Attached files
| file | filename |
|---|---|
| EX-21 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex21.htm |
| EX-23.1 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex23-1.htm |
| EX-10.32 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex10-32.htm |
| EX-32.2 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex32-2.htm |
| EX-31.1 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex31-1.htm |
| EX-32.1 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex32-1.htm |
| EX-31.2 - CONVERSION SERVICES INTERNATIONAL INC | v178388_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
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Annual report pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934.
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For
the fiscal year ending December 31, 2009
Or
|
o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
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For
the transition period from
________ to ________.
Commission
file number 001-32623
CONVERSION
SERVICES INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
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20-0101495
|
|
|
(State
or other jurisdiction
of
incorporation or organization)
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(IRS
Employer
Identification
number)
|
|
|
100
Eagle Rock Avenue, East Hanover, NJ
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07936
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|
|
(Address
of Principal Executive Offices)
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(Zip
Code)
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973-560-9400
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act: None
Title
of Each Class
Common
Stock, $.001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of the Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
|
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting
company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $3,356,517 as of June
30, 2009 (based on the closing price for such stock as of June 30,
2009).
As of
March 22, 2010, there were 123,544,368 shares of common stock, par value $0.001
per share, of the registrant outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
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PART
I
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3
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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12
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Item
1B.
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Unresolved
Staff Comments
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22
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Item
2.
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Properties
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22
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Item
3.
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Legal
Proceedings
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23
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PART
II
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23
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Item
5.
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Market
For Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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23
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Item
6.
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Selected
Financial Data
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23
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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32
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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32
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Item 9A.
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Controls
and Procedures
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33
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Item 9B.
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Other
Information
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34
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PART
III
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34
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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34
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Item
11.
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Executive
Compensation
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38
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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41
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Item
13.
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Certain
Relationships and Related Transactions
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42
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Item
14.
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Principal
Accounting Fees and Services
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42
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PART
IV
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43
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Item
15.
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Exhibits
and Financial Statement Schedules
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43
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2
PART
I
ITEM
1. BUSINESS
References
in this Form 10-K to the “Company,” “CSI,” “we,” “our” and “us” refer to
Conversion Services International, Inc. and our consolidated subsidiaries. We
are a technology and business process improvement/management firm providing
professional services to the Global 2000 as well as mid-market clientele. Our
core competency areas include strategic consulting, data warehousing, business
intelligence, business process optimization, operational merger support, change
management, Lean and Six Sigma consulting and data management consulting. Our
clients are primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries, although we do have clients in other industries.
Our clients are primarily located in the northeastern United States. We enable
organizations to leverage their corporate information assets by providing
strategy, process, methodology, data warehousing, business intelligence,
enterprise reporting and analytic solutions. Our organization delivers value to
our clients, utilizing a combination of business acumen, technical proficiency,
experience and a proven set of “best practices” methodologies to deliver cost
effective services primarily through time and material engagements.
We
believe that we possess the following attributes which differentiate us from our
competitors:
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role
as a full life-cycle solution
provider;
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ability
to provide strategic guidance and ensure that business requirements are
properly supported by technology;
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·
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ability
to provide solutions that integrate people, improve process and integrate
technologies;
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full
range of service offerings relating to data warehousing, business
intelligence, strategy and data
quality;
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perspective
regarding the accuracy of data and our data purification
process;
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·
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best
practices methodology, process and
procedures;
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experience
in architecting, recommending and implementing large and complex data
warehousing and business intelligence
solutions;
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·
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understanding
of data management solutions;
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ability
to consolidate inefficient environments into robust, scalable, reliable
and manageable enterprise
solutions;
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end-to-end
process review and design capabilities;
and
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significant
large-scale merger experience, from both the operational and strategic
perspectives, in the Financial Services
Industry.
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Our goal
is to be the premier provider of data warehousing, business intelligence,
business process optimization solutions and related strategic consulting
services for organizations seeking to leverage their corporate information. In
support of this goal we intend to:
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enhance
our brand and mindshare;
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3
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continue
growth both organically and via
acquisition;
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increase
our geographic coverage;
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expand
our client relationships;
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introduce
new and creative service offerings;
and
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leverage
our strategic alliances.
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We are
committed to being a leader in data warehousing and business intelligence
consulting. As a data warehousing and business intelligence specialist, we
approach business intelligence from a strategic perspective, providing
integrated data warehousing and business intelligence strategy and technology
implementation services to clients that are attempting to leverage their
enterprise information. Our matrix of services includes strategy consulting,
data warehousing and business intelligence architecture and implementation
solutions, data quality solutions and data management solutions. We have
developed a methodology which provides a framework for each stage of a client
engagement, from helping the client conceive its strategy, to architecting,
engineering and extending its information. We believe that our integrated
methodology allows us to deliver reliable, robust, scalable, secure and
extensible business intelligence solutions in rapid timeframes based on accurate
information. We also strive to be the leading provider of business process
optimization solutions for organizations seeking to transform their businesses.
We bring full-service implementation capabilities to handle any business,
process or technical change. We provide value to our business process
optimization clients through end-to-end review and design capabilities, by
providing business/technology alignment to support continuous process
improvement and we employ experienced change management professionals with
functional expertise in their industries. We are at the forefront of
utilizing the most current quality process and change techniques and adapt those
to the best and highest needs of our clients business needs (to include
“facilitated design sessions”, Lean and Six Sigma tools; and Change Adoption
techniques). We integrate the best of both business intelligence and process
reengineering to help clients build the capability to make business decisions
based on metrics in real time.
We are a
Delaware corporation formerly named LCS Group, Inc. In January 2004, a
privately-held company named Conversion Services International, Inc. (“Old CSI”)
merged with and into our wholly owned subsidiary, LCS Acquisition Corp. In
connection with such transaction: (i) a 14-year old information technology
business (formed in 1990) became our operating business, (ii) the former
stockholders of Old CSI assumed control of our Board of Directors and were
issued approximately 75.9% of the outstanding shares of our common stock at that
time (due to subsequent events, that percentage of ownership has decreased), and
(iii) we changed our name to “Conversion Services International,
Inc.”
On
September 21, 2005, our common stock began trading on the American Stock
Exchange under the symbol “CVN.” We voluntarily withdrew trading of
our common stock from AMEX effective September 8, 2008, and begun trading on the
Over-the-Counter Bulletin Board on that day under the symbol
“CVNS.”
Our
offices are located at 100 Eagle Rock Avenue, East Hanover, New Jersey 07936,
and our telephone number is (973) 560-9400.
Our
Services
As a full
service strategic consulting, business intelligence, data warehousing and data
management firm, we offer services in the following solution
categories:
Strategic Consulting: Involves
planning and assessing both process and technology, performing gap analysis,
making recommendations regarding technology and business process improvements to
help our clients realize their business goals and maximize their investments in
people and technology.
4
Business
and Process Consulting
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Change
Management Consulting - Assist clients with implementing project
management governance and best practices for large scale change
initiatives, including consolidations, conversions, integration of new
business processes and systems
applications.
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·
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Integration
Management, Mergers and Acquisitions - Work with clients to implement best
practices for mergers and acquisitions. Support all aspects of the
integration process from initial assessment through implementation
support.
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Acquisition
Readiness - Work with clients to better prepare them for large scale
acquisitions in the financial services domain. This includes building best
practices, mapping and gapping and implementing a strategic roadmap to
integrate multiple companies.
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·
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Process
Improvement (Lean, Six Sigma) - Provide a full array of products and
services in support of Lean and Six Sigma, including training, process
improvement, project management and implementation
support.
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·
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Regulatory
Compliance (The Health Insurance Portability and Accountability Act of
1996, Basel II) - Work with clients to analyze, design and implement
operational control, procedures and business intelligence that will align
the organization to meet new regulatory
requirements.
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Project
Management (PMO) - Setting up an internal office at a client location,
staffed with senior/certified project managers that act in accordance with
the policies and procedures identified in CSI Best Practices for Project
Management.
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Request
For Proposal Creation and Responses - Gather user and technical
requirements and develop Requests For Proposals (RFP) on behalf of our
clients. Respond to client RFPs with detailed project plans, solutions and
cost.
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Strategic
Technology Consulting
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·
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Data
Warehousing and Business Intelligence Strategic Planning - Helping clients
develop a strategic roadmap to align with a data warehouse or business
intelligence implementation. These engagements are focused on six
strategic domains that have been identified and documented by CSI:
Business Case, Program Formulation, Organizational Design, Program
Methodologies, Architecture and Operations and
Servicing.
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Information
Management Strategy & Roadmap – Helping clients develop a roadmap to
leverage and integrate enterprise information. The solution can support a
business intelligence/data warehouse solution, rationalization of a
complex environment, sunsetting of old applications and migration to new
applications.
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Information
Management Software Selection – Evaluation, analysis and recommendation of
appropriate software tools for deploying business
intelligence/data warehousing solutions. Gather business and technical
requirements and measure those requirements against the capabilities of
available tools in the current marketplace. Software evaluated and
recommended include reporting, ad-hoc query, analytics, extract, transform
and load processes (ETL), data profiling, database and data
modeling.
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Business Intelligence: A
category of applications and technologies for gathering, storing, analyzing and
providing access to data to help enterprise users make better and quicker
business decisions.
5
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Business
Intelligence, Architecture and Implementation - Develop architecture plans
and install all tools required to implement a business intelligence
solution, including enterprise reporting, ad-hoc reporting, analytical
views and data mining. Solutions are typically developed using tools such
as Cognos, Business Objects, MicroStrategy, SAS and Crystal
Reports.
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Business
Intelligence Competency Center - Set up an internal office at a client
location, staffed with a mix of senior business intelligence developers
and business intelligence architects that will implement best practices,
policies, procedures, standards and provide training and mentoring to
further increase the use of the data warehouse and facilitate the business
owners embracing of the business intelligence
solution.
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Analytics
and Dashboards - Identify and document dashboard requirements. These
requirements are typically driven by Key Performance Indicators (KPIs)
identified by upper management. Architect a supporting database structure
to support the identified hierarchies, drill-downs and slice and dice
requirements, implement a dashboard tool, provide training and
education.
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Business
Performance Management - Leveraging a new or existing business
intelligence implementation to monitor and manage both business process
and IT events through key performance
indicators.
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Data
Mining - Implementing data mining tools that extract implicit, previously
unknown, and potentially useful information from data. These tools
typically use statistical and visualization techniques to discover and
present knowledge in a form which is easily comprehensible. Business
intelligence tools will answer questions based on information that has
already been captured (history). Data mining tools will discover
information and project information based on historic
information.
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Proof
of Concepts and Prototypes - Gather requirements, design and implement a
small scale business intelligence implementation called a Proof of
Concept. The Proof of Concept will validate the technology and/or business
case, as well as “sell” the concept of business intelligence to
management.
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Outsourcing
- Development of new reports offsite and redeployment of reports in new
technologies in support of technology
consolidation.
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Training
and Education - Provide formal classroom training for Business Objects
software products. Provide training in data warehousing and business
intelligence methodologies and best practices, as well as technology tool
training, including business intelligence tools such as Cognos and
MicroStrategy.
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Data Warehousing: A
consolidated view of high quality enterprise information, making it simpler and
more efficient to analyze and report on that information.
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Data
Warehousing and Data Mart Design, Development and Implementation - Design,
development and implementation of custom data warehouse solutions. These
solutions are based on our methodology and best practices which include
six sigma type tools used in the requirements gathering and warehouse
building process.
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Proof
of Concepts and Prototypes - Gather requirements, design and implement a
small scale data warehouse that is called a Proof of Concept. The Proof of
Concept will validate the technology and/or business case, as well as
“sell” the concept of data warehousing to
management.
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Extract,
Transformation and Loading (ETL) - Design, development and implementation
of data integration solutions with particular expertise and best practices
for integrating ETL tools with other data warehouse
tools.
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Outsourcing
- Implementing and supporting a client data warehouse solution at a CSI
location.
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Data Management: Innovative
solutions for managing data (information) throughout an enterprise.
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Enterprise
Information Architecture - Leveraging our Information, Process and
Infrastructure (IPI) Diagrams to create a “snapshot” of the current
information flow and desired information flow throughout the
enterprise.
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Data
Quality Center of Excellence - Set up an internal office at a client
location, staffed with a mix of senior data quality developers and data
quality architects that will implement best practices, policies,
procedures, standards and provide training and mentoring to further
increase the level of data quality throughout the enterprise and increase
the awareness and importance of data quality as it pertains to decision
making.
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Data
Quality/Cleansing/Profiling - Leveraging profiling as an automated data
analysis process that significantly accelerates the data analysis process.
Leveraging our best practices to identify data quality concerns and
provide rules to cleanse and purify the
information.
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Data
Migrations and Conversions - Design, development and implementation of
custom data migrations. These solutions are based on our methodology and
best practices.
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Application
Development - Custom application development or integration to support
data management or data warehouse initiatives. This may include
modification of existing enterprise applications to capture additional
information required in the warehouse or may be a standalone application
developed to facilitate improved integration of existing
information.
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Infrastructure
Management and Support - An infrastructure must be in place to support any
data warehouse or data management initiative. This may include servers,
cables, disaster recovery or any process and procedure needed to support
these types of initiatives.
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Clients
For 20
years, we have helped our clients develop strategies and implement technology
solutions to help them leverage corporate information.
Our
clients are primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries and are primarily located in the northeastern
United States. During the year ended December 31, 2009, two of our clients, PNC
Bank (28.6%) and Bank of America (10.2%) accounted collectively for
approximately 38.8% of our total revenues. During the year ended December 31,
2008, two of our clients, Bank of America (20.3%) and LEC, a related party
(11.9%), accounted collectively for approximately 32.2% of total revenues.
During 2007, the Company had sales to two major customers, Bank of America
(17.4%) and ING (10.5%), which accounted collectively for approximately 27.9% of
revenues. We do not have long-term contracts with any of these
customers. The loss of any of our largest customers could have a material
adverse effect on our business. We have not had any collections problems with
any of these customers to date.
Marketing
We
currently market our services through our internal marketing group and our sales
force comprised of 18 employees as of December 31, 2009. We also receive new
business opportunities through referrals from current clients, strategic
partners, independent industry analysts and industry associations. We are
engaging in the following specific sales related programs and activities to
expand our brand awareness and generate sales leads:
7
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Advertising and
Sponsorships: Through advertising and sponsorship programs within
the leading industry publications, we obtain new business leads and
further increase our brand awareness. Throughout the year, we sponsor
publications and newsletters published by DM Review, The Business
Intelligence Network, The Data Warehousing Institute and iSix Sigma. Most
of these sponsorships include web banner advertising and registration
vehicles to promote CSI white papers and best practices
research.
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·
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Web Site Promotion: Our
website (www.csiwhq.com) provides a comprehensive view of our service
offerings and promotes our subject matter expertise via white papers,
articles and industry presentations. We are currently promoting our
website through internet search engine advertising, direct marketing and
through reciprocity from partner
sites.
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Trade Show and Conference
Participation: Our participation in trade shows and conferences has
helped our position within our industry. There are a number of trade shows
and conferences within our target industry that provide significant
exposure to prospective customers, business and trade media and industry
analysts, as well as collaborative networking with technology partners. As
with most trade show events, the higher the level of sponsorship, the
greater exposure and benefits received, such as the location of our booth,
banner and advertising space, and position on the conference
agenda.
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Web Seminars:
Participation in web seminars provides exposure to new sales prospects and
affords us the opportunity to demonstrate our subject matter expertise. We
plan to perform approximately 15 web seminars in
2010.
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Thought Leadership: We
continually demonstrate our thought leadership by writing and promoting
our white papers via our web site and through direct mail. CSI Deleeuw is
the sponsor of the Financial Services ISixSigma portal and monthly
articles by our consultants are published in the iSix Sigma financial
services channel. We intend to continue all our publishing activities,
including blogs, by-line articles and expert web channels where our
experts respond to end-user
questions.
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Sponsorships of Vendor
Marketing Activities: We expect that joint marketing
activities with leading software vendors should also stimulate new
business prospect generation. This participation also enhances the
market perception of CSI as experts in individual product areas by
co-sponsoring and participating in vendor marketing activities. We are
invited to write white papers and articles for vendors such as Microsoft,
Business Objects and SAP as well as new product launch seminars with
Business Objects.
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Expanded Direct Sales
Activities: We are continually updating and increasing our direct
contact programs for lead generation, cross selling and up-selling. We
conduct direct sales activities, such as email and direct mail campaigns,
telemarketing, networking and attending partnership functions to generate
leads for direct sales opportunities. In addition, we have developed a
number of best practices service offerings which encompass selection,
deployment, implementation, maintenance and knowledge transfer. In some
cases, these service offerings include methodologies and best practices
for integrating several vendor technology platforms resulting in cross
selling and up selling opportunities when
applicable.
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8
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Vendor Relations: We
are continually identifying key vendor relationships. With the ability to
leverage our 20 year history, we intend to continue to forge and maintain
relationships with technical, service and industry vendors. We have
solidified and continue to develop strategic relationships with technology
vendors in the data warehousing and business intelligence arena. These
relationships designate our status as a systems integration and/or
reseller which authorizes us to provide consulting services and to resell
select vendor software. We employ certified consultants in our vendor
partner technology platforms. We maintain vendor independence by
consistently evaluating the respective vendors’ technologies in our lab
located at our headquarters in East Hanover, New Jersey. We
regularly attend vendor partnership events, including partner summits and
user group meetings, in support of our partnership programs. We currently
maintain relationships with the
following:
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Business
Solutions Vendors:
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SAP
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We
are an SAP partner focusing on Business Objects
integration.
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Database
Vendors:
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Oracle
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We
are part of the Oracle Partner Program (OPP) as a Certified Solution
Provider (CSP). We also employ certified Oracle professionals and our
partnership allows us to utilize Oracle support channels for technical
advisement.
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Microsoft
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We
are a Gold Microsoft Certified Solution Provider. We maintain the required
number of Microsoft certified professionals to hold this
designation.
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Business
Intelligence Vendors:
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SAP
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We
are a partner focusing on integration of the Business Objects suite of
products. We employ and maintain a staff of professionals that are
certified in the vendor’s technology.
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Oracle
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We
are a Systems Integration and Reseller Partner. We employ and maintain a
staff of professionals that are certified in the vendor’s
technology.
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Cognos
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We
are a Systems Integration and Reseller Partner. We employ and maintain a
staff of professionals that are certified in the vendor’s
technology.
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Informatica
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We
are a Systems Integration and Reseller
Partner.
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Protection
Against Disclosure of Client Information
As our
core business relates to the storage and use of client information, which is
often confidential, we have implemented policies to prevent client information
from being disclosed to unauthorized parties or used inappropriately. Our
employee handbook which every employee receives and acknowledges, mandates that
it is strictly prohibited for employees to disclose client information to third
parties. Our handbook further mandates that disciplinary action be taken against
those who violate such policy, including possible termination. Our outside
consultants sign non-disclosure agreements prohibiting disclosure of client
information to third parties, among other things, and we perform background
checks on employees and outside consultants.
Intellectual
Property
The
trademarks “TECH SMART BUSINESS WISE”, “QUALITY MANAGEMENT OFFICE”, “QMO” and
DQXPRESS have been registered with the United States Patent and Trademark
Office. We use non-disclosure agreements with our employees, independent
contractors and clients to protect information which we believe are proprietary
or constitute trade secrets.
9
Competition
To our
knowledge, there are no publicly-traded competitors that focus solely on data
warehousing and business intelligence and business process optimization
consulting and strategy. However, we have several competitors in the general
marketplace, including data warehouse and business intelligence practices within
large international, national and regional consulting and implementation firms,
as well as smaller boutique technology firms. Many of our competitors are large
companies that have substantially greater market presence, longer operating
histories, more significant client bases, and financial, technical, facilities,
marketing, capital and other resources than we have. We believe that we compete
with these firms on the basis of the quality of our services, industry
reputation and price.
We believe our competitors include firms such as:
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Accenture
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Cap
Gemini Ernst & Young
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IBM
Global Services
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Fujitsu
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Bearing
Point
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Answerthink
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Hitachi
Consulting
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Hewlett
Packard
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Business
Edge
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Employees
As of
December 31, 2009, we had 45 outside consultants, 62 consultants on the payroll
and 32 non-consultant employees. Outside consultants are not our employees, and
as such, do not receive benefits or have taxes withheld. These
consultants are members or employees of separate corporations, they are
responsible for providing us with a current certificate of insurance and they
are responsible for filing and payment of their own taxes. Consultants on
the payroll may be either full time or hourly employees. Such consultants are
billable to clients, and they have taxes withheld similar to other
employees.
None of
our employees are represented by a labor union or subject to a collective
bargaining agreement. We have never experienced a work stoppage and we believe
that our relations with employees are good.
Available
Information
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission (the “Commission”). You may read and
copy any document we file with the Commission at the Commission's public
reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway,
New York, New York 10279, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330
for further information on the public reference rooms. Our Commission filings
are also available to the public from the Commission's Website at
"http://www.sec.gov." We make available free of charge our annual, quarterly and
current reports, proxy statements and other information upon request. To request
such materials, please send a written request to William Hendry, our Chief
Financial Officer, at our address as set forth above or at (973)
560-9400.
We
maintain a website at www.csiwhq.com (this is not a hyperlink, you must visit
this website through an internet browser). Our website and the information
contained therein or connected thereto are not incorporated into this Annual
Report on Form 10-K.
10
SPECIAL
NOTE ON FORWARD LOOKING STATEMENTS
In
addition to historical information, this Annual Report on Form 10-K contains
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the sections entitled “Business”, “Risk Factors”, and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s opinions only as of the
date thereof. We undertake no obligation to revise or publicly release the
results of any revision of these forward-looking statements. Readers
should carefully review the risk factors described in this Annual Report and in
other documents that we file from time to time with the Securities and Exchange
Commission.
In
some cases, you can identify forward-looking statements by terminology such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or
the negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other “forward-looking” information. There may be events in
the future that we are not able to accurately predict or control. You should be
aware that the occurrence of any of the events described in these risk factors
and elsewhere in this Annual Report could substantially harm our business,
results of operations and financial condition, and that upon the occurrence of
any of these events, the trading price of our securities could decline. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, growth rates, levels of
activity, performance or achievements.
Except
as required by applicable law, including the securities laws of the United
States, we do not intend to update any of the forward-looking statements to
conform these statements to actual results. The following discussion should be
read in conjunction with our financial statements and the related notes that
appear elsewhere in this report.
We
cannot give any guarantee that these plans, intentions or expectations will be
achieved. All forward-looking statements involve risks and uncertainties, and
actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those factors described in
the “Risk Factors” section of this Annual Report. Listed below and discussed
elsewhere in this Annual Report are some important risks, uncertainties and
contingencies that could cause our actual results, performances or achievements
to be materially different from the forward-looking statements included in this
Annual Report. These risks, uncertainties and contingencies include, but are not
limited to, the following:
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our ability to finance our
operations on acceptable terms, either through the raising of capital, the
incurrence of convertible or other indebtedness or through strategic
financing partnerships;
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our ability to retain members
of our management team and our
employees;
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our ability to retain existing
clients or attract new
clients;
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our ability to adapt to the
rapid technological change constantly occurring in the areas in which we
provide services;
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our ability to offer pricing
for services which is acceptable to
clients;
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our ability to pay our
debts;
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the competition that may arise
in the future; and
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identifying suitable
acquisition candidates and integrating new
acquisitions.
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The
foregoing does not represent an exhaustive list of risks. Please see “Risk
Factors” below for additional risks which could adversely impact our business
and financial performance. Moreover, new risks emerge from time to time and it
is not possible for our management to predict all risks, nor can we assess the
impact of all risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ from those contained in
any forward-looking statements. All forward-looking statements included in this
Report are based on information available to us on the date of this Report.
