,427, or 28.9%, to 141,405 as compared to $198,832 for the nine months ended September 30, 2014. The tax expense for the nine months ended September 30, 2015 and September 30, 2014, decreased compared to prior period due an increase in capital allowances consisting primarily of expenditures for capital and research and development with a pre-tax income related to operations in the United Kingdom of $1,703,010 and $793,862, respectively. The effective tax rates for the nine months ended September 30, 2015 and September 30, 2014 for the United Kingdom were 8.3% and 25.0%, respectively. The lower rate in the United Kingdom can be attributed to both actual capital allowances and research and development credits exceeding the amounts utilized during the year, for estimates resulting in lower taxable income and, consequently the tax benefit.

 

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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, 2015, the Company’s valuation allowance related to the net deferred tax assets in the United States.

Net Income / (Loss)

The Company realized a net loss for the nine months ended September 30, 2015 of $(895,415) compared to net income of $483,383 for the nine months ended September 30, 2014. The change in net (loss) / income was primarily associated with the other income of $1,344,749 related to the patent enforcement settlement received in 2014 with no comparable income for the nine months ended September 30, 2015.

Results of Operations (Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014)

Revenues

Revenues from operations for the three months ended September 30, 2015 decreased $617,862, or 15.0%, to $3,491,853 as compared to $4,109,715 for the three months ended September 30, 2014. The decrease was primarily due to a decrease in CAMRA revenue and a 7.4% negative foreign currency impact. The CAMRA segment sales decreased $445,237, or 23.3%, to $1,464,918 as compared to $1,910,155 for the three months ended September 30, 2014. This decrease was primarily due to customer delay of implementation during the three month period ended September 30, 2015 which the Company did not experience during the three months ended September 30, 2014. The EIM segment decreased $172,625, or 7.8%, to $2,026,935 for the three months ended September 30, 2015 as compared to $2,199,560 for the three months ended September 30, 2014. This decrease was primarily due to the negative foreign currency impact on the UK EIM segment.

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, 2015, decreased $151,395, or 13.5%, to $971,172, as compared to $1,122,567 for the three months ended September 30, 2014. The decrease was primarily related to costs associated with a decrease in revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment decreased $72,513, or 10.8% to $599,642 for the three months ended September 30, 2015 from $672,155 for the three months ended September 30, 2014. The decrease was primarily due to a decrease in revenue in the CAMRA segment. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $78,882, or 17.5%, to $371,530 for the three months ended September 30, 2015 compared to $450,412 for the three months ended September 30, 2014. The decrease was primarily due to the decrease in exchange rate. The cost of products and services, excluding depreciation and amortization, was 27.8% of revenue for the three months ended September 30, 2015, as compared to 27.3% of revenue for the three months ended September 30, 2014.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended September 30, 2015 increased $41,204, or 2.2%, to $1,908,002 compared to $1,866,798 for the three months ended September 30, 2014. The increase was primarily related to increase in stock option expense and professional fees and which was offset by the decrease in corporate compensation expense in the US. Selling, general and administrative costs related to the CAMRA segment increased by $76,766, or 12.3%, to $699,565 for the three months ended September 30, 2015 compared to $622,799 for the three months ended September 30, 2014. This increase is primarily due to an increase in the headcount in the CAMRA segment. Selling, general and administrative costs related to the EIM segment increased $7,382, or 0.8%, to $987,569 for the three months ended September 30, 2015 compared to $980,187 for the three months ended September 30, 2014. The increase is primarily attributable to an increase in sales and support personnel costs.

Selling, general and administrative costs related to the corporate allocation decreased by $42,944, or 16.3%, to $220,868 for the three months ended September 30, 2015 compared to $263,812 for the three months ended September 30, 2014. The decrease increase was primarily attributable to a decrease in personnel costs.

Research and Development Expense

Research and development expense for the three months ended September 30, 2015 decreased $118,932, or 15.7%, to $638,006 as compared to $756,938 for the three months ended September 30, 2014.

 

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Research and development costs related to the CAMRA segment decreased $11,259, or 3.9%, to $278,222 for the three months ended September 30, 2015 compared to $289,481 for the three months ended September 30, 2014. The decrease is primarily due to an increase in work capitalized. Research and development expense related to the EIM segment decreased $107,673, or 23.0%, to $359,784 for the three months ended September 30, 2015 compared to $467,457 for the three months ended September 30, 2014. The decrease is primarily due to reduction of personnel and the exchange rates. Research and development costs for software with established technological feasibility that were capitalized during the three months ended September 30, 2015 and September 30, 2014 amounted to $301,146 and $259,832, respectively. Research and development costs allocated to cost of goods sold during the three months ended September 30, 2015 and September 30, 2014 amounted to $219,400 and $127,443, respectively. The increase was primarily due to the reduction of development cost being capitalized for internally generated software in the UK EIM segment.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2015 decreased $74,937 to $405,378 from $480,315 in the three months ended September 30, 2014. This is due primarily to reduction of amortization of acquired intangible assets.