Except to the extent required by applicable laws or rules, we undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained throughout this Report.
Item 1A. Risk
Factors
The
following factors should be considered carefully in evaluating the Company and
its business:
Risks
Relating to Our Business
Because
we depend on a small number of key clients, non-recurring revenue and contracts
terminable on short notice, our business could be adversely affected if we fail
to retain these clients and/or obtain new clients at a level sufficient to
support our operations and/or broaden our client base.
During
the year ended December 31, 2009, services provided to two of our clients, PNC
Bank (28.6%) and Bank of America, (10.2 %) accounted for an aggregate of
approximately (38.8%) of total revenues. During the year ended December 31,
2008, services provided to two of our clients, Bank of America (20.3%) and LEC,
a related party, (11.9 %) accounted for an aggregate of approximately (32.2%) of
total revenues. Further, the majority of our current assets consist of accounts
receivable, and as of December 31, 2009, receivables relating to PNC Bank and
Bank of America accounted for 35.8% and 12.1% of our accounts receivable
balance, respectively. The loss of any of our largest clients could have a
material adverse effect on our business. In addition, our contracts provide that
our services are terminable upon short notice, typically not more than 30 days.
Non-renewal or termination of contracts with these or other clients without
adequate replacements could have a material and adverse effect upon our
business. In addition, a large portion of our revenues are derived from
information technology consulting services that are generally non-recurring in
nature. There can be no assurance that we will:
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obtain
additional contracts for projects similar in scope to those previously
obtained from our clients;
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be
able to retain existing clients or attract new
clients;
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provide
services in a manner acceptable to
clients;
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offer
pricing for services which is acceptable to clients;
or
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broaden
our client base so that we will not remain largely dependent upon a
limited number of clients that will continue to account for a substantial
portion of our revenues.
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The
Company has received a qualified audit opinion on its ability to continue as a
going concern.
The audit
report our independent registered public accounting firm issued on our audited
financial statements for the fiscal year ended December 31, 2009 contains a
qualification regarding our ability to continue as a going concern. This
qualification indicates that the Company’s recent losses other than in fiscal
year 2009, negative cash flows from operations, its net working capital
deficiency and its ability to pay its outstanding debt as they become due raises
substantial doubt on the part of our independent registered public accounting
firm that we can continue as a going concern in default of covenants with our
financial institution. Such a qualified opinion from our independent registered
public accounting firm may limit our ability to access certain types of
financing, or may prevent us from obtaining financing on acceptable
terms.
Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and operating results. In addition, current and potential
stockholders could lose confidence in our financial reporting, which could have
a material adverse effect on our stock price.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed.
12
We are
required to document and test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessments of the effectiveness of our internal
controls over financial reporting. During the course of our testing,
we may identify deficiencies which we may not be able to remediate in time to
meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the
requirements of Section 404. In addition, if we fail to maintain the adequacy of
our internal controls, as such standards are modified, supplemented or amended
from time to time; we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and
maintain an effective internal control environment could also cause investors to
lose confidence in our reported financial information, which could have a
material adverse effect on our stock price.
Our
disclosure controls and procedures and internal controls over financial
reporting have been materially deficient.
Our
management, under the supervision and with the participation of our CEO and CFO,
has evaluated the effectiveness of our disclosure controls and procedures and
internal control over financial reporting as defined in Exchange Act Rules
13a-15(e) and (f) and15d-15(e) and (f) as of the end of the period covered by
this Report based upon the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on such evaluation, our management has made an assessment that our
disclosure controls and procedures and internal control over
financial reporting is not effective as of December 31, 2009.
We
did not maintain effective financial reporting processes due to lack of
segregation of duties and deficiencies in general controls over information
security and user access.
There is
a lack of segregation of duties at the Company due to the small number of
employees dealing with general administrative and financial matters and general
controls over information technology security and user access. This constitutes
a weakness in financial reporting. Furthermore, the Company’s Chief Financial
Officer is the only person with an appropriate level of accounting knowledge,
experience and training in the selection, application and implementation of
generally accepted accounting principles as it relates to complex transactions
and financial reporting requirements.
At
present, the Company’s ability to rectify the internal control weaknesses
relating to the segregation of duties and the general controls over information
technology security and user access is limited due to budgetary constraints. If
we cannot rectify these material weaknesses through remedial measures and
improvements to our systems and procedures, management may encounter
difficulties in timely assessing business performance and identifying incipient
strategic and oversight issues. Management is reviewing possible improvements to
internal controls, and compensating controls, and this focus will require
management from time to time to devote its attention away from other planning,
oversight and performance functions.
We cannot
provide assurances as to the result of these efforts. We cannot be certain that
any measures we take will ensure that we implement and maintain adequate
internal controls in the future. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations.
Certain
client-related complications may materially adversely affect our
business.
We may be
subject to additional risks relating to our clients that could materially
adversely affect our business, such as delays in clients paying their
outstanding invoices, lengthy client review processes for awarding contracts,
delay, termination, reduction or modification of contracts in the event of
changes in client policies or as a result of budgetary constraints, and/or
increased or unexpected costs resulting in losses under fixed-fee contracts,
which factors could also adversely affect our business.
We
have a history of losses and we could incur losses in the future.
During
the year ended December 31, 2009, we reported net income and for the year ended
December 31, 2008 we sustained a net loss and we cannot be sure that we will
operate profitably in the future. During the year ended December 31, 2009, we
recorded net income in the approximate amount of $31,956. During the fiscal year
ended December 31, 2008, we reported a net loss in the approximate amount of
$10.5 million. If we do not continue to be profitable on an ongoing basis, we
could have difficulty obtaining funds to continue our operations. Except for the
current period, we have incurred net losses each year since our merger with LCS
Group, Inc.
We
have a significant amount of debt, which, in the event of a default, could have
material adverse consequences upon us.
Our total
debt as of December 31, 2009 was approximately $7.3 million. The degree to which
we are leveraged could have important consequences to us, including the
following:
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A
portion of our cash flow must be used to pay interest on our indebtedness,
and therefore is not available for use in our
business;
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Our
indebtedness increases our vulnerability to changes in general economic
and industry conditions;
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Our
ability to obtain additional financing for working capital, capital
expenditures, general corporate purposes or other purposes could be
impaired;
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Our
failure to comply with restrictions contained in the terms of our
borrowings could lead to a default which could cause all or a significant
portion of our debt to become immediately payable;
and
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If
we default, the loans will become due and we may not have the funds to
repay the loans, and we could discontinue our business and investors could
lose all their money.
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In
addition, certain terms of such loans require the prior consent of Access
Capital Inc. on many corporate actions including, but not limited to, mergers
and acquisitions—which is part of our ongoing business strategy.
Our failure to maintain adequate
working capital triggered an event of default under our line of credit with
Access Capital.
As of
April 2008, we failed to maintain $400,000 of working capital that is required
by the Loan and Security Agreement with Access Capital, which constitutes an
event of default. In connection with the default, the Company and
Access entered into a Limited Waiver Agreement whereby Access Capital waived the
default, on the condition that (i) all debts owed to Access Capital bear an
interest rate of 18% per annum from May 1, 2008 until such time as we maintain
working capital of at least $400,000 and (ii) that we pay to Access a waiver fee
in the amount of $5,000. Although Access Capital waived certain
rights and remedies in connection with this event of default, Access Capital may
not waive these rights in the future. As of December 31, 2009, the Company
remained in default with respect to the Access Capital Loan and Security
Agreement. Although the Company remains in default of the Loan and Security
Agreement, in January 2010 Access Capital agreed to reduce the interest rate on
borrowings under the line of credit from 18% to 12% per annum.
The
promissory note and related agreements delivered to Access Capital in connection
with the line of credit contain several events of default which
include:
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failure
to pay interest, principal payments or other fees when
due;
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failure
to maintain a minimum of $400,000 of working
capital;
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failure
to pay taxes when due unless such taxes are being contested in good
faith;
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breach
by us of any material covenant or term or condition of the notes or any
agreements made in connection
therewith;
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default
on any indebtedness to which we or our subsidiaries are a party which has
a material adverse effect;
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breach
by us of any material representation or warranty made in the notes or in
any agreements made in connection
therewith;
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attachment
is made or levy upon collateral securing the Access Capital debt which is
valued at more than $25,000 and is not timely
mitigated;
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any
lien created under the notes and agreements is not valid and perfected
having a first priority interest;
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assignment
for the benefit of our creditors, or a receiver or trustee is appointed
for us;
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bankruptcy
or insolvency proceeding instituted by or against us and not dismissed
within 45 days;
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the
inability to pay debts as they become due or cease business
operations;
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sale,
assignment, transfer or conveyance of any assets except as
permitted;
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a
person or group becomes a beneficial owner of 20% on a fully diluted basis
of the outstanding voting equity interest or the present directors cease
to be the majority on the Board of
Directors;
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indictment
or threatened criminal indictment, or commencement of threatened
commencement of any criminal or civil proceeding against us or any
executive officer; and
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take
any action which would be prohibited under the provisions of any
subordination agreement or make any payment on subordinated debt that any
person was not entitled to receive under the provisions of the applicable
subordination agreement.
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If we
default on the note again and Access Capital demands all amounts due and
payable, the cash required to pay such amounts would most likely come out of
working capital, which may not be sufficient to repay the amounts due. The
default payment shall be the outstanding principal amount of the note, plus
accrued but unpaid interest, all other fees then remaining unpaid, and all other
amounts payable thereunder. In addition, since we rely on our working capital
for our day to day operations, such a default on the note could materially
adversely affect our business, operating results or financial condition to such
extent that we are forced to restructure, file for bankruptcy, sell assets or
cease operations. Further, our obligations under the notes are secured by
substantially all of our assets. Failure to fulfill our obligations under the
notes and related agreements could lead to loss of these assets, which would be
detrimental to our operations.
Our
operating results are difficult to forecast.
We may
increase our general and administrative expenses in the event that we increase
our business and/or acquire other businesses, while our operating expenses for
sales and marketing and costs of services for technical personnel to provide and
support our services also increases. Additionally, although many of our clients
are large, creditworthy entities, at any given point in time, we may have
significant accounts receivable balances with clients that expose us to credit
risks if such clients either delay or elect not to pay or are unable to pay such
obligations. If we have an unexpected shortfall in revenues in relation to our
expenses, or significant bad debt experience, our business could be materially
and adversely affected.
Our
profitability, if any, will suffer if we are not able to retain existing clients
or attract new clients. A continuation of current pricing pressures could result
in permanent changes in pricing policies and delivery capabilities.
Our gross
profit margin is largely a function of the rates we are able to charge for our
information technology services. Accordingly, if we are not able to maintain the
pricing for our services or an appropriate utilization of our professionals
without corresponding cost reductions, our margins will suffer. The rates we are
able to charge for our services are affected by a number of factors,
including:
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our
clients' perceptions of our ability to add value through our
services;
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pricing
policies of our competitors;
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our
ability to accurately estimate, attain and sustain engagement revenues,
margins and cash flows over increasingly longer contract
periods;
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the
use of globally sourced, lower-cost service delivery capabilities by our
competitors and our clients; and
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general
economic and political conditions.
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Our gross
margins are also a function of our ability to control our costs and improve our
efficiency. If the continuation of current pricing pressures persists it could
result in permanent changes in pricing policies and delivery capabilities and we
must continuously improve our management of costs.
Unexpected
costs or delays could make our contracts unprofitable.
In the
future, we may have many types of contracts, including time-and-materials
contracts, fixed-price contracts and contracts with features of both of these
contract types. Any increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including delays caused by
factors outside our control, could make these contracts less profitable or
unprofitable, which would have an adverse effect on all of our margins and
potential net income.
Our
business could be adversely affected if we fail to adapt to emerging and
evolving markets and economic conditions.
The
markets for our services are changing rapidly and evolving and, therefore, the
ultimate level of demand for our services is subject to substantial uncertainty.
Most of our historic revenue was generated from providing information technology
services only. During the last several years, we have focused our efforts on
providing data warehousing services in particular since we believe that there is
going to be an increased need in this area. Any significant decline in demand
for programming, applications development, information technology or data
warehousing consulting services could materially and adversely affect our
business and prospects.
Our
ability to achieve growth targets is dependent in part on maintaining existing
clients and continually attracting and retaining new clients to replace those
who have not renewed their contracts. Our ability to achieve market acceptance,
including for data warehousing, will require substantial efforts and
expenditures on our part to create awareness of our services.
If
we should experience rapid growth, such growth could strain our managerial and
operational resources, which could adversely affect our business.
Any rapid
growth that we may experience would most likely place a significant strain on
our managerial and operational resources. If we acquire other companies, we will
be required to manage multiple relationships with various clients, strategic
partners and other third parties. Further growth (organic or by acquisition) or
an increase in the number of strategic relationships may increase this strain on
existing managerial and operational resources, inhibiting our ability to achieve
the rapid execution necessary to implement our growth strategy without incurring
additional corporate expenses.
Lack
of detailed written contracts could impair our ability to collect fees, protect
our intellectual property and protect ourselves from liability to
others.
We try to
protect ourselves by entering into detailed written contracts with our clients
covering the terms and contingencies of the client engagement. In some cases,
however, consistent with what we believe to be industry practice, work is
performed for clients on the basis of a limited statement of work or verbal
agreements before a detailed written contact can be finalized. To the extent
that we fail to have detailed written contracts in place, our ability to collect
fees, protect our intellectual property and protect ourselves from liability
from others may be impaired.
16
Compliance
with changing regulation of corporate governance and public disclosure may
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act, new SEC regulations and exchange
rules (although not, as of the date of this Annual Report, applicable to us),
are creating uncertainty for companies such as ours. These new or changed laws,
regulations and standards are subject to varying interpretations in many cases
due to their lack of specificity, and as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing
bodies, which could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. We are committed to maintaining high standards of
corporate governance and public disclosure. As a result, our efforts to comply
with evolving laws, regulations and standards have resulted in, and are likely
to continue to result in, increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to comply with Section 404 of
the Sarbanes-Oxley Act and the related regulations regarding our required
assessment of our internal controls over financial reporting and our independent
registered public accounting firm's audit of that assessment will require the
commitment of significant financial and managerial resources. Further, our Board
members, chief executive officer and chief financial officer could face an
increased risk of personal liability in connection with the performance of their
duties. As a result, we may have difficulty attracting and retaining qualified
Board members and executive officers, which could harm our business. If our
efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, our reputation may be harmed.
We
face intense competition and our failure to meet this competition could
adversely affect our business.
Competition
for our information technology consulting services, including data warehousing,
is significant and we expect that this competition will continue to intensify
due to the low barriers to entry. We may not have the financial resources,
technical expertise, sales and marketing or support capabilities to adequately
meet this competition. We compete against numerous large companies, including,
among others, multi-national and other major consulting firms. These firms have
substantially greater market presence, longer operating histories, more
significant client bases and greater financial, technical, facilities,
marketing, capital and other resources than we have. If we are unable to compete
against such competitors, our business will be adversely affected.
Our
competitors may respond more quickly than us to new or emerging technologies and
changes in client requirements. Our competitors may also devote greater
resources than we can to the development, promotion and sales of our services.
If one or more of our competitors develops and implements methodologies that
result in superior productivity and price reductions without adversely affecting
their profit margins, our business could suffer. Competitors may
also:
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engage
in more extensive research and
development;
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undertake
more extensive marketing campaigns;
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adopt
more aggressive pricing policies;
and
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make
more attractive offers to our existing and potential employees and
strategic partners.
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In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties that could be
detrimental to our business.
New
competitors, including large computer hardware, software, professional services
and other technology companies, may enter our markets and rapidly acquire
significant market share. As a result of increased competition and vertical and
horizontal integration in the industry, we could encounter significant pricing
pressures. These pricing pressures could result in substantially lower average
selling prices for our services. We may not be able to offset the effects of any
price reductions with an increase in the number of clients, higher revenue from
consulting services, cost reductions or otherwise.
In
addition, professional services businesses are likely to encounter consolidation
in the future, which could result in decreased pricing and other
competition.
We
depend on our management and qualified personnel. If we fail to retain key
personnel, our business could be adversely affected.
There is
intense competition for qualified personnel in the areas in which we operate.
The loss of existing personnel or the failure to recruit additional qualified
managerial, technical and sales personnel, as well as expenses in connection
with hiring and retaining personnel, particularly in the emerging area of data
warehousing and in business process consulting, could adversely affect our
business. We also depend upon the performance of our executive officers and key
employees in particular, Lori Cohen and Bryan Carey. Although we have entered
into an employment agreement with Ms. Cohen, the loss of either of these
individuals could have a material adverse effect upon us. In addition, we have
not obtained "key man" life insurance on the lives of Ms. Cohen or Mr.
Carey.
17
We will
need to attract, train and retain more employees for management, engineering,
programming, sales and marketing, and client service and support positions. As
noted above, competition for qualified employees, particularly engineers,
programmers and consultants, continues to be intense. Consequently, we may not
be able to attract, train and retain the personnel we need to continue to offer
solutions and services to current and future clients in a cost effective manner,
if at all.
If
we fail to raise capital that we may need to support and increase our
operations, our business could be adversely affected.
Our
future capital uses and requirements will depend on several factors,
including:
|
|
·
|
the
extent to which our solutions and services achieve market
acceptance;
|
|
|
·
|
the
level of revenues from current and future solutions and
services;
|
|
|
·
|
the
expansion of operations;
|
|
|
·
|
the
costs and timing of product and service developments and sales and
marketing activities;
|
|
|
·
|
the
costs related to acquisitions of technology or businesses;
and
|
|
|
·
|
competitive
developments.
|
We will
require additional capital in order to continue to support and increase our
sales and marketing efforts, continue to expand and enhance the solutions and
services we are able to offer to current and future clients and fund potential
acquisitions. This capital may not be available on terms acceptable to us, if at
all. In addition, we may be required to spend greater-than-anticipated funds if
unforeseen difficulties arise in the course of these or other aspects of our
business. As a consequence, we will be required to raise additional capital
through public or private equity or debt financings, collaborative
relationships, bank facilities or other arrangements. We cannot assure that such
additional capital will be available on terms acceptable to us, if at all. Any
additional equity financing is expected to be dilutive to our stockholders, and
debt financing, if available, may involve restrictive covenants and increased
interest costs. Our inability to obtain sufficient financing may require us to
delay, scale back or eliminate some or all of our expansion programs or to limit
the marketing of our services. This could have a material and adverse effect on
our business.
We
could have potential liability for intellectual property infringement, personal
injury, property damage or breach of contract to our clients that could
adversely affect our business.
Our
services involve development and implementation of computer systems and computer
software that are critical to the operations of our clients' businesses. If we
fail or are unable to satisfy a client's expectations in the performance of our
services, our business reputation could be harmed or we could be subject to a
claim for substantial damages, regardless of our responsibility for such failure
or inability. In addition, in the course of performing services, our personnel
often gain access to technologies and content which include confidential or
proprietary client information.
Although
we have implemented policies to prevent such client information from being
disclosed to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. Our business
could be adversely affected if one or more large claims are asserted against us
that are uninsured, exceed available insurance coverage or result in changes to
our insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements. Although we maintain general liability
insurance coverage, including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large
claims.
One
major group controls a significant number of the outstanding shares of our
common stock and will continue to have significant control of our voting
securities for the foreseeable future.
As of
December 31, 2009, one major group, TAG Virgin Islands, controls approximately
76.4% of our common stock. Such percentages include options, warrants and
convertible securities that are exercisable into common stock within sixty (60)
days. This concentration of ownership of our common stock may:
18
|
|
·
|
delay
or prevent a change in the control;
|
|
|
·
|
impede
a merger, consolidation, takeover or other transaction involving us;
or
|
|
|
·
|
discourage
a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us.
|
The
authorization and issuance of “blank check” preferred stock could have an
anti-takeover effect detrimental to the interests of our
stockholders.
Our
certificate of incorporation allows the Board of Directors to issue 20,000,000
shares of preferred stock with rights and preferences set by our Board without
further stockholder approval. The issuance of shares of this "blank check
preferred" under particular circumstances could have an anti-takeover effect.
For example, in the event of a hostile takeover attempt, it may be possible for
management and the Board to endeavor to impede the attempt by issuing shares of
blank check preferred, thereby diluting or impairing the voting power of the
other outstanding shares of common stock and increasing the potential costs to
acquire control of us. Our Board of Directors has the right to issue blank check
preferred without first offering them to holders of our common stock, as the
holders of our common stock have no preemptive rights. To date, the Company has
issued 19,000 shares of Series A Convertible Preferred Stock to investors
represented by TAG Virgin Islands, Inc. and 20,000 shares of Series B
Convertible Preferred Stock to an individual investor.
Our
services or solutions may infringe upon the intellectual property rights of
others.
We cannot
be sure that our services and solutions, or the solutions of others that we
offer to our clients, do not infringe on the intellectual property rights of
third parties, and we may have infringement claims asserted against us or
against our clients. These claims may harm our reputation, cost us money and
prevent us from offering some services or solutions. In some instances, the
amount of these expenses may be greater than the revenues we receive from the
client. Any claims or litigation in this area, whether we ultimately win or
lose, could be time-consuming and costly, injure our reputation or require us to
enter into royalty or licensing arrangements. We may not be able to enter into
these royalty or licensing arrangements on acceptable terms. To the best of our
knowledge, we have never infringed upon the intellectual property rights of
another individual or entity.
We
could be subject to systems failures that could adversely affect our
business.
Our
business depends on the efficient and uninterrupted operation of our computer
and communications hardware systems and infrastructure. We currently maintain
our computer systems in our facilities at our offices in New Jersey and
elsewhere. We do not have complete redundancy in our systems and therefore any
damage or destruction to our systems would significantly harm our business.
Although we have taken precautions against systems failure, interruptions could
result from natural disasters as well as power losses, telecommunications
failures and similar events. Our systems are also subject to human error,
security breaches, computer viruses, break-ins, "denial of service" attacks,
sabotage, intentional acts of vandalism and tampering designed to disrupt our
computer systems. We also lease telecommunications lines from local and regional
carriers, whose service may be interrupted. Any damage or failure that
interrupts or delays network operations could materially and adversely affect
our business.
Our
business could be adversely affected if we fail to adequately address security
issues.
We have
taken measures to protect the integrity of our technology infrastructure and the
privacy of confidential information. Nonetheless, our technology infrastructure
is potentially vulnerable to physical or electronic break-ins, viruses or
similar problems. If a person or entity circumvents our security measures, it
could jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make substantial additional investments and efforts to
protect against or remedy security breaches. Security breaches that result in
access to confidential information could damage our reputation and expose us to
a risk of loss or liability.
Risks
Relating To Acquisitions
We
face intense competition for acquisition candidates, and we have limited cash
available for such acquisitions.
There is
a high degree of competition among companies seeking to acquire interests in
information technology service companies such as those we may target for
acquisition. We plan to be an active participant in the business of seeking
business relationships with, and acquisitions of interests in, such companies. A
large number of established and well-financed entities, including venture
capital firms, are active in acquiring interests in companies that we may find
to be desirable acquisition candidates. Many of these investment-oriented
entities have significantly greater financial resources, technical expertise and
managerial capabilities than we do. Consequently, we may be at a competitive
disadvantage in negotiating and executing possible investments in these entities
as many competitors generally have easier access to capital, on which
entrepreneur-founders of privately-held information technology service companies
generally place greater emphasis than obtaining the management skills and
networking services that we can provide. Even if we are able to compete with
these venture capital entities, this competition may affect the terms and
conditions of potential acquisitions and, as a result, we may pay more than
expected for targeted acquisitions. If we cannot acquire interests in attractive
companies on reasonable terms, our strategy to build our business through
acquisitions may be inhibited.
19
We
will encounter difficulties in identifying suitable acquisition candidates and
integrating new acquisitions.
An
element of our future business strategy is to grow through acquisitions. If we
identify suitable candidates, we may not be able to make investments or
acquisitions on commercially acceptable terms. Acquisitions may cause a
disruption in our ongoing business, distract management, require other resources
and make it difficult to maintain our standards, controls and procedures. We may
not be able to retain key employees of the acquired companies or maintain good
relations with their clients or suppliers. We may be required to incur
additional debt and to issue equity securities, which may be dilutive to
existing stockholders, to effect and/or fund acquisitions.
We
cannot assure you that any acquisitions we make will enhance our
business.
We cannot
assure you that any completed acquisition will enhance our business. Since we
anticipate that acquisitions could be made with both cash and our common stock,
if we consummate one or more significant acquisitions, the potential impacts
are:
|
|
·
|
a
substantial portion of our available cash could be used to consummate the
acquisitions and/or we could incur or assume significant amounts of
indebtedness;
|
|
|
·
|
losses
resulting from the on-going operations of these acquisitions could
adversely affect our cash flow; and
|
|
|
·
|
our
stockholders could suffer significant dilution of their interest in our
common stock.
|
Also, we
are required to account for acquisitions under the purchase method, which would
likely result in our recording significant amounts of goodwill. The inability of
a subsidiary to sustain profitability may result in an impairment loss in the
value of long-lived assets, principally goodwill and other tangible and
intangible assets, which would adversely affect our financial statements.
Additionally, we could choose to divest any acquisition that is not
profitable.
Director
and officer liability is limited.
As
permitted by Delaware law, our certificate of incorporation limits the liability
of our directors for monetary damages for breach of a director's fiduciary duty
except for liability in certain instances. As a result of our charter provision
and Delaware law, stockholders may have limited rights to recover against
directors for breach of fiduciary duty. In addition, our certificate of
incorporation provides that we shall indemnify our directors and officers to the
fullest extent permitted by law.
Risks
Relating To Our Common Stock
Penny
stock regulations may impose certain restrictions on marketability of our common
stock.
The SEC
has adopted regulations which generally define a “penny stock” to be any equity
security that has a
market price of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. As a result, our
common stock is subject to rules that impose additional requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser’s written consent to the transaction prior to the
purchase.
Additionally,
for any transaction involving a penny stock, unless exempt, the rules require
the delivery, prior to the transaction, of a risk disclosure document relating
to the penny stock market. The broker-dealer must also disclose the commission
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market.
20
Finally,
monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. Consequently, the “penny stock” rules may restrict the ability of
broker-dealers to sell our common stock and may affect the ability of investors
to sell our common stock in the secondary market and the price at
which such purchasers can sell any such securities.
Stockholders
should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns
include:
|
|
·
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
|
|
·
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
|
|
·
|
"Boiler
room" practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
|
|
·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
|
|
·
|
The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the
inevitable collapse of those prices with consequent investor
losses.
|
We
do not intend to pay dividends on shares of our common stock in the foreseeable
future.
We have
never paid cash dividends on our common stock. Our current Board of Directors
does not anticipate that we will pay cash dividends in the foreseeable future.
Instead, we intend to retain future earnings for reinvestment in our business
and/or to fund future acquisitions. In addition, our Loan and Security Agreement
with Access Capital requires that we obtain their consent prior to paying any
dividends on our common stock.
The
limited prior public market and trading market may cause possible volatility in
our stock price.
There has
only been a limited public market for our securities and there can be no
assurance that an active trading market in our securities will be maintained. In
addition, the overall market for securities has experienced extreme price and
volume downturns that have particularly affected the market prices of many
smaller companies. The trading price of our common stock is expected to be
subject to significant fluctuations including, but not limited to, the
following:
|
|
·
|
quarterly
variations in operating results and achievement of key business
metrics;
|
|
|
·
|
changes
in earnings estimates by securities analysts, if
any;
|
|
|
·
|
any
differences between reported results and securities analysts' published or
unpublished expectations;
|
|
|
·
|
announcements
of new contracts or service offerings by us or our
competitors;
|
|
|
·
|
market
reaction to any acquisitions, divestitures, joint ventures or strategic
investments announced by us or our
competitors;
|
|
|
·
|
demand
for our services and products;
|
|
|
·
|
shares
being sold pursuant to Rule 144 or upon exercise of warrants;
and
|
21
|
|
·
|
general
economic or stock market conditions unrelated to our operating
performance.
|
These
fluctuations, as well as general economic and market conditions, may have a
material or adverse effect on the market price of our common stock.
Additional
shares of our common stock and preferred stock may adversely affect the
market.
We are
authorized to issue 300,000,000 shares of our common stock. As of March
22, 2010, there were 123,544,368 shares of common stock issued and outstanding.
However, the total number of shares of our common stock issued and outstanding
does not include shares reserved in anticipation of the conversion of notes or
the exercise of options or warrants. As of March 22, 2010, we had 16,666,667
shares of common stock underlying convertible notes. As of March 22, 2010,
we had outstanding stock options and warrants to purchase approximately
79,191,505 shares of our common stock, the exercise prices of which range
between $0.001 and $5.25
per share, and we will have reserved shares of our common stock
for issuance in connection with the potential exercise thereof. Of the
reserved shares, a total of 10,000,000 shares are currently reserved for
issuance in connection with our 2003 Incentive Plan. To the extent such
options or warrants are exercised, the holders of our common stock will
experience further dilution. In addition, in the event that any future
financing should be in the form of, be convertible into or exchangeable for,
equity securities, and upon the exercise of options and warrants, investors may
experience additional dilution.
The
exercise of the outstanding convertible securities will reduce the percentage of
common stock held by our stockholders. Further, the terms on which we could
obtain additional capital during the life of the convertible securities and
warrants may be adversely affected, and it should be expected that the holders
of the convertible securities and warrants would exercise them at a time when we
would be able to obtain equity capital on terms more favorable than those
provided for by such convertible securities. As a result, any issuance of
additional shares of common stock may cause our current stockholders to suffer
significant dilution which may adversely affect the market.
In
addition to the above-referenced shares of common stock which may be issued
without stockholder approval, we have 20,000,000 shares of authorized preferred
stock, the terms of which may be fixed by our Board of Directors. To date, we
have issued 19,000 shares of Series A Convertible Preferred Stock to
shareholders represented by TAG Virgin Islands, Inc. (convertible into 3,800,000
shares of common stock) and 20,000 shares of Series B Convertible Preferred
Stock (convertible into up to 4,000,000 shares of common stock based upon the
lowest contractual conversion price) to an individual investor. While we
presently have no plans to issue any more additional shares of preferred stock,
our Board of Directors has the authority, without stockholder approval, to
create and issue one or more series of such preferred stock and to determine the
voting, dividend and other rights of holders of such preferred stock. The
issuance of any of such series of preferred stock may have an adverse effect on
the holders of common stock.
Shares
eligible for future sale may adversely affect the market.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act of 1933,
as amended, which we refer to herein as the Securities Act, subject to certain
limitations. In general, pursuant to Rule 144, after satisfying a six month
holding period: (i) affiliated stockholder (or stockholders whose shares are
aggregated) may, under certain circumstances, sell within any three month period
a number of securities which does not exceed the greater of 1% of the then
outstanding shares of common stock or the average weekly trading volume of the
class during the four calendar weeks prior to such sale and (ii) non-affiliated
stockholders may sell without such limitations, provided we are current in our
public reporting obligations. Rule 144 also permits the sale of securities by
non-affiliates that have satisfied a one year holding period without any
limitation or restriction. Any substantial sale of our common stock pursuant to
Rule 144 or pursuant to any resale prospectus may have a material adverse effect
on the market price of our securities.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
Company's corporate headquarters are located at 100 Eagle Rock Avenue, East
Hanover, New Jersey 07936, where it operates under an amended lease agreement
expiring December 31, 2015. In addition to minimum rentals, the Company is
liable for its proportionate share of real estate taxes and operating expenses,
as defined. The CSI DeLeeuw division has an office at Suite 1460, Charlotte
Plaza, 201 South College Street, Charlotte, North Carolina 28244. CSI DeLeeuw
leases this space which has a stated expiration date of December 31,
2010. Effective December 31, 2008, CSI’s subsidiary, Deleeuw
Associates, Inc. merged with and into CSI Sub Corp. (DE), a wholly owned
subsidiary of the Company. The Deleeuw Associates, Inc. business is
currently operated by CSI Sub Corp (DE) and is doing business as CSI
DeLeeuw.
22
ITEM 3. LEGAL PROCEEDINGS
From time
to time, the Company is either a defendant or the plaintiff in various claims
and lawsuits. Although there can be no assurances, management believes that the
disposition of such matters will not have a material adverse impact on the
results of operations or financial position of the Company.
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market
Information. The following chart sets forth the closing high and low
sales prices of our common stock for each quarter from January 1, 2008 through
December 31, 2009. Because we voluntarily delisted from AMEX on September 8,
2008, all information after that date reflect high and low bid prices on the
OTCBB.
|
High
|
Low
|
|||||||
|
2009
by Quarter
|
||||||||
|
January
1 - March 31
|
$
|
0.06
|
0.01
|
|||||
|
April
1 - June 30
|
$
|
0.07
|
0.03
|
|||||
|
July
1 - September 30
|
$
|
0.06
|
0.03
|
|||||
|
October
1 - December 31
|
$
|
0.06
|
0.02
|
|||||
|
2008
by Quarter
|
||||||||
|
January
1 - March 31
|
$
|
0.19
|
0.10
|
|||||
|
April
1 - June 30
|
$
|
0.14
|
0.07
|
|||||
|
July
1 - September 30
|
$
|
0.10
|
0.03
|
|||||
|
October
1 - December 31
|
$
|
0.07
|
0.01
|
|||||
On March
22, 2010, the closing price for shares of our common stock, as reported by the
Over-the-Counter Bulletin Board, was $0.07.
No
prediction can be made as to the effect, if any, that future sales of shares of
our common stock or the availability of our common stock for future sale will
have on the market price of our common stock prevailing from time-to-time. The
additional registration of our common stock and the sale of substantial amounts
of our common stock in the public market could adversely affect the prevailing
market price of our common stock.
(b) Record
Holders. As of March 23, 2010, there were 508 registered holders of our
common stock.
(c) Dividends.
We have not paid dividends on our common stock in the past and do not anticipate
doing so in the foreseeable future. We currently intend to retain future
earnings, if any, to fund the development and growth of our business. In
addition, the Loan and Security Agreement with Access Capital requires that we
obtain their consent prior to paying any dividends.
(d) Sales of
Unregistered Securities
During
the period covered by this report we did not issue any other securities that
were not registered under the Securities Act of 1933, as amended, except
previously disclosed in a quarterly report on Form 10-Q or a current report on
Form 8-K.
ITEM
6. SELECTED FINANCIAL DATA
We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
providing the information contained in this item pursuant to Regulation
S-K.
23
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
of our Business
Management’s
Discussion and Analysis contains statements that are forward-looking. These
statements are based on current expectations and assumptions that are subject to
risks and uncertainties. Actual results could differ materially because of
factors discussed in “Risk Factors” and elsewhere in this report. The Company
undertakes no duty to update any forward-looking statement to conform the
statement to actual results or changes in the Company’s
expectations.
Conversion
Services International, Inc. provides professional services to the Global 2000,
as well as mid-market clientele relating to strategic consulting, data
warehousing, business intelligence and data management and, through strategic
partners, the sale of software. The Company’s services based clients are
primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries, although it has clients in other industries as
well. The Company’s clients are primarily located in the northeastern United
States.
The
Company began operations in 1990. Its services were originally focused on
e-business solutions and data warehousing. In the late 1990s, the Company
strategically repositioned itself to capitalize on its data warehousing
expertise in the fast growing business intelligence/data warehousing space. The
Company became a public company via its merger with a wholly owned subsidiary of
LCS Group, Inc., effective January 30, 2004.
The
Company’s core strategy includes capitalizing on the already established
in-house business intelligence/data warehousing (“BI/DW”) technical expertise
and its strategic consulting division. It is anticipated that this will result
in organic growth through the addition of new customers. In addition, this
foundation could be leveraged as the Company may pursue targeted strategic
acquisitions.
The
Company derives a majority of its revenue from professional services
engagements. Its revenue depends on the Company’s ability to generate new
business, in addition to preserving present client engagements. The general
domestic economic conditions in the industries the Company serves, the pace of
technological change, and the business requirements and practices of its clients
and potential clients directly affects its ability to accomplish these goals.
When economic conditions decline, companies generally decrease their technology
budgets and reduce the amount of spending on the type of information technology
(IT) consulting provided by the Company. The Company’s revenue is also impacted
by the rate per hour it is able to charge for its services and by the size and
chargeability, or utilization rate, of its professional workforce. If the
Company is unable to maintain its billing rates or sustain appropriate
utilization rates for its professionals, its overall profitability may decline.
Several large clients have changed their business practices with respect to
consulting services. Such clients now require that we contract with their vendor
management organizations in order to continue to perform services. These
organizations charge fees generally based upon the hourly rates being charged to
the end client. Our revenues and gross margins are being negatively affected by
this practice.
The
Company will continue to focus on a variety of growth initiatives in order to
improve its market share and increase revenue. Moreover, as the Company
endeavors to achieve top line growth, through entry on new approved vendor
lists, penetrating new vertical markets, and expanding its time and material
business, the Company will concentrate its efforts on improving margins and
driving earnings to the bottom line.
In
addition to the conditions described above for growing the Company’s current
business, the Company may continue to grow through acquisitions. One of
the Company’s objectives is to make acquisitions of companies offering services
complementary to the Company’s lines of business. This is expected to accelerate
the Company’s business plan at lower costs than it would generate internally and
also improve its competitive positioning and expand the Company’s offerings in a
larger geographic area. The service industry is very fragmented, with a handful
of large international firms having data warehousing and/or business
intelligence divisions, and hundreds of regional boutiques throughout the United
States. These smaller firms do not have the financial wherewithal to scale
their businesses or compete with the larger players.
The
Company’s most significant costs are personnel expenses, which consist of
consultant fees, benefits and payroll-related expenses.
Years
Ended December 31, 2009 and 2008
The
Company’s revenues are primarily comprised of billing to clients for consulting
hours worked on client projects. Revenues of $24.2 million for the year ended
December 31, 2009 increased by $4.5 million, or 22.5%, compared to revenues of
$19.7 million for the year ended December 31, 2008.
Revenues
for the Company are categorized by strategic consulting, business intelligence
and data warehousing, data management, reimbursable expenses and other. The
chart below reflects revenue by line of business for the years ended December
31, 2009 and 2008.
24
|
For the year ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
$
|
% of total
revenues
|
$
|
% of total
revenues
|
|||||||||||||
|
Strategic
consulting
|
$ | 9,143,320 | 37.8 | % | $ | 5,332,784 | 27.0 | % | ||||||||
|
Business
intelligence and data warehousing
|
11,576,737 | 47.8 | % | 11,076,398 | 56.1 | % | ||||||||||
|
Data
management
|
2,095,983 | 8.7 | % | 2,340,657 | 11.9 | % | ||||||||||
|
Reimbursable
expenses
|
1,184,738 | 4.9 | % | 719,956 | 3.6 | % | ||||||||||
|
Other
|
193,425 | 0.8 | % | 273,791 | 1.4 | % | ||||||||||
| $ | 24,194,203 | 100.0 | % | $ | 19,743,586 | 100.0 | % | |||||||||
Strategic
Consulting
The
strategic consulting line of business includes work related to planning and
assessing both process and technology for clients, performing gap analysis,
making recommendations regarding technology and business process improvements to
assist clients to realize their business goals and maximize their investments in
both people and technology. The Company performs strategic consulting work
through its CSI DeLeeuw division.
Strategic
consulting revenues of $9.1 million, or 37.8% of total revenues, for the year
ended December 31, 2009, increased by $3.8 million, or 10.8% points of total
revenue, as compared to revenues of $5.3 million, or 27.0% of total revenues,
for the comparable prior year period. The $3.8 million increase is primarily due
to a project with PNC Bank that started in April 2009 and contributed
approximately $6.5 million to strategic consulting revenues in 2009. Partially
offsetting this increase was a $1.6 million reduction in revenues from Bank of
America and a total of approximately $1.1 million of reductions from various
other clients relating to projects that were ongoing in both 2009 and 2008,
including NYISO and clients of our former Integrated Strategies division, as
compared to the prior year. The strategic consulting division increased average
headcount by 21% and increased its average bill rate by 46.8% as compared to the
prior year.
Business
Intelligence and Data Warehousing
The
business intelligence line of business includes work performed with various
applications and technologies for gathering, storing, analyzing and providing
clients with access to data in order to allow enterprise users to make better
and faster business decisions. This type of work is primarily invoiced to
clients on a time and materials basis.
The data
warehousing line of business includes work performed for client companies to
provide a consolidated view of high quality enterprise information. CSI provides
services in the data warehouse and data mart design, development and
implementation, proof of concept preparation, implementation of data warehouse
solutions and integration of enterprise information.
Business
intelligence and data warehousing (“BI/DW”) revenues of $11.6 million, or 47.8%
of total revenues, for the year ended December 31, 2009, increased by $0.5
million, but decreased by 8.3% points of total revenues, as compared to BI/DW
revenues of $11.1 million, or 56.1% of total revenues, for the comparable prior
year period. The increase in BI/DW revenues for the year ended December 31, 2009
is primarily due to new 2009 projects which provided approximately $2.6 million
of current year revenue, partially offset by $2.4 million of 2008 projects which
were completed in the prior year. Overall, the Company experienced a 6.1%
increase in billable hours, a 9.8% increase in average headcount, and a 1.9%
decrease in utilization in this line of business during 2009 as compared to the
prior year. The remaining $0.3 million increase in revenues relates to an
increase in the volume of business transacted with ongoing clients in 2009 as
compared to 2008.
Data
Management
The data
management line of business includes such activities as Enterprise Information
Architecture, Metadata Management, Data Quality/Cleansing/Profiling. The Company
performs these activities through its exclusive subcontractor agreement with its
related party, Leading Edge Communications (“LEC”).
Data
management revenues of $2.1 million, or 8.7% of total revenues, for the year
ended December 31, 2009, decreased by $0.2 million, or 3.2% points, as compared
to data management revenues of $2.3 million, or 11.9% of total revenues, for the
comparable prior year period. This decrease in current year revenue is primarily
due to a 1.6% reduction in the number of billable hours in 2009 as compared to
the prior year and a 9.4% reduction in the average hourly bill rate as compared
to the prior year. The number of consultants working in the data management line
of business remained unchanged as compared to the prior year.
25
Cost
of revenue
Cost of
revenue includes payroll and benefit and other direct costs for the Company’s
consultants. Cost of revenue was $17.4 million or 71.7% of total revenues for
the year ended December 31, 2009, increased by $2.6 million, but decreased as a
percent of total revenue by 3.5% points as compared to cost of revenue of $14.8
million, or 75.2% of total revenues, for the comparable prior year
period.
Services
Cost of
services was $14.2 million, or 68.7% of services revenue, for the year ended
December 31, 2009, which increased by $2.4 million, but decreased by 3.4%
points, as compared to cost of services of $11.8 million, or 72.1% of services
revenue, for the year ended December 31, 2008. This increase in
cost of services is primarily due to a 26.3% increase in services revenue,
partially offset by a $0.2 million reduction in stock compensation expense in
the current period, as compared to the prior year. The average number of
consultants on billing increased 14.0% in the current year as compared to the
prior year. The Company’s average billable consultant headcount in this services
category was 98 and 86 for the years ended December 31, 2009 and 2008,
respectively.
Related
Party Services
Cost of
related party services was $1.8 million, or 88.2% of related party services
revenue, for the year ended December 31, 2009, representing a decrease of $0.4
million and 3.7% points of related party services revenue, as compared to $2.2
million, or 91.9%, of related party services revenue for the year ended December
31, 2008. Cost of
related party services decreased by $0.4 million in the current year primarily
due to a $0.3 million reduction due to reduced revenues in the current year as
compared to the prior period and $0.1 million of various other cost reductions.
Overall, the average number of billable consultants utilized by LEC was
unchanged at 16 for each of the periods ended December 31, 2009 and 2008,
respectively.
Gross
profit
Gross
profit of $6.8 million or 28.3% of total revenue for the year ended December 31,
2009, increased by $1.9 million and increased as a percentage of revenue by 3.5%
points as compared to gross profit of $4.9 million or 24.8% of total revenues
for the comparable prior year period.
Services
Gross
profit from services was $6.5 million, or 31.3% of services revenue, for the
year ended December 31, 2009, increased by $1.9 million, and increased as a
percentage of services revenue by 3.4% points, as compared to $4.6 million, or
27.9% of services revenue, for the year ended December 31, 2008. These gross
profit changes as compared to the prior year have been outlined in the revenue
and cost of revenue analysis.
Related
Party Services
Gross
profit from related party services was $0.2 million, or 11.8% of related party
services revenue, for the year ended December 31, 2009, remaining unchanged, but
increasing by 3.7% points, as compared to gross profit from related party
services of $0.2 million, or 8.1% of related party services revenue, for the
year ended December 31, 2008. These gross profit changes as compared to the
prior year have been outlined in the revenue and cost of revenue
analysis.
Selling
and marketing
Selling
and marketing expenses include payroll, employee benefits and other
headcount-related costs associated with sales and marketing personnel and
advertising, promotions, tradeshows, seminars and other programs. Selling
and marketing expenses of $3.0 million, or 12.5% of revenue for the year ended
December 31, 2009, decreased by $0.3 million, or 4.0% points of total revenue,
as compared to $3.3 million, or 16.5% of total revenue, for the year ended
December 31, 2008. The $0.3 million decrease in selling and marketing expense is
primarily due to a $0.2 million decrease in payroll and payroll related expenses
and a $0.1 million reduction in professional fees as compared to the prior year.
The 4.0% point decrease in selling and marketing expense as a percent of total
revenue is due to the $4.5 million increase in revenue as compared to the prior
year.
General
and administrative
General
and administrative costs include payroll, employee benefits and other
headcount-related costs associated with the finance, legal, facilities, certain
human resources and other administrative headcount, and legal and other
professional and administrative fees. General and administrative costs of
$2.8 million or 11.4% of revenue for the year ended December 31, 2009, decreased
by $0.8 million, or 6.8% points of total revenues, as compared to $3.6 million,
or 18.2% of total revenues for the year ended December 31, 2008. The $0.8
million decrease in general and administrative expense is primarily due to a
$0.2 million reduction in payroll and payroll related expense, a $0.3 million
reduction in bad debt expense, and a $0.1 million reduction in legal fees.
Additionally, there was a $0.2 million reduction in various expenses including
travel, utilities, bank fees, stock exchange listing fees, SEC filing expenses,
business taxes and rent expense.
26
Goodwill
and intangibles impairment
During
the year ended December 31, 2008, the Company learned that the remaining
Integrated Strategies (“ISI”) consultants were to be ending their projects.
Additionally, the strategic consulting revenues related to the DeLeeuw
Associates business declined dramatically in 2008 due to the completion of the
ING project in December 2007, fewer new projects in 2008, and a reduced forecast
due to the general economic decline in the financial services sector. The Scosys
business was restructured during 2008 in an effort to reduce Company expenses.