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 $222,061 and $220,786 for the three months ended September 30, 2015 and 2014, respectively.

Other Income and Expense

The Company recognized interest income of $5,079 for the three months ended September 30, 2015 compared to interest expense of ($3,779) for the three months ended September 30, 2014. The change in interest expense was primarily due to the increase in investment income offsetting interest expense in 2015.

Taxes

The tax expense for the three months ended September 30, 2015 decreased $6,793, or 7.9%, to $79,099 as compared to an expense of $85,892 for the three months ended September 30, 2014. The tax expense for the three months ended September 30, 2015 and September 30, 2014 was due to the pre-tax income in the United Kingdom of $805,733 and $351,809, respectively. The effective tax rates for the three months ended September 30, 2015 and September 30, 2014 for the United Kingdom were 9.8% and 24.4%, respectively. The lower rate in the United Kingdom can be attributed to both actual capital allowances and research and development credits.

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, 2015, the Company’s valuation allowance related to the net deferred tax assets in the United States.

Net Income / (Loss)

The Company realized net loss for the three months ended September 30, 2015 of $504,725 compared to net loss of $206,574 for the three months ended September 30, 2014. The increase in the net loss was primarily associated with the losses generated from the CAMRA 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 decreased $2,363,635 to $2,914,841 as of September 30, 2015 compared to $5,278,476 as of December 31, 2014. The decrease in cash and cash equivalents, during the nine months ended September 30, 2015 was predominately related to the reduction in deferred revenue of $1,993,544 and to capitalization of internally developed software and the purchase of equipment of $930,527. The cash used in operating activities in the nine months ended September 30, 2015 of $1,298,286 was primarily attributable to the net loss of $895,415. The decrease in deferred revenue is primarily related to a customer prepayment in the EIM segment that was partially realized during the nine months ended September 30, 2015.

 

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Cash used in investing activities for the nine months ended September 30, 2015 of $930,527 was primarily related to capitalization of internally developed software and the purchase of equipment of $930,527. The cash used in financing activities for the nine months ended September 30, 2015 of $19,297 related to the payment on note and partially offset by the exercising of stock. The effect of foreign currency exchange rates on cash and cash equivalents was a loss of $116,259.

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, 2015 of $841,038 and $(421, 656), respectively and for the three months ended September 30, 2015 of $69,297 and $(274,874), respectively. The Corporate Allocation expense was $1,175,266 for the nine months ended September 30, 2015 and $225,128 for the three months ended September 30, 2015. The United States location generated a loss from operations for the nine and three months ended September 30, 2015 of $1,400,490 and $704,872, 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 $644,606 and $274,167, 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 and if necessary from the cash on hand. If the Company is unable to generate adequate cash from operations, the Company may seek additional funds from Fairford, any one of the other lenders or Enghouse (as defined below). If necessary, there can be no assurance that the Company will be successful in such efforts. As of September 30, 2015, the Company did not and, as of the date of this Form 10-Q, does not have an operating line of 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, 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 Data – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

 

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the tax provision in the statement of operations. As of September 30, 2015, 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 US 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, 2015.

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 2014. 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, 2014. 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 65%) 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 1, 2015, the Company’s “market cap” was above the Company’s book value.

 

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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 analysis as of November 1, 2014 is sufficiently current and no formal analysis has been performed at September 30, 2015. On October 19, 2015, the Company entered into a Merger Agreement, which provides an acquisition offer of $0.61 per share. This acquisition offer further supports the Company’s conclusion the market cap of the Company exceeds the book value. 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.

Through March 31, 2015, the Company treated all RSUs as equity awards as it was the Company’s intent to redeem these awards via transfer of stock.

 

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On April 20, 2015, the Board of Directors consented to allow RSUs that had vested at April 1, 2015 to be redeemed for their cash or stock value. As a result of this decision, the remaining RSUs outstanding were deemed tainted, and were modified to be treated as liability awards. The Company now records a liability for restrictive stock units and re-measures the liability on each reporting date and the associated compensation cost is adjusted to reflect the re-measurement of the fair value at the reporting date.

Selling, general and administrative expense included stock-based compensation for the three months ended September 30, 2015 and September 30, 2014 of $135,052 and $8,142, respectively. Selling, general and administrative expense included stock-based compensation for the nine months ended September 30, 2015 and September 30, 2014 of $268,152 and $88,108, respectively. 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 $377,295, $422,154, $391,069 and $89,327 for the fiscal years ending December 31, 2015, 2016, 2017 and 2018, respectively, of compensation costs for non-vested stock options and RSUs previously granted to employees.