William McKnight’s employment with the Company was terminated during 2008. The
accounting standards instruct the Company to test intangible assets
for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. As a result of the
above, the remaining $0.1 million of ISI goodwill was determined to be impaired,
the entire $0.4 million of Scosys goodwill was determined to be impaired, the
$1.4 million of McKnight goodwill was determined to be impaired, and the $5.0
million of DeLeeuw Associates goodwill and intangible assets was determined to
be impaired during 2008. In total, $6.9 million of goodwill and intangible
assets were impaired during 2008 and therefore written off.
There
were no impairments of goodwill or intangible assets recorded during the year
ended December 31, 2009.
Depreciation
and amortization
Depreciation
expense is recorded on the Company’s property and equipment, which is generally
depreciated over a period between three to seven years. Amortization of
leasehold improvements was taken over the shorter of the estimated useful life
of the asset or the remaining term of the lease. The Company amortizes deferred
financing costs utilizing the effective interest method over the term of the
related debt instrument. Acquired software is amortized on a straight-line basis
over an estimated useful life of three years. Acquired contracts are amortized
over a period of time that approximates the estimated life of the contracts,
based upon the estimated annual cash flows obtained from those contracts,
generally five to six years. Depreciation and amortization expenses were
$0.1 million for the year ended December 31, 2009, decreasing by $0.2 million as
compared to $0.3 million for the year ended December 31, 2008. The $0.2 million
decrease in depreciation and amortization expense for the year ended December
31, 2009 is primarily due to equipment becoming fully depreciated in 2009 and
intangibles that became fully amortized during 2008 required a partial year of
amortization in 2008, but none in 2009.
Other
income (expense)
The loss
on extinguishment of debt of $0.7 million in 2008 related to accounting for the
conversion of notes payable to shareholders represented by TAG Virgin Islands
into Company common stock. No loss on extinguishment was recorded in
2009.
Equity in
(losses) earnings from investments was ($103,298) in 2009 as compared to $21,045
in 2008. During 2009, the Company performed an impairment review with respect to
its investment in Leading Edge Technologies (“LEC”) and, as a result, recorded
an impairment charge for the recorded value of its investment in
LEC.
Interest
expense, net of $0.8 million for the year ended December 31, 2009 decreased by
$0.3 million, or 26.3%, from interest expense, net of $1.1 million for the year
ended December 31, 2008. The $0.3 million decrease in interest expense is
primarily due to a reduction of $0.1 million for charges related to the relative
fair value of warrants issued, a $0.2 million reduction in amortization of debt
discounts, and a reduction of $0.2 million related to accretion of warrants on
notes issued in 2008. These interest expense reductions were partially offset by
$0.2 million of increased interest expense related to the Access Capital line of
credit in 2009 as compared to the prior year. This interest increased due to
having the line in place for the entire year in 2009 as compared to nine months
in 2008 and the interest rate was raised to 18% subsequent to the Company being
in default of the loan covenant. Additionally, the average line of credit
balance was approximately $2.9 million in 2009 as compared to approximately $1.7
million in 2008, so interest was being paid on a larger account balance in the
current period.
Income
Taxes
The
Company evaluates the amount of deferred tax assets that are recorded against
expected taxable income over its forecasting cycle which is currently two years.
As a result of this evaluation, the Company has recorded a valuation
allowance of $12.5 million and $12.6 million during the years ended December 31,
2009 and 2008, respectively. This allowance was recorded because, based
on the weight of available information, it is more likely than not that some, or
all, of the deferred tax asset may not be realized.
27
At
December 31, 2009, the Company had net operating loss carryfowards for Federal
and State income tax purposes of approximately $12.1 million, which begin to
expire in 2023. The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carryforwards if there has been
an ownership change, as defined by the tax law. An ownership change as described
in Section 382 of the Internal Revenue Code, may limit the Company’s ability to
utilize its net operating loss and tax credit carryforwards on a yearly basis.
The Company has issued a substantial number of shares of common stock during
2007 and 2008, which may place limitations on the current net loss
carryforwards.
LIQUIDITY
AND CAPITAL RESOURCES
Although
the Company reported net income for the year ended December 31, 2009, it has
incurred net losses for the years ended December 31, 2004 through 2008, negative
cash flows from operating activities for the years ended December 31, 2004
through 2008, and had an accumulated deficit of $71.6 million at December 31,
2009. The Company has relied upon cash from its financing activities to fund its
ongoing operations as it has not been able to generate sufficient cash from its
operating activities in the past, and there is no assurance that it will be able
to do so in the future. Due to this history of losses and operating cash
consumption, we cannot predict for how long we will remain profitable or if the
Company’s business will continue to improve. These factors raise substantial
doubt as to our ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As
of December 31, 2009, the Company had a cash balance of approximately $0.1
million, compared to $0.3 million at December 31, 2008, and a working capital
deficiency of $0.5 million.
The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments. During 2008, the Company
issued 10% Convertible Unsecured Notes and warrants to purchase Company common
stock in exchange for $450,000 cash. These Notes were repaid in full during
fiscal 2009. Additionally, during 2008 the Company and TAG Virgin Islands, Inc.
executed a Stock Purchase Agreement whereby an investor represented by TAG
Virgin Islands, Inc. purchased 2,500,000 shares of Company common stock for a
total investment of $200,000.
The
Company executed a three-year revolving line of credit agreement in March 2008
with Access Capital, Inc. (“Access Capital” or “Access”) which matures on March
30, 2011. As of December 31, 2009, the Company was in default of the Loan and
Security Agreement. As a result of the default, Access has increased the
interest rate payable on borrowings under the line of credit to 18% per annum,
has notified the Company’s clients of their security interest in the amounts due
to the Company, and has provided instruction that payments are to be made
directly to Access Capital. Effective in January 2010, Access Capital has agreed
to reduce the interest rate payable on borrowings under the Loan and Security
Agreement from 18% to 12% per annum. Refer to footnote 5 of the Notes to
Consolidated Financial Statements for further discussion on the Line of
Credit.
On June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock. This note was replaced in December 2008 with
a note that reflected the $1,050,000 balance outstanding at that time. The
maturity date remained June 6, 2009. $550,000 was repaid in cash during fiscal
2009. The maturity on the remaining $500,000 balance which is outstanding at
December 31, 2009, has been extended to April 30, 2012. The December 2008 note
was replaced in March 2010. A $500,000 Unsecured Convertible Note was issued in
March 2010 which bears interest at 7% and matures on April 30,
2012.
In
February 2006, the Company issued Series A Preferred Stock, in the amount of
$1,900,000, which matures on February 6, 2011. The Company does not currently
have the funds to repay this debt upon maturity. Refer to footnote 9 of the
Notes to Consolidated Financial Statements for further discussion on the
Preferred Stock issuance.
The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. Our
primary sources of liquidity are cash flows from operations, borrowings under
our revolving credit facility, and various short and long term financings. We
plan to continue to strive to increase revenues and to control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
28
The
Company’s working capital deficit of $0.5 million as of December 31, 2009
decreased by $0.8 million as compared to the Company’s working capital deficit
of $1.3 million as
of December 31, 2008. The Company’s working capital position has improved during
the current year primarily due to the repayment of $0.9 million of short-term
notes and $0.5 million of short-term notes were reclassified to long-term debt.
Additionally, accounts receivable increased by $0.4 million due to increased
revenues in the current period. Partially offsetting this improvement, was an
increased liability under the Company’s line of credit of $0.2 million, deferred
revenue increased by $0.1 million, and accounts payable and accrued liabilities
increased by $0.5 million. The Company’s cash balance also declined by $0.2
million.
Cash
provided by operating activities during the year ended December 31, 2009 was
$0.6 million, an increase of $2.5 million from the cash used in operating
activities of $1.9 million for the year ended December 31, 2008. Cash provided
by operating activities during the year ended December 31, 2009 primarily
relates to a $0.4 million “cash-based” income from operating activities, as
determined by adding the non-cash charges incurred of $0.4 million to the
reported net income of $31,956 for the year ended December 31, 2009 and $0.2
million of cash provided by changes in operating assets and liabilities. The
changes in operating assets and liabilities includes a $0.6 million increase in
accounts payable and accrued expenses and deferred revenue, partially offset by
a $0.4 million increase in accounts receivable and prepaid expenses as compared
to the prior year.
Cash used
in investing activities during 2009 of $15,466 relates to the purchase of
computer equipment for the Company’s employees. Cash used in investing
activities of $32,194 during 2008 also relates to the purchase of computer
equipment for the Company’s employees.
Cash used
in financing activities was $0.8 million during the year ended December 31,
2009. During 2009, $1.0 million of short-term debt was repaid. Partially
offsetting this use was $0.2 million of additional advances received under the
Company’s revolving line of credit.
While the
Company reported net income in the amount of $31,956 for the year ended December
31, 2009, it has experienced significant losses from 2004 through 2008. To that
extent, the Company had experienced negative cash flow during these years which
has perpetuated the Company’s liquidity issues. To address the liquidity issue,
the Company entered into various debt and equity instruments between August 2004
and December 2008 and, as of December 31, 2009 had approximately $5.4 million of
liabilities outstanding in addition to an aggregate of $3.9 million of Series A
and Series B Convertible Preferred Stock which was issued in 2006.
Financing
transactions effectuated in 2008, and through March 30, 2010, are as
follows:
TAG
Virgin Islands, Inc.
In March
2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
converted $600,000 of debt due to them under an Unsecured Convertible Line of
Credit Note dated June 7, 2004 into Company Common Stock. The Company issued
4,615,385 shares of Common Stock to the investors. The number of shares of
common stock acquired was based on the $0.13 closing price of the Company’s
stock on the American Stock Exchange on the date of conversion. Warrants to
purchase 4,615,385 shares of Company Common Stock were provided to the investors
as an inducement to convert. The warrants are exercisable at a price of $0.143
per share, and are exercisable for five years.
As of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.
On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes were due on December 27, 2008 and were convertible into 2,500,000 shares
of common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable at a
price of $0.088 per share (subject to adjustment), and are exercisable for a
period of five years. The maturity dates of the Notes had been extended to
October 31, 2009. These Notes were repaid in September 2009.
On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. This note was due on March 1, 2009 and was convertible into 2,500,000
shares of common stock at the option of the holders. The investors were also
granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. In March 2009, the maturity date of this
Note was extended to September 1, 2009. This Note was repaid in September
2009.
On
October 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$50,000. The maturity date of this Note was extended to October 31, 2009 and was
convertible into 1,000,000 shares of common stock at the option of the holders.
The investors were also granted warrants to purchase 1,000,000 shares of Company
common stock, exercisable at a price of $0.055 per share (subject to
adjustment), and are exercisable for a period of five years. This Note was
repaid in October 2009.
29
Access
Capital, Inc.
On March
31, 2008, the Company executed a revolving line of credit agreement with Access
Capital, Inc. The Access Capital line of credit provides for borrowing up to a
maximum of $3,500,000, based upon collateral availability, a 90% advance rate
against eligible accounts receivable, has a three year term, and an interest
rate of prime (which was 3.25% as of December 31, 2009) plus 2.75%. The Company
must comply with a minimum working capital covenant which requires the Company
to maintain minimum monthly working capital of $400,000. Additionally, during
the first year of the three year term the Company must maintain an average
minimum monthly borrowing of $2,000,000 which increases to $2,250,000 in the
second year and to $2,500,000 in the third year. The Company must also pay an
annual facility fee equal to 1% of the maximum available under the facility and
a $1,750 per month collateral management fee. As of December 31, 2008 and 2009
and as of March 30, 2010, the Company was in default of the Loan and Security
Agreement. As a result of the default, Access had increased the interest rate
payable on borrowings under the line of credit to 18% per annum, had notified
the Company’s clients of their security interest in the amounts due to the
Company, and had provided instruction that payments are to be made directly to
Access Capital.
As of
December 31, 2009, approximately $2.5 million was outstanding under the
revolving line of credit. The interest rate on the revolving line was 18.0% as
of December 31, 2009. In January 2010, Access Capital agreed to reduce the
interest rate on the revolving line of credit to 12%. The interest rate remained
at 12% as of March 30, 2010.
There are
currently no material commitments for capital expenditures.
As of
December 31, 2009 and 2008, the Company had accounts receivable due from LEC of
approximately $0.3 million and $0.3 million, respectively. There are no known
collections problems with LEC.
For the
years ended December 31, 2009 and 2008, we invoiced LEC $2.1 million and $2.3
million, respectively, for the services of consultants subcontracted to LEC by
us. The majority of LEC’s billing is derived from Fortune 100 clients. The
collection process is slow, as these clients require separate approval on their
own internal systems, which extends the payment cycle.
As of
December 31, 2009, Mr. Peipert’s outstanding loan balance to the Company was
approximately $0.1 million. The unsecured loan by Mr. Peipert accrues interest
at a simple rate of 8% per annum, and the loan matured on April 30,
2007.
The
following is a summary of the debt instruments outstanding as of March 23,
2010:
|
Lender
|
Type of facility
|
Outstanding as of
March 23, 2010 (not
including interest) (all
numbers approximate)
|
Remaining
Availability (if
applicable)
|
|||||||
|
Access
Capital, Inc.
|
Line
of Credit
|
$ | 2,284,215 | $ | 579,329 | |||||
|
TAG
Virgin Islands, Inc. investors
|
Long-term
debt
|
$ | 500,000 | $ | 0 | |||||
|
TAG
Virgin Islands, Inc. investors
|
Series
A and B Convertible Preferred Stock
|
$ | 3,900,000 | $ | 0 | |||||
|
Glenn
Peipert
|
Related
party note payable
|
$ | 93,225 | $ | 0 | |||||
|
TOTAL
|
$ | 6,777,440 | $ | 579,329 | ||||||
The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. Our
primary sources of liquidity are cash flows from operations, borrowings under
our revolving credit facility, and various short and long term financings. We
plan to continue to strive to increase revenues and to control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
30
Off-balance
sheet arrangements
The
Company does not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Revenue
recognition
Our
revenue recognition policy is significant because revenues are a key component
of our results from operations. In addition, revenue recognition determines the
timing of certain expenses, such as incentive compensation. We follow very
specific and detailed guidelines in measuring revenue; however, certain
judgments and estimates affect the application of the revenue policy. Revenue
results are difficult to predict and any shortfall in revenues or delay in
recognizing revenues could cause operating results to vary significantly from
quarter to quarter and could result in future operating losses or reduced net
income.
Services
Revenues
are principally derived from consulting and professional services and are
recognized as earned when the services are rendered, evidence of an arrangement
exists, the fee is fixed or determinable and collection is probable. For
projects charged on a time and materials basis, revenue is recognized based on
the number of hours worked by consultants at an agreed-upon rate per hour. For
large services projects where costs to complete the contract could reasonably be
estimated, the Company undertakes projects on a fixed-fee basis and recognizes
revenues on the percentage of completion method of accounting based on the
evaluation of actual costs incurred to date compared to total estimated costs.
Revenues recognized in excess of billings are recorded as costs in excess of
billings. Billings in excess of revenues recognized are recorded as deferred
revenues until revenue recognition criteria are met. Reimbursements, including
those relating to travel and other out-of-pocket expenses, are included in
revenues, and an equivalent amount of reimbursable expenses are included in cost
of services.
Business
Combinations
We are
required to allocate the purchase price of acquired companies to the tangible
and intangible assets acquired and liabilities assumed based on their estimated
fair values. Such a valuation requires us to make significant estimates and
assumptions, especially with respect to intangible assets. Critical estimates in
valuing certain intangible assets include, but are not limited to, future
expected cash flows from customer contracts, customer lists, distribution
agreements and acquired developed technologies, and estimating cash flows from
projects when completed and discount rates. Our estimates of fair value are
based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from
estimates. These estimates may change as additional information becomes
available regarding the assets acquired and liabilities assumed. Additionally,
in accordance with generally accepted accounting principles, the Company values
an acquisition based upon the market price of its common stock for a reasonable
period before and after the date the terms of the acquisition are agreed upon
and announced.
Impairment
of Goodwill, Intangible Assets and Other Long-Lived Assets
We
evaluate our identifiable goodwill, intangible assets, and other long-lived
assets for impairment on an annual basis and whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. Future impairment evaluations could result in impairment charges, which
would result in an expense in the period of impairment and a reduction in the
carrying value of these assets.
Stock-based
Compensation
Accounting
for stock-based compensation primarily relates to the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. The standards require a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
is recognized over the period during which an employee is required to provide
service in exchange for the award. On March 29, 2005, the SEC issued Staff
Accounting Bulletin No. 107 (“SAB No. 107”), which provides the
Staff’s views regarding interactions between generally accepted accounting
principles and certain SEC rules and regulations and provides interpretations of
the valuation of share-based payments for public companies.
31
Deferred
Income Taxes
Determining
the consolidated provision for income tax expense, income tax liabilities and
deferred tax assets and liabilities involves judgment. We record a
valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. We have considered
future taxable income and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. A valuation allowance is
maintained by the Company due to the impact of the current years net operating
loss (NOL). In the event that we determine that we would not be able to realize
all or part of our net deferred tax assets, an adjustment to the deferred tax
assets would be charged to net income in the period such determination is made.
Likewise, if we later determine that it is more likely than not that the net
deferred tax assets would be realized, then the previously provided valuation
allowance would be reversed. Our current valuation allowance relates
predominately to benefits derived from the utilization of our
NOL’s.
New
Accounting Standards
In July
2009, the FASB”s Accounting Standards Codification™ (“Codification” or “ASC”)
became the single source of authoritative U.S. GAAP (other than rules and
interpretive releases of the SEC). The Codification is topically based with
topics organized by ASC number and updated ASUs. ASUs replace accounting
guidance that was historically issued as Statements of Financial Accounting
Standards (“SFAS”), FASB Interpretations (“FIN”), FASB Staff Positions (“FSP”),
Emerging Issue Task Force (“EITF”) Abstracts and other types of accounting
standards. The Codification became effective September 30, 2009 for the
Company, and disclosures within this Annual Report on Form 10-K have been
updated to reflect the change.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6,
Improving Disclosures About
Fair Value Measurements, that amends existing disclosure requirements
under ASC 820 by adding required disclosures about items transferring into and
out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures
about purchase, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value
disclosures about the level of disaggregation. This pronouncement is
related to disclosure only and it is not anticipated to have a material impact
on the Company’s consolidated financial statements.
In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements which amends the criteria for when to evaluate individual
delivered items in a multiple deliverable arrangement and how to allocate the
consideration received. This ASU is effective for fiscal periods beginning on or
after June 15, 2010, which is January 1, 2011 for the Company.
This ASU is effective prospectively for revenue arrangements entered into or
materially modified after January 1, 2011. The Company is
currently evaluating the impact that this new accounting guidance will have on
its consolidated financial statements.
In
August 2009, the FASB issued ASU 2009-05 Measuring Liabilities at Fair
Value to clarify how entities should estimate the fair value of
liabilities under ASC Topic 820. This ASU clarifies the fair value
measurements for a liability in an active market and the valuation techniques in
the absence of a Level 1 measurement. The Company has adopted this guidance in
its consolidated financial statements for the year ended December 31, 2009.
The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In
May 2009, the FASB issued guidance now included in ASC Topic 855 Subsequent Events. This
guidance establishes general standards of accounting for and disclosures of
events that occur after the balance sheet date but before the consolidated
financial statements are issued or are available to be issued. Among other
items, the guidance requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The Company has
adopted this guidance in its consolidated financial statements for the year
ended December 31, 2009.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
providing the information contained in this item pursuant to Regulation
S-K.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference
is made to pages 47 through 65 comprising a portion of this
Annual Report on Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
32
.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of controls and procedures
As of the
end of the period covered by this Annual Report, the Company’s management, with
the participation of the Company’s Chief Executive Officer and Chief Financial
Officer (“the Certifying Officers”), conducted evaluations of the Company’s
disclosure controls and procedures. As defined under Sections 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the term “disclosure controls and procedures” means controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms. Disclosure controls and
procedures include without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including the Certifying Officers, to allow timely
decisions regarding required disclosures. Based on this evaluation, the
Certifying Officers have concluded that the Company’s disclosure controls and
procedures were not effective to ensure that material information is recorded,
processed, summarized and reported by management of the Company on a timely
basis in order to comply with the Company’s disclosure obligations under the
Exchange Act and the rules and regulations promulgated thereunder. The Chief
Executive Officer’s and Chief Financial Officer’s conclusion regarding the
Company’s disclosure controls and procedures is based solely on management’s
conclusion that the Company’s internal control over financial reporting
continues to be ineffective.
Management’s
Report on Internal Controls Over Financial Reporting
Our Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”).
Internal
control over financial reporting is promulgated under the Exchange Act as a
process designed by, or under the supervision of, our CEO and CFO and effected
by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:
|
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or disposition of our assets that could have a
material effect on the financial
statements.
|
Readers
are cautioned that internal control over financial reporting, no matter how well
designed, has inherent limitations and may not prevent or detect misstatements.
Therefore, even effective internal control over financial reporting can only
provide reasonable assurance with respect to the financial statement preparation
and presentation.
Our
management, under the supervision and with the participation of our CEO and CFO,
has evaluated the effectiveness of our disclosure controls and procedures and
internal controls over financial reporting as defined in Exchange Act Rules
13a-15(e) and (f) and 15d-15(e) and (f) as of the end of the period covered by
this Report based upon the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on such evaluation, our management has made an assessment that our
internal control over financial reporting is not effective as of December 31,
2009.
There is
a lack of segregation of duties at the Company due to the small number of
employees dealing with general administrative and financial matters and general
controls over information technology security and user access. This constitutes
a weakness in financial reporting. Furthermore, the Company’s Chief Financial
Officer is the only person with an appropriate level of accounting knowledge,
experience and training in the selection, application and implementation of
generally accepted accounting principles as it relates to complex transactions
and financial reporting requirements. Management will continue to evaluate the
segregation of duties issues considering the cost involved to remediate
them.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
33
Changes
in internal control over financial reporting
No
significant changes were made in our internal control over financial reporting
during the Company’s fourth quarter of 2009 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not
applicable.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The
following table sets forth the names and ages of our current directors and
executive officers, the principal offices and positions with us held by each
person and the date such person became a director or executive officer. Our
Board of Directors elects our executive officers annually. Each year the
stockholders elect the members of our Board of Directors.
Our
directors and executive officers are as follows:
|
Name
|
Year
First Elected
as Director
or Officer
|
Age
|
Positions Held
|
|||
|
Lori
Cohen
|
2009
|
52
|
Chief
Executive Officer and Director
|
|||
|
Scott
Newman
|
2004
|
50
|
Chief
Strategy Officer and Chairman
|
|||
|
William
Hendry
|
2006
|
49
|
Vice
President, Chief Financial Officer, Secretary and
Treasurer
|
|||
|
Bryan
Carey
|
2007
|
52
|
Senior
Vice President - Strategic Consulting and Managing Director, CSI DeLeeuw
division
|
|||
|
Glenn
Peipert
|
2004
|
49
|
Director
|
|||
|
Lawrence
K. Reisman*
|
2004
|
51
|
Director
|
|||
|
Thomas
Pear**
|
2006
|
57
|
Director
|
* Chair
of the Audit Committee, and member of the Compensation and Stock Option
Committee and the Nominating and Corporate Governance Committee.
** Chair
of the Compensation and Stock Option Committee, and member of the Audit
Committee and the Nominating and Corporate Governance Committee.
LORI COHEN, has been our Chief
Executive Officer since April 2009. Prior to that, she has
been Vice President of Technology at the Company for over 13 years. Ms.
Cohen has been a hands-on strategist and project manager with more than 25 years
of experience in Architecture, Data Migrations, Data Modeling, Design, QA and
Development of a variety of Information and Data warehouse systems. In addition
Ms. Cohen has significant industry expertise in both financial services as well
as pharmaceutical. Ms. Cohen provided subject matter expertise as
well technical expertise to our global 2000 clients and served on the company's
technical advisory committee (TAC). Her leadership skills and
strengths have positioned her as the lead strategist and engagement manager on
many of CSI’s high-profile engagements. She has been instrumental in developing
the best practices for information management development currently in use at
CSI. Cohen holds a bachelor’s degree in computer science from S.U.N.Y.
Oswego.
34
SCOTT NEWMAN has been our
Chief Strategy Officer since April 2009 and Chairman since January
2004. From January 2004 to April 2009, he served as our President and
Chief Executive Officer. Mr. Newman founded the former Conversion Services
International, Inc. in 1990 (before its merger with and into LCS Group, Inc. in
2004). He has over twenty years of experience providing technology solutions to
major companies internationally. Mr. Newman has direct experience in strategic
planning, analysis, design, testing and implementation of complex big-data
solutions. He possesses a wide range of software and hardware
architecture/discipline experience, including, client/server, data discovery,
distributed systems, data warehousing, mainframe, scaleable solutions and
e-business. Mr. Newman has been the architect and lead designer of several
commercial software products used by Chase, Citibank, Merrill Lynch and Jaguar
Cars. Mr. Newman advises and reviews data warehousing and business intelligence
strategy on behalf of our Global 2000 clients, including AT&T Capital,
Jaguar Cars, Cytec and Chase. Mr. Newman is a member of the Young Presidents
Organization, a leadership organization that promotes the exchange of ideas,
pursuit of learning and sharing strategies to achieve personal and professional
growth and success. Mr. Newman received his B.S. from Brooklyn College in
1980.
WILLIAM HENDRY has been our
Vice President, Chief Financial Officer and Treasurer since October 2006. He was
appointed Secretary of the Company in August 2007. Mr. Hendry previously served
as the Company’s Controller from 2004-2006. Prior to joining the Company, Mr.
Hendry was controller of Scientific Games Online Entertainment Systems, a
developer, installer and operator of online, instant and video lottery systems,
from 2002-2004. From 2000-2002, Mr. Hendry was a consultant to Cipolla Sziklay
Zak & Co. and Pharmacia. Prior to this, Mr. Hendry served as the corporate
controller of AlphaNet Solutions, a publicly-held information technology
professional services company, as the corporate controller of Biosource
International, a publicly-held international manufacturer of technology
products, and as vice president - finance of Quarterdeck, a publicly-held
publisher of utility and software applications. Mr. Hendry began his career at
KPMG LLP. Mr. Hendry has an M.B.A. in finance and a B.S. in accounting from
Fairleigh Dickinson University, is a certified public accountant in New Jersey,
and is a member of the American Institute of Certified Public Accountants, the
New Jersey Society of Certified Public Accountants, and the Financial Executives
Institute.
BRYAN CAREY has been our
Senior Vice President - Strategic Consulting, and Managing Director of our CSI
DeLeeuw division (formerly CSI’s wholly owned subsidiary DeLeeuw Associates,
Inc.) since February 2007. Prior to joining DeLeeuw Associates in 2000 as a
senior vice president of business development, Carey spent nearly 20 years as an
executive in project and change management in the banking industry, including
Bank of America. Mr. Carey was promoted to executive vice president of DeLeeuw
Associates in 2003, where he was responsible for major account relationships,
project oversight and business development. Mr. Carey built DeLeeuw Associates’s
Lean and Six Sigma practice providing the leadership, consulting, training and
discipline to grow the business from a start-up to a successful, thriving
business. Most recently, Mr. Carey has led Lean Six Sigma roll-out initiatives
at NY Independent System Operators, Bank of New York, Cendant Corporation and
JPMorgan Chase. Mr. Carey has spoken at numerous Six Sigma events, as well as
authored a number of articles on change and project management utilizing Lean
and Six Sigma. Mr. Carey received his B.S in Philosophy from Notre Dame in 1980
and received his M.B.A. in finance from the University of South Carolina in
1983.
GLENN PEIPERT has been a
Director since January 2004, and was Executive Vice President and Chief
Operating Officer from January 2004 to January 2010 and held those same
positions with the former Conversion Services International, Inc. since its
inception in 1990. Mr. Peipert has over two decades of experience consulting to
major organizations about leveraging technology to enable strategic change. He
has advised clients representing a broad cross-section of rapid growth
industries worldwide. Mr. Peipert has hands on experience with the leading data
warehousing products. His skills include architecture design, development and
project management. He routinely participates in architecture reviews and
recommendations for our Global 2000 clients. Mr. Peipert has managed major
technology initiatives at Chase, Tiffany, Morgan Stanley, Cytec and the United
States Tennis Association. He speaks nationally on applying data warehousing
technologies to enhance business effectiveness and has authored multiple white
papers regarding business intelligence. Mr. Peipert is a member of the Institute
of Management Consultants, as well as TEC International, a leadership
organization whose mission is to increase the effectiveness and enhance the
lives of chief executives and those they influence. Mr. Peipert received his
B.S. from Brooklyn College in 1982.
LAWRENCE K. REISMAN has been a
Director of our company since February 2004, is Chairman of the Board’s Audit
Committee, and a member of the Compensation and Stock Option Committee and the
Nominating and Corporate Governance Committee. Mr. Reisman is a Certified Public
Accountant who has been the principal of his own firm, The Accounting Offices of
L.K. Reisman, since 1986. Prior to forming his company, Mr. Reisman was a tax
manager at Coopers & Lybrand and Peat Marwick Mitchell. He routinely
provides accounting services to small and medium-sized companies, which services
include auditing, review and compilation of financial statements, corporate,
partnership and individual taxation, designing accounting systems and management
consulting services. Mr. Reisman received his B.S. and M.B.A. in Finance from
St. John’s University in 1981 and 1985, respectively.
THOMAS PEAR has been a
Director of our company since August 2006, is Chairman of the Board’s
Compensation and Stock Option Committee, and a member of the Audit Committee and
the Nominating and Corporate Governance Committee. Presently he is a
principal in Saw Mill Sports Management and a management
consultant. From 1993 to 2006, Mr. Pear served as chief
financial officer of The Atlantic Club, and also served as its president
from 2002 to 2006. Prior to this, Mr. Pear served as vice president
and general manager of DM Engineering, vice president and chief financial
officer of Tennis Equities, and staff accountant at Malkin, Studley and Ramey
CPA, PC. Mr. Pear received his B.S. in Accounting from Nichols College in
1974.
35
Code
of Conduct and Ethics
Our Board
of Directors has adopted a Code of Conduct and Ethics which is applicable to all
of our directors, officers, employees, agents and representatives, including our
principal executive officer and principal financial officer, principal
accounting officer or controller, or other persons performing similar functions.
We have made available on our website copies of our Code of Conduct and Ethics
and charters for the committees of our Board and other information that may be
of interest to investors.
Director
Independence
The Board
has reviewed each of the directors’ relationships with the Company in
conjunction with Section 121(A) of the listing standards of the American Stock
Exchange and has affirmatively determined that two of our directors, Lawrence K.
Reisman and Thomas Pear are independent of management and free of any
relationship that would interfere with the independent judgment as members of
the Board of Directors or any committee thereof.
Committees
of the Board of Directors
The Board
of Directors has established three standing committees: (1) the Audit Committee,
(2) the Compensation and Stock Option Committee and (3) the Nominating and
Corporate Governance Committee. Each committee operates under a charter that has
been approved by the Board. Copies of the charters of the Audit Committee, the
Compensation and Stock Option Committee and the Nominating and Corporate
Governance Committee are posted on our website. Mr. Reisman and Mr. Pear are
members of each of such committees.
Audit
Committee
The Audit
Committee was formed in April 2005. The Audit Committee met 4 times in fiscal
year 2009. A quorum of the members of the Audit Committee was present, either in
person or telephonically at each meeting. The Audit Committee is responsible for
matters relating to financial reporting, internal controls, risk management and
compliance. These responsibilities include appointing, overseeing, evaluating
and approving the fees of our independent auditors, reviewing financial
information which is included in our Annual Report on Form 10-K, discussions
with management and the independent auditors regarding the results of the annual
audit and our quarterly financial statements, reviewing with management our
system of internal controls and financial reporting process and monitoring our
compliance program and system.
The Audit
Committee operates pursuant to a written charter, which sets forth the functions
and responsibilities of this committee. A copy of the charter can be viewed on
our website. All members of this committee are independent directors under the
SEC rules. The Board of Directors has determined that Lawrence K. Reisman, the
committee’s chairman, meets the SEC criteria of an “audit committee financial
expert”, as defined in Item 401(h) of Regulation S-K.
Compensation
and Stock Option Committee
The
Compensation Committee and the Stock Option Committee merged in March 2007. The
Committee met 3 times in fiscal year 2009 and a quorum of the members of the
Compensation and Stock Option Committee was present, either in person or
telephonically, at the meetings. Additionally, the Committee acted once by
written consent during 2009. The Compensation and Stock Option Committee is
responsible for matters relating to the development, attraction and retention of
the Company’s management and for matters relating to the Company’s compensation
and benefit programs. As part of its responsibilities, this committee evaluates
the performance and determines the compensation of the Company’s Chief Executive
Officer and approves the compensation of our senior officers, as well as to fix
and determine awards to employees of stock options, restricted stock and other
types of stock-based awards.
The
Compensation and Stock Option Committee operates under a written charter that
sets forth the functions and responsibilities of this committee. A copy of the
charter can be viewed on our website. Pursuant to its charter, the Compensation
and Stock Option Committee must be comprised of at least two (2) Directors who,
in the opinion of the Board of Directors, must meet the definition of
“independent director” within the rules and regulations of the SEC. The Board of
Directors has determined that all members of this committee are independent
directors under the SEC rules.
36
Nominating
and Corporate Governance Committee
The
Nominating and Corporate Governance Committee is responsible for providing
oversight on a broad range of issues regarding our corporate governance
practices and policies and the composition and operation of the Board of
Directors. These responsibilities include reviewing potential candidates for
membership on the Board and recommending to the Board nominees for election as
directors of the Company. The Nominating and Corporate Governance Committee was
formed in May 2005. This Committee met 1 time during fiscal 2009. A quorum of
the members of this Committee was present at the meeting. The former chairperson
of this Committee resigned from the Board of Directors during fiscal 2009. On
March 19, 2010, Thomas Pear was appointed chairperson of this Committee. A
complete description of the Nominating and Corporate Governance Committee’s
responsibilities is set forth in the Nominating and Corporate Governance written
charter. A copy of the charter is available to stockholders on the Company’s
website. All members of the Nominating and Corporate Governance Committee are
independent directors as defined by the rules and regulations of the SEC. The
Nominating and Corporate Governance Committee will consider director nominees
recommended by stockholders. There are no minimum qualifications for
consideration for nomination to be a director of the Company. The nominating
committee will assess all director nominees using the same criteria. Nominations
made by stockholders must be made by written notice received by the Secretary of
the Company within 30 days of the date on which notice of a meeting for the
election of directors is first given to stockholders. The Nominating and
Corporate Governance Committee and the Board of Directors carefully consider
nominees regardless of whether they are nominated by stockholders, the
Nominating and Corporate Governance Committee or existing Board
members.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
directors and persons who beneficially own more than 10% of a registered class
of our equity securities (“ten percent stockholders”) to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and ten percent stockholders are charged
by the SEC regulations to furnish us with copies of all Section 16(a) forms they
file.
Based
solely upon a review of copies of Section 16(a) reports and representations
received by us from reporting persons, and without conducting any independent
investigation of our own, in fiscal year 2009, all Forms 3, 4 and 5 were timely
filed with the SEC by such reporting persons.
37
ITEM 11. EXECUTIVE
COMPENSATION
The
following table summarizes compensation information for the last two fiscal
years for (i) Ms. Lori Cohen, our Principal Executive Officer and
(ii) the two most highly compensated executive officers other than the
Principal Executive Officer, who were serving as executive officers at the end
of the fiscal year and who we refer to collectively, the Named Executive
Officers.
SUMMARY
COMPENSATION TABLE
|
Name
and
Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards(s)
|
Non-Equity
Incentive Plan
Compensation
|
Non-
Qualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
|
Total
|
|||||||||||||||||||||||||
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||||||||||
|
Lori
Cohen
|
2009
|
276,633 | 47,178 | 13,753 | (2) | 337,564 | ||||||||||||||||||||||||||||
|
Chief
Executive Officer
|
2008
|
235,927 | 18,999 | 18,859 | (2) | 273,785 | ||||||||||||||||||||||||||||
|
Scott
Newman
|
2009
|
303,833 | 174,894 | 31,280 | (1) | 510,007 | ||||||||||||||||||||||||||||
|
Chief
Strategy Officer
|
2008
|
375,000 | 46,765 | (1) | 421,765 | |||||||||||||||||||||||||||||
|
Bryan
Carey
|
||||||||||||||||||||||||||||||||||
|
Senior
Vice
|
2009
|
250,000 | 86,601 | 13,889 | (2) | 350,490 | ||||||||||||||||||||||||||||
|
President,
Managing Director DeLeeuw Associates
|
2008
|
250,000 | 21,072 | 14,762 | (2) | 285,834 | ||||||||||||||||||||||||||||
Scott
Newman served as the Company’s President and Chief Executive Officer until prior
to April 2009, and the Company’s Chief Strategy Officer following April
2009.
Lori
Cohen served as the Company’s Vice President of Technology prior to, and the
Company’s Chief Executive Officer following April 2009.
|
(1)
|
Amounts
shown reflect payments related to medical, dental and life insurance, car
payments, 401(k) contributions and country club dues paid by the
Company.
|
|
(2)
|
Amounts
shown reflect payments related to medical, dental and life insurance, car
payments and 401(k) contributions by the
Company.
|
38
The
following table shows outstanding equity awards at December 31,
2009:
Outstanding
Equity Awards at Fiscal Year-End
|
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares, Units or
Other
Rights
That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
have not
Vested
($)
|
|||||||||||||||||||||||||||
|
(a)
|
(b)
|
I
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||||
|
Lori
Cohen
|
300,000 | — | — | 2.475 |
3/29/2014
|
— | — | — | — | |||||||||||||||||||||||||||
| 150,000 | 0.83 |
11/16/2015
|
||||||||||||||||||||||||||||||||||
| 150,000 | 0.25 |
10/10/2016
|
||||||||||||||||||||||||||||||||||
|
Scott
Newman
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Bryan
Carey
|
33,333 | — | — | 3.00 |
5/28/2014
|
— | — | — | — | |||||||||||||||||||||||||||
| 125,000 | — | — | 0.83 |
11/16/2015
|
— | — | — | — | ||||||||||||||||||||||||||||
| 150,000 | — | — | 0.25 |
10/10/2016
|
— | — | — | — | ||||||||||||||||||||||||||||
| 166,666 | 83,334 | — | 0.30 |
5/10/2017
|
— | — | — | — | ||||||||||||||||||||||||||||
The
following table shows the details of compensation paid to outside directors of
the Company during 2008:
Director
Compensation for 2009
|
Name
|
Fees
Earned or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|||||||||||||||||||||
|
Frederick
Lester
|
2,250 | — | — | — | — | — | 2,250 | |||||||||||||||||||||
|
Thomas
Pear
|
7,500 | 7,500 | — | — | — | — | 15,000 | |||||||||||||||||||||
|
Lawrence
K. Reisman
|
7,750 | 7,500 | — | — | — | — | 15,250 | |||||||||||||||||||||
Narrative
Disclosure to Summary Compensation
On June
30, 2009, Lori Cohen, our President and Chief Executive Officer, entered into an
employment agreement dated as of April 1, 2009 for a term ending July 31, 2010,
unless further extended or earlier terminated. Pursuant to the
employment agreement, Ms. Cohen will receive the following compensation: (a) an
annual salary of $280,000; (b) bonus as determined by the Board of Directors;
(c) 2% of the gross sales of any project that is managed by Ms. Cohen; (d) 7.5%
of net income (subject to certain adjustments) of the Company for the period
commencing April 1, 2009 and ending December 31, 2009, provided the
Company’s net income exceeds $133,000 during the period; the
incentive payment for the annual period commencing January 1, 2010 will be based
on the Company’s net income exceeding $200,000; (e) and other benefits including
health, life and disability insurance, as well as a monthly car
allowance.
39
Scott
Newman, our Chief Strategy Officer and Chairman, agreed to an employment
agreement dated as of May 1, 2009 for a term ending April 31, 2010 unless
extended or earlier terminated. Pursuant to the employment agreement, Mr. Newman
will receive the following compensation: (a) an annual salary of $275,000; (b)
20% of his hourly billable rate billed to clients; (c) 2% of the gross billing
for clients for whom Mr. Newman serves as the Engagement Manager, excluding Mr.
Newman’s billable time for that client; (d) 0.5% of the Company’s monthly gross
profits on the first $400,000 and 5% of the gross profit for the Company in
excess of $400,000 for any given month; (e) 2.5% of net income (subject to
certain adjustments) of the Company during the period commencing on April 1,
2009 and ending December 31, 2009, provided the Company’s net income exceeds
$133,000; the incentive payment for the annual period commencing January 1, 2010
will be based on the Company’s net income exceeding $200,000; and (f) and other
benefits including health, life and disability insurance, as well as a monthly
car allowance.
The
following named executive officers have arrangements pursuant to their
employment agreements that provide for payment of severance
payments:
|
|
*
|
In
the event that Lori Cohen’s employment is terminated other than with good
cause, Ms. Cohen will receive a lump sum payment of 3 months salary
without incentives.
|
|
|
*
|
In
the event that Scott Newman’s employment is terminated other than with
good cause, Mr. Newman will receive a lump sum payment of 35,000 at the
date of termination.
|
Stock
Ownership Requirement for Management
The
Company does not have a formal policy requiring stock ownership by management.
One of the key objectives of the 2003 Incentive Plan is to promote ownership of
the Company’s stock by management.
Compensation
of Members of the Board of Directors
Directors
of the Company who are not employees of the Company or its subsidiaries are
entitled to receive an amount of restricted common stock equal in value to
$7,500 plus cash in the amount of $2,500 as compensation for serving as
directors. The directors also receive $500 per Board meeting attended in person,
$250 per Board meeting attended via teleconference, $250 per Committee meeting
attended, and an annual stock option grant.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information regarding the beneficial
ownership of our common stock, our only class of outstanding voting securities
as of March 22, 2010, based on 123,544,368 aggregate shares of common stock
outstanding as of such date, by: (i) each person who is known by us to own
beneficially more than 5% of our outstanding common stock with the address of
each such person, (ii) each of our present directors and officers, and (iii) all
officers and directors as a group:
|
Name and Address of
Beneficial Owner(1)(2)
|
Amount of
Common Stock
Beneficially
Owned
|
Percentage of
Outstanding
Common Stock
Beneficially Owned
|
||||||
|
Lori
Cohen (3)
|
606,166 | * | ||||||
|
Scott
Newman(4)
|
19,655,413 | 15.9 | % | |||||
|
Glenn
Peipert(5)
|
10,450,394 | 8.4 | % | |||||
|
William
Hendry(6)
|
210,000 | * | ||||||
|
Bryan
Carey (7)
|
474,999 | * | ||||||
|
Lawrence
K. Reisman (8)
|
429,535 | * | ||||||
|
Thomas
Pear (9)
|
383,735 | * | ||||||
|
Matthew
J. Szulik
|
73,049,991 | 45.6 | % | |||||
|
All
directors and officers as a group (7 persons)
|
32,210,242 | 25.7 | % | |||||
|
*
|
Represents
less than 1% of the issued and outstanding Common
Stock.
|
|
(1)
|
Each
stockholder, director and executive officer has sole voting power and sole
dispositive power with respect to all shares beneficially owned by him,
unless otherwise indicated.
|
|
(2)
|
All
addresses are c/o Conversion Services International, Inc., 100 Eagle Rock
Avenue, East Hanover, New Jersey
07936.
|
|
(3)
|
Ms.
Cohen is the Company’s Chief Executive Officer and Director. Consists of
an option to purchase 300,000 shares of Common Stock granted on March 29,
2004, and expiring on March 29, 2014, at an exercise price of $2.475 per
share. Consists of an option to purchase 150,000 shares of Common Stock
granted on November 16, 2005, and expiring on November 16, 2015, at an
exercise price of $0.83 per share. Consists of an option to purchase
150,000 shares of Common Stock granted on October 10, 2006, and expiring
on October 10, 2016, at an exercise price of $0.25 per
share.
|
|
(4)
|
Mr.
Newman is the Company’s Chief Strategy Officer and Chairman of the
Board.
|
|
(5)
|
Mr.
Glenn Peipert is a Director of the Company. Includes an option to purchase
250,000 shares of Common Stock granted on November 16, 2005, and expiring
on November 16, 2010, at an exercise price of $0.83 per
share.
|
|
(6)
|
Mr.
William Hendry is the Company’s Vice President, Chief Financial Officer,
Secretary and Treasurer. Consists of an option to purchase 30,000 shares
of Common Stock granted on May 28, 2004, and expiring on May 28, 2014, at
an exercise price of $3.00 per share.
Consists of an option to purchase 30,000 shares
of Common Stock granted on November 16, 2005, and expiring on November 16,
2015, at an exercise price of $0.83 per share. Consists of an option to
purchase 150,000 shares of Common Stock granted on October 10, 2006, and
expiring on October 10, 2016, at an exercise price of $0.25 per
share.
|
41
|
(7)
|
Mr.
Carey is the Company’s Senior Vice President and Managing Director, CSI
DeLeeuw. Consists of an option to purchase 33,333 shares of Common Stock
granted on May 28, 2004, and expiring on May 28, 2014, at an exercise
price of $3.00 per share.
Consists of an option to purchase 125,000 shares
of Common Stock granted on November 16, 2005, and expiring on November 16,
2015, at an exercise price of $0.83 per share. Consists of an option to
purchase 150,000 shares of Common Stock granted on October 10, 2006, and
expiring on October 10, 2016, at an exercise price of $0.25 per share.
Consists of an option to purchase 166,666 shares of Common Stock granted
on May 10, 2007, and expiring on May 10, 2017, at an exercise price of
$0.30 per share and does not include an option to purchase 83,334 shares
of Common Stock which vest on May 10,
2010.
|
|
(8)
|
Mr.
Reisman is a Director. Consists of an option to purchase 30,000
shares of Common Stock granted on May 28, 2004, and expiring on May 28,
2014, at an exercise price of $3.00 per share. Consists of an option to
purchase 20,000 shares of Common Stock granted on November 16, 2005, and
expiring on November 16, 2015, at an exercise price of $0.83 per share.
Consists of an option to purchase 25,000 shares of Common Stock granted on
October 10, 2006, and expiring on October 10, 2016, at an exercise price
of $0.25 per share. Includes 24,178 shares granted in October 2007,
142,857 shares granted in October 2008, and 187,500 shares granted in
October 2009 in connection with the annual director
compensation.
|
|
(9)
|
Mr.
Pear is a Director. Consists of an option to purchase 25,000 shares of
Common Stock granted on October 10, 2006, and expiring on October 10,
2016, at an exercise price of $0.25. Includes 24,178 shares granted in
October 2007, 142,857 shares granted in October 2008, and 187,500 shares
granted in October 2009 in connection with the annual director
compensation.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
During the last fiscal year, we have no material transactions which involved or
are planned to involve a direct or indirect interest of a director, or an
executive officer or any family of such parties.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table sets forth fees billed to us by our independent registered
public accounting firms during the fiscal years ended December 31, 2009 and
December 31, 2008 for: (i) services rendered for the audit of our annual
financial statements and the review of our quarterly financial statements; (ii)
services by our independent registered public accounting firms that are
reasonably related to the performance of the audit or review of our financial
statements and that are not reported as Audit Fees; (iii) services rendered in
connection with tax compliance, tax advice and tax planning; and (iv) all other
fees for services rendered.