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), which supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for the Company in first quarter of fiscal 2018, with early adoption to fiscal year 2017 permitted. The standard allows entities to apply either of two adoption methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The Company is evaluating the impact of adopting this new standard on its financial statements and the method of adoption.

In August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements.

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.

 

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Based on this evaluation, the principal executive officer and principal financial officer concluded that as of September 30, 2015, 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.

Item 1A – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed below, as well as in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect the Company’s business, financial condition or future results. Other that those risk factors set forth below, the risk factors in the Company’s Annual Report on Form 10-K, have not materially changed. The risks discussed below, as well as 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.

Risks Related to Agreement and Plan of Merger

Our proposed Merger into Merger Sub may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.

The consummation of the transactions contemplated by the Merger Agreement is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement. We expect to close the Merger in the fourth quarter of calendar 2015, subject to the satisfaction or waiver of these conditions. If the Merger is delayed or otherwise not consummated within the contemplated time periods or at all, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

 

    if the Merger is not completed, and no other party is willing and able to acquire us at a price of $0.61 per share or higher, on terms acceptable to us, the share price of our common stock is likely to decline, particularly to the extent that the current market price reflects a market assumption that the proposed Merger will be completed;

 

    we have incurred, and will continue to incur, significant expenses for professional services related to the proposed Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these fees and costs will be payable even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the transaction; and

 

    a failed Merger may result in negative publicity and/or give a negative impression of us among our customers or in the investment community or business community generally.

 

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The announcement and pendency of Enghouse’s proposed acquisition of us pursuant to the Offer and subsequent Merger could adversely affect our business, financial condition and results of operations.

The announcement and pendency of the Offer and Merger could disrupt our business in the following ways, among others:

 

    third parties may determine to delay or defer purchase decisions with regard to our products or services or terminate and/or attempt to renegotiate their relationships with us as a result of the Offer and Merger, whether pursuant to the terms of their existing agreements with us or otherwise;

 

    the diversion of significant management and employee time and resources towards the completion of the Offer and the Merger and the unavoidable disruption to our relationships with employees, customers and other business partners may detract from our ability to grow revenue and minimize cost;

 

    the impairment of our ability to attract and retain key personnel;

 

    the restrictions on the conduct of our business prior to the completion of the Merger, which prevents us from taking specified actions without the prior consent of Enghouse, which we might otherwise take in absence of the Merger Agreement; and

 

    we may be unable to respond effectively to competitive pressures, industry developments and future opportunities.

Any of the above matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Certain of our directors and executive officers negotiated the terms of the Merger Agreement, and our Board of Directors approved the Merger Agreement and recommended that our stockholders accept the offer to purchase their shares and tender their shares pursuant to the Offer. These directors and executive officers may have interests in the Merger that are different from, or in addition to, those of our stockholders generally. These interests include, but are not limited to, provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses to our directors and officers.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire our company prior to the completion of the Offer and the Merger.

The Merger Agreement contains provisions that make it difficult for us to entertain a third-party proposal to acquire us. These provisions include our agreement not to solicit or initiate any additional discussions with third parties regarding other proposals for our acquisition, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our Board. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to Enghouse a termination fee of $800,000.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the Offer and the Merger. Furthermore, even if a third party elects to propose an acquisition, our obligation to pay a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Lawsuits may be filed against us and the members of our Board arising out of our acquisition by Enghouse, which may delay or prevent the proposed transaction.

Putative stockholder class action complaints and other lawsuits may be filed against us, our Board, Enghouse and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain and we may not be successful in defending against any such future claims. Lawsuits, that may be filed against us could delay or prevent our acquisition by Enghouse, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

 

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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 – Exhibits.

 

Exhibit 2.1   Agreement and Plan of Merger, dated October 18, 2015, by and among the Company, Enghouse Systems Limited and New Acquisitions Corporation (incorporated by reference from Exhibit 2.1 of the Company’s current report on Form 8-K with the Commission on October 19, 2015)
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 101INS *   XBRL Instance Document
Exhibit 101 SCH*   XBRL Taxonomy Extension Schema Document
Exhibit 101 CAL*   XBRL Calculation Linkbase Document
Exhibit 101 DEF*   XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101 LAB*   XBRL Label Linkbase Document
Exhibit 101 PRE*   XBRL Taxonomy Presentation Linkbase Document

 

* Filed herewith
** Furnished herewith

 

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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/ Manfred Hanuschek

   
Manfred Hanuschek     Date: November 13, 2015
Chief Executive Officer    
(Principal Executive Officer)    

/s/ Nathan Habegger

   
Nathan Habegger     Date: November 13, 2015
Chief Financial Officer    
(Principal Financial Officer)    

 

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