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Audit
Fees
|
$ | 130,063 | $ | 141,200 | ||||
|
Audit
Related Fees
|
7,475 | - | ||||||
|
Tax
Fees
|
31,342 | 45,500 | ||||||
|
All
Other Fees
|
15,376 | 17,500 | ||||||
| $ | 184,256 | $ | 204,200 | |||||
Audit
Committee Policies
The Board
of Directors is solely responsible for the approval in advance of all audit and
permitted non-audit services to be provided by the independent auditors
(including the fees and other terms thereof), subject to the de minimus
exceptions for non-audit services provided by Section 10A(i)(1)(B) of the
Exchange Act, which services are subsequently approved by the Board of Directors
prior to the completion of the audit. None of the fees listed above are for
services rendered pursuant to such de minimus exceptions.
42
Part
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
2.1
Agreement and Plan of Reorganization, dated August 21, 2003, among
Registrant, LCS Acquisition Corp., Conversion Services International, Inc. and
certain affiliated stockholders of Conversion Services International, Inc.
(filed as Appendix A on Schedule 14A on January 5, 2004).
2.2
First Amendment to Agreement and Plan of Reorganization, dated November
28, 2003, among Registrant, LCS Acquisition Corp., Conversion Services
International, Inc. and certain affiliated stockholders of Conversion Services
International, Inc. (filed as Appendix A on Schedule 14A on January 5,
2004).
2.3
Certificate of Merger, dated January 30, 2004, relating to the merger of
LCS Acquisition Corp. and Conversion Services International, Inc. (filed as
Exhibit 2.3 on Form 8-K on February 17, 2004).
2.4
Acquisition Agreement, dated February 27, 2004, among the Company, DeLeeuw
Associates, Inc. and Robert C. DeLeeuw (filed as Exhibit 2.1 on Form 8-K on
March 16, 2004).
2.5
Plan and Agreement of Merger and Reorganization, dated February 27, 2004,
among Registrant, DeLeeuw Associates, Inc. and DeLeeuw Conversion LLC filed as
Exhibit 2.1 on Form 8-K on March 16, 2004).
2.6
Asset Purchase Agreement, dated May 26, 2004, among Registrant, Evoke
Asset Purchase Corp. and Evoke Software Corporation (filed as Exhibit 2.1 on
Form 8-K on July 13, 2004).
2.7 Asset
Purchase Agreement dated July 18, 2005 by and among Registrant, Similarity
Vector Technologies (Sivtech) Limited (d/b/a Similarity Systems), Similarity
Systems Inc. and Evoke Software Corporation (filed as Exhibit 2.1 on Form 8-K on
September 27, 2004).
2.8 Agreement
and Plan of Merger dated July 22, 2005 among Registrant, McKnight Associates,
Inc., McKnight Associates, Inc. and William McKnight (filed as Exhibit 2 on Form
8-K on July 28, 2005).
2.9 Agreement
and Plan of Merger dated July 28, 2005 among Registrant, ISI Merger Corp., a
Delaware corporation, Integrated Strategies, Inc., a Delaware corporation, ISI
Consulting, LLC, a Delaware limited liability company, Adam Hock, and Larry Hock
(filed as Exhibit 2 on Form 8-K on August 2, 2005).
3.1
Certificate of Incorporation, as amended (filed as Exhibit 3.1 on Form
10-SB on December 9, 1999).
3.2
Certificate of Amendment to Certificate of incorporation, dated January
27, 2004, amending, among other things, the authorized shares of common and
preferred stock (filed as Exhibit 3.1 on Form 8-K on February 17,
2004).
3.3
Certificate of Amendment to Certificate of Incorporation, dated January
30, 2004, changing the name of the Company from LCS Group, Inc. to Conversion
Services International, Inc. (filed as Exhibit 3.2 on Form 8-K on February 17,
2004).
3.4 Certificate
of Amendment to Certificate of Incorporation, dated September 20, 2005,
effecting, among other things, the 1 for 15 reverse stock split (filed as
Exhibit D on Schedule 14A on July 26, 2005).
3.5 Certificate
of Amendment to Certificate of Incorporation, dated August 8, 2006, increasing
the authorized shares of common stock (filed as Exhibit A on Schedule 14A on
July 17, 2006).
3.6 Certificate
of Designations of Preferences, Rights and Limitations of Series A Convertible
Preferred Stock of Registrant dated February 2, 2006 (filed as Exhibit 4.1 on
Form 8-K on February 8, 2006).
3.7 Certificate
of Designations of Preferences, Rights and Limitations of Series B Convertible
Preferred Stock of Registrant (filed as Exhibit 4.1 on Form 8-K on August 16,
2006).
3.8
Amended and Restated Bylaws (filed as Exhibit 3.3 on Form 8-K on February
17, 2004).
3.9 Certificate
of Amendment of Certificate of Designations of Preferences, Rights and
limitations of Series B Convertible Preferred Stock of Conversion Services
International, Inc. (filed as Exhibit 4.1 on Form 8-K on June 28,
2007)
3.10
Amended and Restated By-Laws of Conversion Services International, Inc. (filed
as Exhibit 3.1 on Form 8-K on December 27, 2007).
43
4.1 Common
Stock Purchase Warrant dated February 2, 2006, in favor of Taurus Advisory
Group, LLC (filed as Exhibit 10.3 on Form 8-K on February 8, 2006).
4.2 Common
Stock Purchase Warrant, dated August 11, 2006, in favor of Matthew J. Szulik
(filed as Exhibit 10.3 on Form 8-K on August 16, 2006).
4.3 Common
Stock Purchase Warrant, dated August 11, 2006, in favor of Feiner Family Trust
(filed as Exhibit 10.4 on Form 8-K on August 16, 2006).
4.4 Common
Stock Purchase Warrant in favor of certain investors represented by Taurus
Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.3 on Form 8-K
on January 5, 2007).
4.5 Common
Stock Purchase Warrant in favor of investors represented by TAG Virgin Islands,
Inc., dated March 1, 2007 (filed as Exhibit 10.3 on Form 8-K on March 7,
2007).
4.6 Common
Stock Warrant in favor of Laurus Master Fund, Ltd., dated March 1, 2007 (filed
as Exhibit 10.6 on Form 8-K on March 7, 2007).
4.7 10%
Convertible Unsecured Note issued to investor represented by TAG Virgin Islands,
Inc., dated March 1, 2007 (filed as Exhibit 10.1 on Form 8-K on March 7,
2007).
4.8 Form
of Common Stock Purchase Warrant (filed as Exhibit 10.2 on Form 8-K on May 3,
2007)
4.9 10%
Convertible Unsecured Note issued to the Investor, dated June 6, 2007 (filed as
Exhibit 10.1 on Form 10-Q filed on August 8, 2007).
4.10 Common
Stock Purchase Warrant issued to the Investor, dated June 6, 2007 (filed as
Exhibit 10.2 on Form 10-Q filed on August 8, 2007).
4.11 10%
Convertible Unsecured Note issued to the Investor, dated June 27, 2007 (filed as
Exhibit 10.3 on Form 10-Q filed on August 8, 2007).
4.12
Common Stock Purchase Warrant issued to the Investor, dated June 27, 2007 (filed
as Exhibit 10.4 on Form 10-Q filed on August 8, 2007).
4.13
Form of Common Stock Purchase Warrant issued to Investor, dated August 24, 2007.
(filed as Exhibit 4.1 on Form 10-Q filed on November 13, 2007).
4.14
Form of Common Stock Purchase Warrant issued to Investor, dated September 4,
2007 (filed as Exhibit 4.2 on Form 10-Q filed on November 13,
2007).
4.15 Form
of 10% Convertible Unsecured Note issued to Investor, dated as of June 27,
2007(filed as Exhibit 4.3 on Form 10-Q filed on November 13, 2007).
4.16
Form of Common Stock Purchase Warrant issued to Investor, dated as of June 27,
2007(filed as Exhibit 4.4 on Form 10-Q filed on November 13, 2007).
4.17
Form of Common Stock Purchase Warrant issued to Investor, dated October 26,
2007(filed as Exhibit 4.5 on Form 10-Q filed on November 13, 2007).
4.18
Form of Common Stock Purchase Warrant issued to Investor, dated October 19,
2007. (filed as Exhibit 4.6 on Form 10-Q filed on November 13,
2007).
4.19
Form of Common Stock Purchase Warrant issued to investors, dated March 26,
2008. (filed as Exhibit 4.29 on Form 10-K filed on March 30,
2008)
4.20 Form
of Common Stock Purchase Warrant issued to investors, dated March 26, 2008.
(filed as Exhibit 4.1 on Form 10-Q filed on August 12, 2008)
4.21 Form
of Common Stock Purchase Warrant issued to investor, dated June 30, 2008. (filed
as Exhibit 4.2 on Form 10-Q filed on August 12, 2008)
44
4.22 Form
of Common Stock Purchase Warrant issued to investors, dated July 28, 2008.
(filed as Exhibit 4.3 on Form 10-Q filed on August 12, 2008)
4.23 Form
of 10% Convertible Unsecured Note issued to investors, dated July 28,
2008. (filed as Exhibit 4.4 on Form 10-Q filed on August 12,
2008)
4.24 Form
of Common Stock Purchase Warrant issued to investor, dated September 2, 2008
(filed as Exhibit 4.1 on Form 10-Q filed on November 12, 2008).
4.25 Form
of Common Stock Purchase Warrant issued to investor, dated October 2,
2008. (filed as Exhibit 4.2 on Form 10-Q filed on November 12,
2008)
10.1
Employment Agreement among Registrant and Lori Cohen (filed as Exhibit
10.1 on Form 8-K on July 7, 2009).
10.2
Employment Agreement among Registrant and Glenn Peipert, (filed as Exhibit
10.1 on Form 8-K on July 7, 2009)..
10.3
Employment Agreement among Registrant and Scott Newman, (filed as Exhibit
10.1 on Form 8-K on July 7, 2009).
10.4 2003
Incentive Plan, as amended (filed as Exhibit 4.1 on Form S-8 POS on October 18,
2006).
10.5 Stock
Purchase Agreement dated February 2, 2006 by and between Registrant and Taurus
Advisory Group, LLC (filed as Exhibit 10.1 on Form 8-K on February 7,
2006).
10.6 Registration
Rights Agreement dated February 2, 2006 by and between Registrant and Taurus
Advisory Group, LLC (filed as Exhibit 10.1 on Form 8-K on February 7,
2006).
10.7 Stock
Purchase Agreement dated August 11, 2006 by and between Registrant and Matthew
J. Szulik (filed as Exhibit 10.1 on Form 8-K on August 16, 2006).
10.8 Registration
Rights Agreement dated August 11, 2006 by and between Registrant, Matthew J.
Szulik and the Feiner Family Trust (filed as Exhibit 10.2 on Form 8-K on August
16, 2006).
10.9 Stock
Purchase Agreement by and between Registrant and certain investors represented
by Taurus Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.1 on
Form 8-K on January 5, 2007).
10.10 Registration
Rights Agreement by and between Registrant and certain investors represented by
Taurus Advisory Group, LLC, dated December 29, 2006 (filed as Exhibit 10.2 on
Form 8-K on January 5, 2007).
10.11 Registration
Rights Agreement by and between Registrant and investor represented by TAG
Virgin Islands, Inc., dated March 1, 2007 (filed as Exhibit 10.2 on Form 8-K on
March 7, 2007).
10.12 Third
Extension Agreement among Registrant and Sands Brothers Venture Capital LLC,
Sands Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV
LLC, dated March 1, 2007 (filed as Exhibit 10.4 on Form 8-K on March 7,
2007).
10.13 Omnibus
Amendment and Waiver No. 2 among Registrant, CSI Sub Corp. (DE), DeLeeuw
Associates, Inc. and Laurus Master Fund, Ltd. dated March 1, 2007 (filed as
Exhibit 10.5 on Form 8-K on March 7, 2007).
10.14 Assumption,
Adoption and Consent Agreement among Registrant, CSI Sub Corp. (DE), DeLeeuw
Associates, Inc. and Laurus Master Fund, Ltd. dated March 1, 2007 (filed as
Exhibit 10.7 on Form 8-K on March 7, 2007).
10.15 Amended
and Restated Registration Rights Agreement among Registrant and Laurus dated
March 1, 2007 (filed as Exhibit 10.8 on Form 8-K on March 7, 2007).
10.16 10%
Convertible Unsecured Note issued to TAG Virgin Islands, Inc. Due on August 31,
2007 (filed as Exhibit 10.1 on Form 8-K on May 3, 2007)
10.17
Amendment No. 1 to Employment Agreement among Registrant and Glenn
Peipert, dated August 6, 2007 (filed as Exhibit 10.5 on Form 10-Q filed on
August 8, 2007).
10.18
Amendment No. 1 to Employment Agreement among Registrant and Scott Newman,
dated August 6, 2007 (filed as Exhibit 10.6 on Form 10-Q filed on August 8,
2007).
45
10.36 Stock
Purchase Agreement entered into between the Company and Investor, dated August
24, 2007 (filed as Exhibit 10.1 on Form 10-Q filed on November 13,
2007.
10.37 Registration
Rights Agreement entered into between the Company and Investor, dated August 24,
2007 (filed as Exhibit 10.2 on Form 10-Q filed on November 13,
2007.
10.19 Stock
Purchase Agreement entered into between the Company and Investor, dated
September 4, 2007 (filed as Exhibit 10.3 on Form 10-Q filed on November 13,
2007.
10.20 Registration
Rights Agreement entered into between the Company and Investor, dated September
4, 2007 (filed as Exhibit 10.4 on Form 10-Q filed on November 13,
2007.
10.21 Amendment
1 to March 1, 2007 Registration Rights Agreement entered into between the
Company and Investor, dated as of June 27, 2007 (filed as Exhibit 10.5 on Form
10-Q filed on November 13, 2007.
10.22 Stock
Purchase Agreement entered into between the Company and Investor, dated as of
October 19, 2007 (filed as Exhibit 10.6 on Form 10-Q filed on November 13,
2007.
10.23
Registration Rights Agreement entered into between the Company and Investor,
dated as of October 19, 2007 (filed as Exhibit 10.7 on Form 10-Q filed on
November 13, 2007.
10.24
Omnibus Amendment and Waiver No. 3 dated December 11, 2007 to the Security
Agreement (filed as Exhibit 10.1 on Form 8-K filed on December 13,
2007).
10.25 Note
Conversion Agreement by and between the Company and certain Noteholders, dated
as of March 27, 2008. (filed as Exhibit 10.43 on Form 10-K filed on March 31,
2008)
10.26
Loan and Security Agreement by and between the Company and Access Capital, Inc.,
dated as of March 31, 2008. (filed as Exhibit 10.44 on Form 10-K filed on March
31, 2008)
10.27
Stock Pledge Agreement by and between the Company and Access Capital, Inc. dated
as of March 31, 2008 (filed as Exhibit 10.43 on Form 10-K filed on March 31,
2008)
10.28 Note
Conversion Agreement by and between the Registrant and investors represented by
TAG Virgin Islands, Inc. dated as of March 26, 2008. (filed as
Exhibit 10.1 on Form 10-Q filed on August 12, 2008)
10.29 Stock
Purchase Agreement dated June 30, 2008 by and between Registrant and Matthew J.
Szulik. (filed as Exhibit 10.2 on Form 10-Q filed on August 12,
2008)
10.30 10%
Convertible Unsecured Note by and between the Registrant and investor
represented by TAG Virgin Islands, Inc. dated as of September 2,
2008. (filed as Exhibit 10.1 on Form 10-Q filed on November 12,
2008)
10.31 10%
Convertible Unsecured Note by and between the Registrant and investor
represented by TAG Virgin Islands, Inc. dated as of October 2,
2008. (filed as Exhibit 10.2 on Form 10-Q filed on November 12,
2008)
10.32* 7%
Convertible Unsecured Note by and between the Registrant and Investors
represented by TAG Virgin Islands, Inc. dated as of March 8, 2010.
21 Subsidiaries of Registrant (filed as Exhibit 21.1 to the
Form 10-K filed March 30, 2007).
23.1* Consent
of Friedman LLP, Independent Registered Public Accounting Firm
31.1*
Certification of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2*
Certification of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1*
Certification of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
32.2*
Certification of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
·
|
filed
herewith
|
46
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Conversion
Services International, Inc.
We have
audited the accompanying consolidated balance sheets of Conversion Services
International, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the two years in the period ended December 31,
2009. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Conversion Services
International, Inc. as of December 31, 2009 and December 31, 2008, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, negative cash flows, is not in
compliance with a covenant associated with its Line of Credit and has
significant future cash flow commitments. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to this matter are also described in Note 2. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
|
/s/
Friedman LLP
|
|
|
East
Hanover, New Jersey
|
|
|
March
26, 2010
|
47
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31,
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
|
$ | 96,957 | $ | 338,240 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $108,001 and
$260,205 as of December 31, 2009 and 2008, respectively
|
3,912,021 | 3,440,810 | ||||||
|
Accounts
receivable from related parties, net of allowance for doubtful accounts of
$26,407 and $7,024 as of December 31, 2009 and 2008,
respectively
|
236,233 | 284,028 | ||||||
|
Prepaid
expenses
|
124,764 | 140,493 | ||||||
|
TOTAL
CURRENT ASSETS
|
4,369,975 | 4,203,571 | ||||||
|
PROPERTY
AND EQUIPMENT, at cost, net
|
36,887 | 68,536 | ||||||
|
OTHER
ASSETS
|
110,494 | 306,778 | ||||||
|
Total
Assets
|
$ | 4,517,356 | $ | 4,578,885 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Line
of credit
|
$ | 2,541,900 | $ | 2,349,920 | ||||
|
Accounts
payable and accrued expenses
|
1,964,513 | 1,503,145 | ||||||
|
Short
term notes payable
|
- | 1,384,811 | ||||||
|
Deferred
revenue
|
240,606 | 159,177 | ||||||
|
Related
party note payable
|
92,236 | 102,796 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
4,839,255 | 5,499,849 | ||||||
|
Long-term
debt, net of current portion
|
500,000 | - | ||||||
|
Total
Liabilities
|
5,339,255 | 5,499,849 | ||||||
|
Convertible
preferred stock, $0.001 par value, $100 stated value, 20,000,000 shares
authorized.
|
||||||||
|
Series
A convertible preferred stock, 19,000 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
1,488,332 | 1,108,332 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS'
DEFICIT
|
||||||||
|
Common
stock, $0.001 par value, 300,000,000 shares authorized; 122,295,838 and
119,594,463 issued and outstanding at December 31, 2009 and 2008,
respectively
|
122,296 | 119,594 | ||||||
|
Series
B convertible preferred stock, 20,000 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
1,352,883 | 1,352,883 | ||||||
|
Additional
paid in capital
|
68,260,325 | 68,575,918 | ||||||
|
Treasury
stock, at cost, 1,145,382 shares in treasury as of December 31, 2009 and
2008
|
(423,869 | ) | (423,869 | ) | ||||
|
Accumulated
deficit
|
(71,621,866 | ) | (71,653,822 | ) | ||||
|
Total
Stockholders' Deficit
|
(2,310,231 | ) | (2,029,296 | ) | ||||
|
Total
Liabilities and Stockholders' Deficit
|
$ | 4,517,356 | $ | 4,578,885 | ||||
See Notes
to Consolidated Financial Statements
48
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31,
|
2009
|
2008
|
|||||||
|
REVENUE:
|
||||||||
|
Services
|
$ | 20,720,057 | $ | 16,409,181 | ||||
|
Related
party services
|
2,095,983 | 2,340,658 | ||||||
|
Reimbursable
expenses
|
1,184,738 | 719,956 | ||||||
|
Other
|
193,425 | 273,791 | ||||||
| 24,194,203 | 19,743,586 | |||||||
|
COST
OF REVENUE:
|
||||||||
|
Services
|
14,232,615 | 11,832,715 | ||||||
|
Related
party services
|
1,847,984 | 2,151,157 | ||||||
|
Reimbursable
expenses
|
1,270,279 | 864,250 | ||||||
| 17,350,878 | 14,848,122 | |||||||
|
GROSS
PROFIT
|
6,843,325 | 4,895,464 | ||||||
|
OPERATING
EXPENSES
|
||||||||
|
Selling
and marketing
|
3,028,003 | 3,262,546 | ||||||
|
General
and administrative
|
2,759,233 | 3,592,309 | ||||||
|
Goodwill
& intangibles impairment
|
- | 6,857,125 | ||||||
|
Depreciation
and amortization
|
106,033 | 264,996 | ||||||
| 5,893,269 | 13,976,976 | |||||||
|
INCOME
(LOSS) FROM OPERATIONS
|
950,056 | (9,081,512 | ) | |||||
|
OTHER
INCOME (EXPENSE)
|
||||||||
|
Equity
in earnings (losses) from investments
|
(103,298 | ) | 21,045 | |||||
|
Loss
on extinguishment of debt
|
- | (664,372 | ) | |||||
|
Interest
expense, net
|
(814,802 | ) | (1,104,927 | ) | ||||
| (918,100 | ) | (1,748,254 | ) | |||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
31,956 | (10,829,766 | ) | |||||
|
INCOME
TAX BENEFIT
|
- | 363,400 | ||||||
|
NET
INCOME (LOSS)
|
31,956 | (10,466,366 | ) | |||||
|
Accretion
of issuance costs associated with convertible preferred
stock
|
(380,000 | ) | (380,000 | ) | ||||
|
Dividends
on convertible preferred stock
|
(180,000 | ) | (217,081 | ) | ||||
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | (528,044 | ) | $ | (11,063,447 | ) | ||
|
Basic
and diluted loss per share attributable to common
stockholders
|
$ | (0.00 | ) | $ | (0.10 | ) | ||
|
Weighted
average common shares used to compute loss per common
share:
|
||||||||
|
Basic
and diluted
|
120,123,905 | 115,358,271 | ||||||
See Notes
to Consolidated Financial Statements
49
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Additional
|
Retained
|
Total
|
||||||||||||||||||||||||||||||
|
Common
|
Capital
|
Treasury
|
Series B
|
Series B
|
Paid-in
|
Earnings
|
Stockholders'
|
|||||||||||||||||||||||||
|
Shares
|
Stock
|
Stock
|
Preferred Shares
|
Preferred Stock
|
Capital
|
(Deficit)
|
Equity (Deficit)
|
|||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
110,144,462 | $ | 111,290 | $ | (423,869 | ) | 20,000 | $ | 1,352,883 | $ | 66,742,898 | $ | (61,187,456 | ) | $ | 6,595,746 | ||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (10,466,366 | ) | (10,466,366 | ) | ||||||||||||||||||||||
|
Dividends
payable on preferred stock
|
- | - | - | - | - | (217,081 | ) | - | (217,081 | ) | ||||||||||||||||||||||
|
Compensation
expense for stock and stock option grants
|
- | - | - | - | - | 469,978 | - | 469,978 | ||||||||||||||||||||||||
|
Relative
fair value of warrants issued
|
- | - | - | - | - | 968,846 | - | 968,846 | ||||||||||||||||||||||||
|
Dividends
on Series A preferred stock paid in common stock
|
527,778 | 528 | - | - | - | 46,972 | - | 47,500 | ||||||||||||||||||||||||
|
Dividends
on Series B preferred stock paid in common stock
|
227,885 | 227 | - | - | - | 121,854 | - | 122,081 | ||||||||||||||||||||||||
|
Shares
issued in conjunction with services agreement
|
5,000 | 5 | - | - | - | (5 | ) | - | - | |||||||||||||||||||||||
|
Issuance
of Common Stock in connection with a stock purchase
agreement
|
2,500,000 | 2,500 | - | - | - | 197,500 | - | 200,000 | ||||||||||||||||||||||||
|
Issuance
of Common Stock for Director compensation
|
428,571 | 429 | - | - | - | 29,571 | - | 30,000 | ||||||||||||||||||||||||
|
Issuance
of Common Stock in payment of Notes Payable
|
4,615,385 | 4,615 | - | - | - | 595,385 | - | 600,000 | ||||||||||||||||||||||||
|
Accretion
of issuance costs associated with convertible preferred
stock
|
- | - | - | - | - | (380,000 | ) | - | (380,000 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2008
|
118,449,081 | $ | 119,594 | $ | (423,869 | ) | 20,000 | $ | 1,352,883 | $ | 68,575,918 | $ | (71,653,822 | ) | $ | (2,029,296 | ) | |||||||||||||||
|
Net
income
|
- | - | - | - | - | - | 31,956 | 31,956 | ||||||||||||||||||||||||
|
Dividends
payable on preferred stock
|
- | - | - | - | - | (180,000 | ) | - | (180,000 | ) | ||||||||||||||||||||||
|
Compensation
expense for stock and stock option grants
|
- | - | - | - | - | 52,109 | - | 52,109 | ||||||||||||||||||||||||
|
Dividends
on Series A preferred stock paid in common stock
|
2,154,649 | 2,155 | - | - | - | 92,845 | - | 95,000 | ||||||||||||||||||||||||
|
Dividends
on Series B preferred stock paid in common stock
|
171,726 | 172 | - | - | - | 84,828 | - | 85,000 | ||||||||||||||||||||||||
|
Issuance
of Common Stock for Director compensation
|
375,000 | 375 | - | - | - | 14,625 | - | 15,000 | ||||||||||||||||||||||||
|
Accretion
of issuance costs associated with convertible preferred
stock
|
- | - | - | - | - | (380,000 | ) | - | (380,000 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2009
|
121,150,456 | $ | 122,296 | $ | (423,869 | ) | 20,000 | $ | 1,352,883 | $ | 68,260,325 | $ | (71,621,866 | ) | $ | (2,310,231 | ) | |||||||||||||||
See Notes
to Consolidated Financial Statements
50
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31,
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income (loss)
|
$ | 31,956 | $ | (10,466,366 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
of property and equipment and amortization of leasehold
improvements
|
47,116 | 146,526 | ||||||
|
Amortizaton
of intangible assets
|
- | 56,470 | ||||||
|
Amortization
of debt discounts
|
69,070 | 267,766 | ||||||
|
Amortization
of relative fair value of warrants issued
|
115,189 | 416,685 | ||||||
|
Amortization
of deferred financing costs
|
58,917 | 62,000 | ||||||
|
Impairment
of goodwill and intangible assets
|
- | 6,857,125 | ||||||
|
Stock
based compensation
|
67,109 | 499,978 | ||||||
|
Loss
on extinguishment of debt
|
- | 664,372 | ||||||
|
Deferred
tax benefit
|
- | (363,400 | ) | |||||
|
Increase
(decrease) in allowance for doubtful accounts
|
(132,821 | ) | 108,804 | |||||
|
Loss
(Income) from equity investments
|
103,298 | (21,045 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Increase
in accounts receivable
|
(319,007 | ) | (480,987 | ) | ||||
|
Decrease
in accounts receivable from related parties
|
28,412 | 40,695 | ||||||
|
(Increase)
decrease in prepaid expenses
|
(19,270 | ) | 59,142 | |||||
|
Decrease
in other assets
|
- | 2,070 | ||||||
|
Increase
in accounts payable and accrued expenses
|
469,576 | 107,414 | ||||||
|
Increase
in deferred revenue
|
81,428 | 99,828 | ||||||
|
Net
cash provided by (used in) operating activities
|
600,973 | (1,942,923 | ) | |||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Acquisition
of property and equipment
|
(15,466 | ) | (32,194 | ) | ||||
|
Net
cash used in investing activities
|
(15,466 | ) | (32,194 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Net
advances under line of credit
|
191,980 | 293,579 | ||||||
|
Proceeds
from issuance of short-term note payable
|
- | 450,000 | ||||||
|
Increase
in financing costs
|
- | (113,036 | ) | |||||
|
Principal
payments on short-term notes
|
(1,000,000 | ) | - | |||||
|
Proceeds
from sale of Company common stock and exercise of stock
options
|
- | 200,000 | ||||||
|
Principal
payments on capital lease obligations
|
- | (10,822 | ) | |||||
|
Principal
payments on related party notes
|
(18,770 | ) | (13,230 | ) | ||||
|
Net
cash (used in) provided by financing activities
|
(826,790 | ) | 806,491 | |||||
|
NET
DECREASE IN CASH
|
(241,283 | ) | (1,168,626 | ) | ||||
|
CASH,
beginning of period
|
338,240 | 1,506,866 | ||||||
|
CASH,
end of period
|
$ | 96,957 | $ | 338,240 | ||||
See Notes
to Consolidated Financial Statements
51
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31,
|
2009
|
2008
|
|||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for interest
|
$ | 640,824 | $ | 364,658 | ||||
|
Cash
paid for income taxes
|
- | - | ||||||
|
Common
stock issued in settlement of debt
|
- | 600,000 | ||||||
|
Common
stock issued in payment of preferred stock dividends
|
180,000 | 169,581 | ||||||
|
Common
stock issued in payment of Director's fees
|
15,000 | 30,000 | ||||||
See Notes
to Consolidated Financial Statements
52
CONVERSION
SERVICES INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Accounting Policies
Organization
and Business
Conversion
Services International, Inc. (“CSI”) was incorporated in the State of Delaware
and has been conducting business since 1990. CSI and its wholly owned
subsidiaries (together the “Company”) are principally engaged in the information
technology services industry in the following areas: strategic consulting,
business intelligence, data warehousing and data management, on credit, to its
customers principally located in the northeastern United States.
On
January 30, 2004, the Company became a public company through its merger with a
wholly owned subsidiary of LCS Group, Inc. Although LCS Group, Inc. (now known
as Conversion Services International, Inc.) was the legal survivor in the merger
and remains the Registrant with the Securities and Exchange Commission, the
merger was accounted for as a reverse acquisition, whereby the Company was
considered the accounting “acquirer” of LCS Group, Inc. for financial reporting
purposes.
In August
2008, the Company notified the American Stock Exchange (“AMEX”) of its intent to
voluntarily delist trading of its common stock, par value $0.001 per share, from
AMEX. The Company’s last day of trading on AMEX was September 5, 2008. On
September 8, 2008, the Company’s common stock began trading on the Over the
Counter Bulletin Board under the symbol CVNS.OB.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions and balances have
been eliminated in the consolidation. Investments in business entities in which
the Company does not have control, but has the ability to exercise significant
influence (generally 20-50% ownership), are accounted for by the equity
method.
Revenue
recognition
Revenues
are principally derived from consulting and professional services and are
recognized as earned when the services are rendered, evidence of an arrangement
exists, the fee is fixed or determinable and collection is probable. For
projects charged on a time and materials basis, revenue is recognized based on
the number of hours worked by consultants at an agreed-upon rate per hour. For
large services projects where costs to complete the contract could reasonably be
estimated, the Company undertakes projects on a fixed-fee basis and recognizes
revenues on the percentage of completion method of accounting based on the
evaluation of actual costs incurred to date compared to total estimated costs.
Revenues recognized in excess of billings are recorded as costs in excess of
billings. Billings in excess of revenues recognized are recorded as deferred
revenues until revenue recognition criteria are met. Reimbursements, including
those relating to travel and other out-of-pocket expenses, are included in
revenues, and an equivalent amount of reimbursable expenses are included in cost
of services.
Business
Combinations
Business
combinations are accounted for in accordance with standards which require the
purchase method of accounting for business combinations be followed. The
standards require that the Company determine the recognition of intangible
assets based on the following criteria: (i) the intangible asset arises
from contractual or other rights; or (ii) the intangible is separable or
divisible from the acquired entity and capable of being sold, transferred,
licensed, returned or exchanged. The Company allocates the purchase price of its
business combinations to the tangible assets, liabilities and intangible assets
acquired based on their estimated fair values. The excess purchase price over
those fair values is recorded as goodwill.
Accounts
receivable
The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable and
adjusts the allowance for doubtful accounts, when deemed necessary, based upon
its history of past write-offs and collections, contractual terms and current
credit conditions. During 2009 and 2008, $89,942 and $121,116 of uncollectible
accounts receivable were written off against the allowance for doubtful
accounts, respectively.
53
Property
and equipment
Property
and equipment are stated at cost and includes equipment held under capital lease
arrangements. Depreciation is computed using the straight-line method and is
based on the estimated useful lives of the various assets ranging from three to
seven years. Leasehold improvements are amortized over the shorter of the asset
life or the remaining lease term on a straight-line basis. When assets are sold
or retired, the cost and accumulated depreciation are removed from the accounts
and any gain or loss is included in operations.
Expenditures
for maintenance and repairs have been charged to operations. Major renewals and
betterments have been capitalized.
Goodwill
and intangible assets
Goodwill
and intangible assets are accounted for in accordance with generally accepted
accounting principles. Goodwill and indefinite lived intangible assets are no
longer amortized but instead are reviewed annually for impairment, or more
frequently if impairment indicators arise. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
estimated useful lives. The Company tests for impairment whenever events or
changes in circumstances indicate that the carrying amount of goodwill or other
intangible assets may not be recoverable, or at least annually at December 31 of
each year. These tests are performed at the reporting unit level using a
two-step, fair-value based approach. The first step compares the fair value of
the reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit is less than its carrying amount, a second step is
performed to measure the amount of impairment loss. The second step allocates
the fair value of the reporting unit to the Company’s tangible and intangible
assets and liabilities. This derives an implied fair value for the reporting
unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized equal
to that excess. In the event that the Company determines that the value of
goodwill or other intangible assets have become impaired, the Company will incur
a charge for the amount of the impairment during the fiscal quarter in which the
determination is made.
For the
year ended December 31, 2008, the Company recorded impairment charges related to
its goodwill and intangible assets in the amount of $6,857,125. The Company has
no goodwill remaining at December 31, 2009.
Deferred
financing costs
The
Company capitalizes costs associated with the issuance of debt instruments.
These costs are amortized on a straight-line basis over the term of the related
debt instruments, which are currently less than two years.
Stock
compensation
Accounting
for stock-based compensation focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
The standards require a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. On March 29, 2005, the SEC issued Staff Accounting
Bulletin No. 107 (“SAB No. 107”), which provides the Staff’s views
regarding interactions between generally accepted accounting principles and
certain SEC rules and regulations and provides interpretations of the valuation
of share-based payments for public companies.
There
were no stock options granted during 2008 or 2009.
Concentrations
of credit risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk are cash and accounts receivable arising from its normal business
activities. The Company routinely assesses the financial strength of its
customers, based upon factors surrounding their credit risk, establishes an
allowance for doubtful accounts, and as a consequence believes that its accounts
receivable credit risk exposure beyond such allowances is limited. At December
31, 2009, PNC Bank accounted for approximately 35.8% of the Company’s accounts
receivable balance. Receivables related to services performed for Bank of
America accounted for approximately 12.1% of the Company’s accounts receivable
balance. This is comprised of receivables directly from Bank of America and
receivables from two vendor management companies that are issued invoices for
the Company’s work at Bank of America, Sapphire Technologies and
ZeroChaos.
Cash
balances in banks are secured by the Federal Deposit Insurance Corporation
subject to certain limitations.
54
Advertising
The
Company expenses advertising costs as incurred. Advertising costs amounted to
approximately $58,208 and $53,635 for the years ended December 31, 2009 and
2008, respectively.
Income
taxes
The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
The
Company records a valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. The Company’s current
valuation allowance primarily relates to benefits from the Company’s Net
Operating Losses.
Financial
Instruments
The
carrying value of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, notes payable, accounts payable and accrued
liabilities approximate fair value because of the short maturities of those
instruments. The carrying value of convertible notes and notes payable also
approximate fair value based on borrowing rates currently available to the
Company, for loans with similar terms.
We review
the terms of convertible debt and equity instruments we issued to determine
whether there are embedded derivative instruments, including the embedded
conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances where the
embedded conversion option in a convertible instrument is required to be
bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated
derivative instruments are accounted for as a single, compound derivative
instrument.
In
connection with the sale of convertible debt and equity instruments, we may also
issue freestanding options or warrants. If freestanding options or warrants were
issued and will be accounted for as derivative instrument liabilities (rather
than as equity), the proceeds are first allocated to the fair value of those
instruments. When the embedded derivative instrument is to be bifurcated and
accounted for as a liability, the remaining proceeds received are then allocated
to the fair value of the bifurcated derivative instrument. The remaining
proceeds, if any, are then allocated to the convertible instrument itself,
usually resulting in that instrument being recorded at a discount from its face
amount. In circumstances where a freestanding derivative instrument is to be
accounted for as an equity instrument, the proceeds are allocated between the
convertible instrument and the derivative equity instrument, based on their
relative fair values.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, we use the
Black-Scholes option pricing model to value the derivative
instruments.
The
discount from the face value of the convertible debt instrument resulting from
the allocation of part of the proceeds to embedded derivative instruments and/or
freestanding options or warrants is amortized over the life of the instrument
through periodic charges to income, using the effective interest
method.
Reclassification
Certain amounts in prior periods have
been reclassified to conform to the 2009 financial statement
presentation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
55
Note 2 - Going Concern
Although
the Company reported net income for the year ended December 31, 2009, it has
incurred net losses for the years ended December 31, 2004 through 2008, negative
cash flows from operating activities for the years ended December 31, 2004
through 2008, and had an accumulated deficit of $71.6 million at December 31,
2009. The Company has relied upon cash from its financing activities to fund its
ongoing operations as it has not been able to generate sufficient cash from its
operating activities in the past, and there is no assurance that it will be able
to do so in the future. Due to this history of losses and operating cash
consumption, we cannot predict for how long we will remain profitable or if the
Company’s business will continue to improve. These factors raise substantial
doubt as to our ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As
of December 31, 2009, the Company had a cash balance of approximately $0.1
million, compared to $0.3 million at December 31, 2008, and a working capital
deficiency of $0.5 million.
The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments. During 2008, the Company
issued 10% Convertible Unsecured Notes and warrants to purchase Company common
stock in exchange for $450,000 cash. These Notes were repaid in full during
fiscal 2009. Additionally, during 2008 the Company and TAG Virgin Islands, Inc.
executed a Stock Purchase Agreement whereby an investor represented by TAG
Virgin Islands, Inc. purchased 2,500,000 shares of Company common stock for a
total investment of $200,000.
The
Company executed a three-year revolving line of credit agreement in March 2008
with Access Capital, Inc. (“Access Capital” or “Access”) which matures on March
30, 2011. As of December 31, 2009, the Company was in default of the Loan and
Security Agreement. As a result of the default, Access has increased the
interest rate payable on borrowings under the line of credit to 18% per annum,
has notified the Company’s clients of their security interest in the amounts due
to the Company, and has provided instruction that payments are to be made
directly to Access Capital. Effective in January 2010, Access Capital has agreed
to reduce the interest rate payable on borrowings under the Loan and Security
Agreement from 18% to 12% per annum. Refer to footnote 5 of the Notes to
Consolidated Financial Statements for further discussion on the Line of
Credit.
On June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock. This note was replaced in December 2008 with
a note reflected the $1,050,000 balance outstanding at that time. The maturity
date remained June 6, 2009. $550,000 was repaid in cash during fiscal 2009. The
maturity on the remaining $500,000 balance which is outstanding at December 31,
2009, has been extended to April 30, 2012. The December 2008 note was replaced
in March 2010. A $500,000 Unsecured Convertible Note was issued in March 2010
which bears interest at 7% and matures on April 30, 2012.
In
February 2006, the Company issued Series A Preferred Stock, in the amount of
$1,900,000, which matures on February 6, 2011. The Company does not currently
have the funds to repay this debt upon maturity. Refer to footnote 9 of the
Notes to Consolidated Financial Statements for further discussion on the
Preferred Stock issuance.
The
Company needs additional capital in order to survive. Additional capital will be
needed to fund current working capital requirements, ongoing debt service and to
repay the obligations that are maturing over the upcoming 12 month period. Our
primary sources of liquidity are cash flows from operations, borrowings under
our revolving credit facility, and various short and long term financings. We
plan to continue to strive to increase revenues and to control operating
expenses in order to reduce, or eliminate, the operating losses. Additionally,
we will continue to seek equity and/or debt financing in order to enable us to
continue to meet our financial obligations until we achieve profitability. There
can be no assurance that any such funding will be available to us on favorable
terms, or at all. Failure to obtain sufficient financing would have substantial
negative ramifications to the Company.
Note 3 - New Accounting
Standards
In July
2009, the FASB”s Accounting Standards Codification™ (“Codification” or “ASC”)
became the single source of authoritative U.S. GAAP (other than rules and
interpretive releases of the SEC). The Codification is topically based with
topics organized by ASC number and updated ASUs. ASUs replace accounting
guidance that was historically issued as Statements of Financial Accounting
Standards (“SFAS”), FASB Interpretations (“FIN”), FASB Staff Positions (“FSP”),
Emerging Issue Task Force (“EITF”) Abstracts and other types of accounting
standards. The Codification became effective September 30, 2009 for the
Company, and disclosures within this Annual Report on Form 10-K have been
updated to reflect the change.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6,
Improving Disclosures About
Fair Value Measurements, that amends existing disclosure requirements
under ASC 820 by adding required disclosures about items transferring into and
out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures
about purchase, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value
disclosures about the level of disaggregation. This pronouncement is
related to disclosure only and it is not anticipated to have a material impact
on the Company’s consolidated financial statements.
56
In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements which amends the criteria for when to evaluate individual
delivered items in a multiple deliverable arrangement and how to allocate the
consideration received. This ASU is effective for fiscal periods beginning on or
after June 15, 2010, which is January 1, 2011 for the Company.
This ASU is effective prospectively for revenue arrangements entered into or
materially modified after January 1, 2011. The Company is
currently evaluating the impact that this new accounting guidance will have on
its consolidated financial statements.
In
August 2009, the FASB issued ASU 2009-05 Measuring Liabilities at Fair
Value to clarify how entities should estimate the fair value of
liabilities under ASC Topic 820. This ASU clarifies the fair value
measurements for a liability in an active market and the valuation techniques in
the absence of a Level 1 measurement. The Company has adopted this guidance in
its consolidated financial statements for the year ended December 31, 2009.
The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In
May 2009, the FASB issued guidance now included in ASC Topic 855 Subsequent Events. This
guidance establishes general standards of accounting for and disclosures of
events that occur after the balance sheet date but before the consolidated
financial statements are issued or are available to be issued. Among other
items, the guidance requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The Company has
adopted this guidance in its consolidated financial statements for the year
ended December 31, 2009.
Note
4 - Property and equipment
Property
and equipment consisted of the following:
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Computer
equipment
|
$ | 1,064,243 | $ | 1,048,776 | ||||
|
Furniture
and fixtures
|
161,543 | 161,543 | ||||||
|
Leasehold
improvements
|
92,459 | 92,459 | ||||||
| 1,318,245 | 1,302,778 | |||||||
|
Accumulated
depreciation
|
(1,281,358 | ) | (1,234,242 | ) | ||||
| $ | 36,887 | $ | 68,536 | |||||
In March
2008, the Company executed a revolving line of credit agreement with Access
Capital, Inc. The Access Capital line of credit provides for borrowing up to a
maximum of $3,500,000, based upon collateral availability, a 90% advance rate
against eligible accounts receivable, has a three year term, and an interest
rate of prime (which was 3.25% as of December 31, 2008) plus 2.75%. The Company
must comply with a minimum working capital covenant which requires the Company
to maintain minimum monthly working capital of $400,000. Additionally, during
the first year of the three year term the Company must maintain an average
minimum monthly borrowing of $2,000,000 which increases the $2,250,000 in the
second year and to $2,500,000 in the third year. The Company must also pay an
annual facility fee equal to 1% of the maximum available under the facility and
a $1,750 per month collateral management fee. Further debt incurred by the
Company may need to be subordinated to Access Capital, Inc.
The
Company was in default of the Loan and Security Agreement as of December 31,
2009 since its working capital was below the minimum required working capital of
$400,000. In the event of a default under the Loan and Security Agreement,
Access Capital’s remedies include, but are not limited to, the
following:
|
·
|
upon
the occurrence of, and for so long as any event of default exists, the
interest rate is increased to one and one-half percent (1.5%) per
month;
|
|
·
|
At
Access Capital’s election, following the occurrence of an event of
default, they may terminate the Loan and Security Agreement. In the event
of early termination after the occurrence of default, the Company would be
liable for various early payment fees, penalties and
interest;
|
57
As a
result of this default, to date, Access has increased the interest rate payable
on borrowings under the line of credit to 18% per annum, has notified the
Company’s clients of their security interest in the amounts due to the Company,
and has provided instruction that payments are to be made directly to Access
Capital.
As of
December 31, 2009, approximately $2.5 million was outstanding under the
revolving line of credit. Remaining availability under the line of credit at
December 31, 2009, based on the year end collateral balance, was approximately
$1.0 million. The interest rate on the revolving line was 18.0% as of December
31, 2009.
Note
6 – Fair Value Measurements
The standards relating to fair value
measurements define fair value, establish a framework for measuring fair value
in accordance with generally accepted accounting principles and expand
disclosures about fair value measurements.
The carrying amounts of our cash, trade
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these items. The carrying amount of the
revolving line of credit approximates fair value because of the revolving nature
of the borrowings.
Note
7 - Notes Payable
Short
term notes payable consisted of the following:
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Convertible
line of credit note with a maturity date of June 6, 2009 unless converted
into common stock at the Company or the note holder’s
option. Interest accrues at 7% per annum. The face value of the
note was originally $2.0 million. In December 2007, $0.35 million was
converted into Company common stock and in March 2008 $0.6 million was
converted into Company common stock. In October 2009, $0.55 million was
repaid in cash and the maturity date was extended to April 30,
2012.
|
$ | - | $ | 1,050,000 | ||||
|
Convertible
note dated July 28, 2008
|
- | 200,000 | ||||||
|
Convertible
note dated September 2, 2008
|
- | 200,000 | ||||||
|
Convertible
note dated October 2, 2008
|
- | 50,000 | ||||||
|
Unamortized
fair value of warrants issued with Convertible notes
|
- | (115,189 | ) | |||||
| $ | - | $ | 1,384,811 | |||||
In June
2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line of
Credit Note. The note accrues interest at an annual rate of 7%, and the
conversion price of the shares of common stock issuable under the note is equal
to $1.58 per share. In addition, such investors received a warrant to purchase
277,778 shares of our common stock at an exercise price of $1.58 per share. This
warrant expired in June 2009. The note also contains a beneficial conversion
feature and, therefore, the Company recorded a beneficial conversion charge of
$1.5 million and allocated $0.5 million to the warrant based on its relative
fair value. Accordingly, the discount, as enumerated above, was amortized as
interest utilizing the effective interest method. On December 28, 2007, $350,000
of this note was extinguished in return for Company Common Stock and warrants.
The investors received 2,499,997 shares of Company Common Stock and warrants to
purchase 2,499,997 shares of Common Stock at a purchase price of $0.154 per
share. Using the Black-Scholes option pricing model, the Company calculated the
fair value of the warrants to purchase 2,499,997 shares of Company common stock
to be $325,000. This fair value was charged to the loss on extinguishment during
2007.
58
During
March 2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
converted $600,000 of the debt due to them under the Unsecured Convertible Line
of Credit Note dated June 7, 2004 into Company common stock. The Company issued
4,615,385 shares of common stock to the investors. The number of shares acquired
was based on the $0.13 per share closing price of the Company’s common stock on
the American Stock Exchange on the date of conversion. Warrants to purchase
4,615,385 shares of Company common stock were provided to the investors as an
inducement to convert. The warrants are exercisable at a price of $0.143 per
share, and are exercisable for five years. Using the Black-Scholes option
pricing model, the Company calculated the fair value of the warrants to purchase
4,615,385 shares of Company common stock to be approximately $553,846. This fair
value was recorded as a charge to the loss on extinguishment of debt and an
addition to additional paid-in capital.
In
December 2008, the Company replaced the June 2004 Unsecured Convertible Line of
Credit Note with a $1,050,000, 7% Convertible Unsecured Note. This note accrues
interest at an annual rate of 7%, matured on June 6, 2009, and the conversion
price of the shares of common stock issuable under the note is equal to 75% of
the average bid price for the prior ten trading days (prior to the date of
conversion), subject to adjustment.
During
2009, $550,000 of the remaining $1,050,000 balance was repaid in cash, leaving a
balance outstanding at December 31, 2009 of $500,000. The maturity date for
repayment of the $500,000 balance has been extended to April 30,
2012.
In March
2010, the Company replaced the December 2008, 7% Convertible Unsecured Note with
a $500,000, 7% Convertible Unsecured Note. This note accrues interest at an
annual rate of 7%, matures on April 30, 2012, and the conversion price of the
shares of common stock issuable under the note is equal to $0.03 per
share.
On July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes were originally due on December 27, 2008 and were convertible into
2,500,000 shares of common stock at the option of the holders. The investors
were also granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. Using the Black-Scholes option pricing
model, the Company calculated the fair value of the warrants to purchase
2,500,000 shares of Company common stock to be approximately $200,000. This Note
had a five month term and the fair value of the warrants was charged to interest
expense over the term of the Note. These Notes were repaid in September
2009.
On
September 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$200,000. This note was originally due on March 1, 2009 and was convertible into
2,500,000 shares of common stock at the option of the holders. The investors
were also granted warrants to purchase 2,500,000 shares of Company common stock,
exercisable at a price of $0.088 per share (subject to adjustment), and are
exercisable for a period of five years. Using the Black-Scholes option pricing
model, the Company calculated the fair value of the warrants to purchase
2,500,000 shares of Company common stock to be approximately $200,000. This Note
had a six month term and the fair value of the warrants was charged to interest
expense over the term of the Note. This Note was repaid in September
2009.
On
October 2, 2008, the Company issued a 10% Convertible Unsecured Note (the
“Note”) to certain investors represented by TAG Virgin Islands, Inc. for
$50,000. This note was originally due on April 1, 2009 and was convertible into
1,000,000 shares of common stock at the option of the holders. The investors
were also granted warrants to purchase 1,000,000 shares of Company common stock,
exercisable at a price of $0.055 per share (subject to adjustment), and are
exercisable for a period of five years. Using the Black-Scholes option pricing
model, the Company calculated the fair value of the warrants to purchase
1,000,000 shares of Company common stock to be approximately $50,000. This Note
was repaid in October 2009.
Long-term
debt consisted of the following:
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Convertible
line of credit note with a maturity date of April 30, 2012 unless
converted into common stock at the note holder’s
option. Interest accrues at 7% per annum.
|
$ | 500,000 | $ | - | ||||
| $ | 500,000 | $ | - | |||||
59
The
Company provides for federal and state income taxes in accordance with current
rates applied to accounting income before taxes. The provision for income taxes
is as follows:
|
Years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
|
$ | - | $ | - | ||||
|
Deferred
|
- | (363,400 | ) | |||||
| $ | - | $ | (363,400 | ) | ||||
The
Company has $12.1 million of net operating loss carry-forwards for both federal
and state purposes expiring between 2023 and 2029. The following summarizes the
Company’s deferred tax assets and liabilities:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net operating
losses
|
$ | 12,077,000 | $ | 12,153,000 | ||||
|
Accounts
receivable
|
46,000 | 107,000 | ||||||
|
Property and
equipment
|
50,000 | 44,000 | ||||||
|
Deferred
Compensation
|
(27,000 | ) | - | |||||
|
Stock based
compensation
|
339,000 | 338,000 | ||||||
| 12,485,000 | 12,642,000 | |||||||
|
Valuation
allowance
|
(12,485,000 | ) | (12,642,000 | ) | ||||
| $ | - | $ | - | |||||
The
Company evaluates the amount of deferred tax assets that are recorded against
expected taxable income over its forecasting cycle which is currently two years.
As a result of this evaluation, the Company has recorded a valuation allowance
of $12,485,000 and $12,642,000 for the years ended December 31, 2009 and 2008,
respectively, representing a current year change in the valuation allowance of
$157,000. This allowance was recorded because, based on the weight of available
evidence, it is more likely than not that some, or all, of the deferred tax
asset may not be realized.
At
December 31, 2009, the Company had net operating loss carryforwards for Federal
and State income tax purposes of approximately $12.1 million, which begin to
expire in 2023. The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carryforwards if there has been
an ownership change, as defined by the tax law. An ownership change as described
in Section 382 of the Internal Revenue Code, may limit the Company’s ability to
utilize its net operating loss and tax credit carryforwards on a yearly basis.
The Company has issued a substantial number of shares of common stock during
2007 and 2008, which may place limitations on the current net loss
carryforwards.
60
Income
taxes computed at the federal statutory rate differ from the amounts provided as
follows:
|
For the year ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Income (loss) before income
taxes
|
$ | 31,956 | $ | (10,829,766 | ) | |||
|
Provision for Federal taxes at
statutory rate (34%)
|
10,865 | (3,682,120 | ) | |||||
|
State taxes, net of Federal
benefit
|
11,457 | (242,554 | ) | |||||
|
Permanent difference due to
non-deductible items
|
31,241 | 32,593 | ||||||
|
Stock based
compensation
|
22,817 | 45,116 | ||||||
|
Valuation allowance applied
against income tax benefit (expense)
|
(76,380 | ) | 3,483,565 | |||||
|
Income tax
provision
|
$ | - | $ | (363,400 | ) | |||
Note 9 - Preferred
Stocks
In
February 2006, we entered into a Securities Purchase Agreement with investors
represented by TAG Virgin Islands, Inc. (“TAG”), pursuant to which
we issued 19,000 shares of our newly created Series A Convertible Preferred
Stock, $.001 par value (the “Series A Preferred”). Each share of Series A
Preferred has a stated value of $100.00. We received proceeds of $1,900,000. The
Series A Preferred has a cumulative annual dividend equal to five percent (5%),
which is payable semi-annually in cash or common stock, at our election,
and is convertible into shares of the Company’s common stock at any time at a
price equal to $0.50 per share (subject to adjustment). In addition, the Series
A Preferred has no voting rights, but has liquidation preferences and certain
other privileges. All shares of Series A Preferred not previously converted
shall be redeemed by the Company, in cash or common stock, at the election of
the Taurus investors, on February 1, 2011. Pursuant to the Securities Purchase
Agreement, the TAG investors were also granted a warrant to purchase 1,900,000
shares of our common stock exercisable at a price of $0.60 per share (subject to
adjustment), exercisable for a period of five years.
Using the
Black-Scholes option pricing model, the Company calculated the relative fair
value of the warrant to purchase 1,900,000 shares of Company common stock to be
approximately $1,128,000. This relative fair value has been recorded as a
reduction of the $1,900,000 mezzanine equity balance for the preferred stock and
an addition to additional paid-in capital. Additionally, the Company calculated
a beneficial conversion feature charge related to the conversion price for the
preferred stock to common stock of approximately $772,000.
In August
2006, we entered into a Stock Purchase Agreement with an investor represented by
TAG, pursuant to which we issued 20,000 shares of our newly created Series
B Convertible Preferred Stock, $.001 par value (the “Series B Preferred”). Each
share of Series B Preferred has a stated value of $100.00. We received proceeds
of $2,000,000. The Series B Preferred has a cumulative annual dividend equal to
the Prime Rate plus one percent (1%), which is payable monthly in cash or
common stock, at our election, and is convertible into shares of our common
stock at any time at a price equal to the lower of (1) $0.85 or (2) the average
daily volume weighted market price for the five consecutive trading days
immediately prior to the date for which such price is determined, with a minimum
price of $0.50. In addition, the Series B Preferred has no voting rights, but
has liquidation preferences and certain other privileges. Pursuant to the Stock
Purchase Agreement, warrants to purchase 1,276,471 shares of our common stock
were issued, exercisable at a price of $0.94 per share (subject to adjustment),
and exercisable for a period of five years.
Using the
Black-Scholes option pricing model, the Company calculated the relative fair
value of the warrants to purchase 1,276,471 shares of Company common stock to be
approximately $593,000. This relative fair value has been recorded as a
reduction of the $2,000,000 mezzanine equity balance for the preferred stock and
an addition to additional paid-in capital.
Note
10 - Treasury Stock
In
February 2006, the Company repurchased 3,892,355 shares of its common stock from
the Company’s largest non-affiliated stockholder, WHRT I Corp. for
$1,848,868.80, and such shares were placed back into the Company’s treasury. An
additional 253,027 shares of our common stock relating to the escrowed shares
were also placed back into treasury. The Company utilized the proceeds from its
issuance of its Series A Convertible Preferred Stock in order to finance this
common stock repurchase.
In
December 2006, the Company sold 3,000,000 shares of its common stock to an
investor for $750,000. Treasury shares were re-issued during this transaction
and a charge to retained earnings was recorded for the difference between the
$0.475 per share acquisition cost and the $0.25 per share price at which the
shares were re-issued.
61
Note
11 - Common Stock Warrants
Warrants
outstanding consisted of the following:
|
December 31,
|
December 31,
|
||||||||||
|
Expiration date
|
Exercise price
|
2009
|
2008
|
||||||||
|
2010
and after
|
$0.01-$0.50 | 65,178,438 | 65,178,438 | ||||||||
|
2009-2011
|
$0.51-$1.00 | 3,176,471 | 4,008,248 | ||||||||
|
2009-2011
|
$1.01-$5.25 | 800,000 | 1,077,778 | ||||||||
| 69,154,909 | 70,264,464 | ||||||||||
Note
12 - Stock Based Compensation
The 2003
Incentive Plan (“2003 Plan”) originally authorized the issuance of up to
20,000,000 shares of common stock for issuance upon exercise of options. It also
authorizes the issuance of stock appreciation rights. The options granted may be
a combination of both incentive and nonstatutory options, generally vest over a
three year period from the date of grant, and expire ten years from the date of
grant. In March 2008, the Company’s Board of Directors approved a 10,000,000
share reduction in the number of shares reserved under the 2003 Incentive Plan,
resulting in up to 10,000,000 shares of common stock currently authorized for
issuance upon the exercise of stock options.
To the
extent that CSI derives a tax benefit from options exercised by employees, such
benefit will be credited to additional paid-in capital when realized on the
Company’s income tax return. There were no tax benefits realized by the Company
during 2009 or 2008.
The
following summarizes the stock option transactions under the 2003 Plan during
2009:
|
Shares
|
Weighted average
exercise price |
|||||||
|
Options
outstanding at December 31, 2008
|
5,204,997 | $ | 0.76 | |||||
|
Options
canceled
|
(432,998 | ) | 0.77 | |||||
|
Options
outstanding at December 31, 2009
|
4,771,999 | $ | 0.76 | |||||
The
following table summarizes information concerning outstanding and exercisable
Company common stock options at December 31, 2009:
|
Range
of exercise
prices |
Options
outstanding |
Weighted
average exercise price |
Weighted
average
remaining contractual life |
Options
exercisable |
Weighted
average exercise price |
|||||||||||||||
|
$0.25-$0.30
|
1,980,000 | $ | 0.260 | 6.7 | 1,846,665 | $ | 0.257 | |||||||||||||
|
$0.46-0.60
|
1,005,000 | $ | 0.461 | 6.0 | 1,005,000 | $ | 0.461 | |||||||||||||
|
$0.70-0.830
|
1,172,000 | 0.830 | 4.8 | 1,172,000 | 0.830 | |||||||||||||||
|
$2.475-3.45
|
614,999 | 2.746 | 4.3 | 614,999 | 2.746 | |||||||||||||||
| 4,771,999 | 4,638,664 | |||||||||||||||||||
62
Note 13 - Loss Per
Share
Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding. Diluted loss per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options using the “treasury stock” method.
Basic and
diluted loss per share was determined as follows:
|
For the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
loss attributable to common stockholders
|
$ | (528,044 | ) | $ | (11,063,447 | ) | ||
|
Weighted
average common shares used to compute net loss per common share
attributable to common stockholders
|
120,123,905 | 115,358,271 | ||||||
|
Basic
and diluted loss per common share attributable to common
stockholders
|
$ | (0.00 | ) | $ | (0.10 | ) | ||
For the
years ended December 31, 2009 and 2008, 4,771,999 shares and 5,204,997 shares,
respectively, attributable to outstanding stock options were excluded from the
calculation of diluted loss per share because the effect was antidilutive.
Additionally, the effect of 69,154,909 warrants and 36,596 options which were
issued prior to December 31, 2008, and outstanding as of December 31, 2009, were
excluded from the calculation of diluted loss per share for the years ended
December 31, 2009 and 2008, as appropriate, because the effect was antidilutive.
Also excluded from the calculation of loss per share because their effect was
antidilutive were 666,667 shares of common stock underlying the $1,050,000
convertible line of credit note to TAG Virgin Islands, Inc. as of December 31,
2008 and 16,666,667 shares of common stock underlying the $500,000 convertible
line of credit note to TAG Virgin Islands, Inc. as of December 31, 2009,
6,000,000 shares underlying the short-term notes to TAG Virgin Islands, Inc.
issued in 2008, 7,800,000 shares underlying the Series A and Series B
convertible preferred stock, and an option to purchase 36,596 shares of common
stock which was issued to Laurus in 2006.
Note
14 - Major Customers
During
2009, the Company had sales to two major customers, PNC Bank (28.6%) and Bank of
America (10.2%), which totaled approximately $9,378,475.
During
2008, the Company had sales to two major customers, Bank of America (20.3%) and
LEC, a related party (11.9%), which totaled approximately
$6,354,325.
Note
15 - Employee Benefit Plan
The
Company has a defined contribution profit sharing plan under Section 401(k) of
the Internal Revenue Code that covers substantially all employees. Eligible
employees may contribute on a tax deferred basis a percentage of compensation up
to the maximum allowable amount. Although the plan does not require a matching
contribution by the Company, the Company may make a contribution. The Company’s
contributions to the plan for the years ended December 31, 2009 and 2008 were
approximately $68,477 and $78,690, respectively.
Note
16 - Commitments and Contingencies
Legal
Proceedings
From time
to time, the Company is either a defendant or the plaintiff in various claims
and lawsuits. Although there can be no assurances, management believes that the
disposition of such matters will not have a material adverse impact on the
results of operations or financial position of the Company.
Employment
Agreements
Lori
Cohen, our President and Chief Executive Officer entered into an employment
agreement dated as of April 1, 2009 to serve as the President and Chief
Executive Officer for a term ending July 31, 2010, unless further extended or
earlier terminated. Pursuant to the employment agreement, Ms. Cohen
will receive the following compensation: (a) an annual salary of $280,000; (b)
bonus as determined by the Board of Directors; (c) 2% of the gross sales of any
project that is managed by Ms. Cohen; (d) 7.5% of net income (subject to certain
adjustments) for the period commencing April 1, 2009 and ending December 31,
2009, provided net income exceeds $133,000 during the period; the incentive
payment for the annual period commencing January 1, 2010 will be based on the
net income exceeding $200,000; (e) and such other benefits (including a car
allowance) as described in the employment agreement.
63
Scott
Newman, our Chairman and Chief Strategy Officer entered into an employment
agreement dated as of May 1, 2009 to serve as the Chief Strategy Officer for a
term ending April 30, 2010 unless extended or earlier
terminated. Pursuant to the employment agreement, Mr. Newman will
receive the following compensation: (a) an annual salary of $275,000; (b) 20% of
his hourly billable rate billed to clients; (c) 2% of the gross billing for
clients for whom Mr. Newman serves as the Engagement Manager, excluding Mr.
Newman’s billable time for that client; (d) 0.5% of the monthly gross profits on
the first $400,000 and 5% of the gross profit in excess of $400,000 for any
given month; (e) 2.5% of net income (subject to certain adjustments) during the
period commencing on April 1, 2009 and ending December 31, 2009, provided net
income exceeds $133,000; the incentive payment for the annual period commencing
January 1, 2010 will be based on the net income exceeding $200,000; and (f) such
other benefits (including a car allowance) as described in the employment
agreement.
Glenn
Peipert, our Executive Vice President and Chief Operating Officer entered into
an employment agreement dated as of May 1 2009, pursuant to which he will
continue to serve as the Executive Vice President and Chief Operating Officer
for a term ending April 30, 2010 unless extended or earlier
terminated. Pursuant to the employment agreement, Mr. Peipert will
receive the following compensation: (a) an annual salary of $275,000; (b) 10% of
his hourly billable rate billed to clients; (c) 1.5% of gross revenue of any
business leads brought in by Peipert which result in recognized revenue; (d)
2.5% of net income (subject to certain adjustments) during the period commencing
on May 1, 2009 and ending December 31, 2009, provided net income exceeds
$133,000; the incentive payment for the annual period commencing January 1, 2010
will be based on net income exceeding $200,000; and (e) such other benefits
(including a car allowance) as described in the employment agreement. Mr.
Peipert submitted his resignation from the Company, effective January 25,
2010.
William
Hendry, Vice President and Chief Financial Officer, agreed to a three-year
employment agreement dated as of October 15, 2007. The agreement provides for an
annual salary to Mr. Hendry of $200,000 per year and an annual bonus, to be
determined by the Company’s Board of Directors. The agreement also provides for
health, life and disability insurance. In the event that Mr. Hendry’s employment
is terminated other than with good cause, he will receive severance equal to his
salary and the cost of any company sponsored insurance policy for twelve months.
If Mr. Hendry is terminated without Good Cause as a result of a change in
control of the Company, as defined in the Agreement, then in addition to the
Severance Pay and the cost of any company sponsored insurance policy for twelve
months, all unvested stock options and/or restricted shares owned by Mr. Hendry
shall vest immediately. In the event Mr. Hendry is terminated for Good Cause, as
defined in the Agreement, Mr. Hendry shall be paid salary earned and expenses
reimbursable through the termination date, and receive health benefits for
twelve months thereafter.
Lease
Commitments
The
Company's corporate headquarters are located at 100 Eagle Rock Avenue, East
Hanover, New Jersey 07936, where it operates under an amended lease agreement
expiring December 31, 2015. This amendment requires the Company to
surrender approximately 7,467 square feet of its office space to the landlord
effective July 1, 2010, leaving the Company with approximately 9,137 square feet
of office space in this facility. Monthly rent with respect to our East Hanover,
New Jersey facility is $16,581.50 until December 31, 2010. Monthly rent for the
period beginning January 1, 2011 and ending December 31, 2015 will be
$11,822.75. In addition to minimum rentals, the Company is liable for its
proportionate share of real estate taxes and operating expenses, as
defined. The Company’s CSI DeLeeuw division has an office at Suite 1460,
Charlotte Plaza, 201 South College Street, Charlotte, North Carolina
28244. DeLeeuw leases this space which had an original expiration date of
December 31, 2005, but has been extended until December 31, 2010. Monthly
rent with respect to our Charlotte, North Carolina facility is $2,679, however,
this monthly rate increases to $2,787 per month effective January 1, 2010
through December 31, 2010.
Rent
expense, including automobile rentals, totaled approximately $173,986 and
$218,000 in 2009 and 2008, respectively.
64
Future
minimum lease payments due under all operating lease agreements as of December
31, 2009 are as follows:
|
Years Ending December 31
|
Office
|
Subleases
|
Net
|
|||||||||
|
2010
|
$ | 232,417 | $ | 71,540 | $ | 160,877 | ||||||
|
2011
|
141,873 | - | 141,873 | |||||||||
|
2012
|
141,873 | - | 141,873 | |||||||||
|
2013
|
141,873 | - | 141,873 | |||||||||
|
2014
|
141,873 | - | 141,873 | |||||||||
|
2015
|
141,873 | - | 141,873 | |||||||||
| $ | 941,782 | $ | 71,540 | $ | 870,242 | |||||||
Note
17 – Related Party Transactions
In
November 2003, the Company executed an Independent Contractor Agreement with
LEC, whereby the Company agreed to be a subcontractor for LEC, and to provide
consultants as required to LEC. In return for these services, the Company
receives a fee from LEC based on the hourly rates established for consultants
subcontracted to LEC. In May 2004, the Company acquired 49% of all issued and
outstanding shares of common stock of LEC. For the years ended December 31, 2009
and 2008, the Company invoiced LEC $2,095,983 and $2,340,658, respectively, for
the services of consultants subcontracted to LEC by the Company. As of December
31, 2009 and 2008, the Company had accounts receivable due from LEC of
approximately $236,000 and $284,000, respectively. There are no known collection
problems with respect to LEC. The majority of their billing is derived from
Fortune 1000 clients. The collection process is slow as these clients require
separate approval on their own internal systems, which extends the payment
cycle.
As of
December 31, 2009 and 2008, Mr. Peipert’s outstanding loan balance to the
Company was $92,000 and $102,000, respectively. The unsecured loan by Mr.
Peipert accrues interest at a simple rate of 8% per annum, had a term expiring
on April 30, 2007, and is currently due on demand. However, this loan is
subordinated to the Company’s line of credit arrangement with Access Capital,
Inc.
Although
the Company remained in default with respect to the Access Capital Loan and
Security Agreement, in January 2010, Access Capital agreed to reduce the
interest rate to be charged on revolving line of credit borrowings from 18% to
12% per annum.
In March
2010, the Company replaced the $1,050,000 7% Convertible Unsecured Note dated
December 23, 2008 with a $500,000, 7% Convertible Unsecured Note. This note
accrues interest at an annual rate of 7%, matures on April 30, 2012, and the
conversion price of the shares of common stock issuable under the note is equal
to $0.03 per share.
65
Pursuant
to the requirements of Section 13 or 15(d) 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.
Dated:
March 26, 2010
|
/s/
Lori Cohen
|
|
|
Lori
Cohen
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Lori Cohen
|
President,
Chief Executive Officer
|
March
26, 2010
|
||
|
Lori
Cohen
|
and
Director
|
|||
|
|
||||
|
/s/
William Hendry
|
Vice
President, Chief Financial Officer,
|
March
26, 2010
|
||
|
William
Hendry
|
Secretary
and Treasurer
|
|||
|
/s/
Scott Newman
|
Chief
Strategy Officer, Director
|
March
26, 2010
|
||
|
Scott
Newman
|
||||
|
/s/
Glenn Peipert
|
Director
|
March
26, 2010
|
||
|
Glenn
Peipert
|
||||
|
/s/
Thomas Pear
|
Director
|
March
26, 2010
|
||
|
Thomas
Pear
|
||||
|
/s/
Lawrence K. Reisman
|
Director
|
March
26, 2010
|
||
|
Lawrence
K. Reisman
|
66