CTI GROUP HOLDINGS INC - FORM 10-Q

CTI GROUP HOLDINGS INC - FORM 10-Q - May 15, 2013

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EXCEL - IDEA: XBRL DOCUMENT - CTI GROUP HOLDINGS INC	Financial_Report.xls
EX-31.2 - EX-31.2 - CTI GROUP HOLDINGS INC	d509856dex312.htm
EX-31.1 - EX-31.1 - CTI GROUP HOLDINGS INC	d509856dex311.htm
EX-32.2 - EX-32.2 - CTI GROUP HOLDINGS INC	d509856dex322.htm
EX-32.1 - EX-32.1 - CTI GROUP HOLDINGS INC	d509856dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from to

Commission file number 000-10560

CTI GROUP (HOLDINGS) INC.

(Exact name of registrant as specified in its charter)


DELAWARE		51-0308583
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

333 North Alabama Street, Suite 240, Indianapolis, IN 46204

(Address of principal executive offices) (Zip Code)

(317) 262-4666

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 1, 2013, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,178,271.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS


ITEM NO.	PAGE NO.
Forward Looking Statements		3

PART I – Financial Information
1. Financial Statements
Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012		4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2013 and March 31, 2012		5
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and March 31, 2012		6
Notes to Consolidated Financial Statements (unaudited)		7
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
3. Quantitative and Qualitative Disclosures about Market Risk		21
4. Controls and Procedures		21

PART II – Other Information
1. Legal Proceedings		22
1A. Risk Factors		23
2. Unregistered Sales of Equity Securities and Use of Proceeds		23
3. Defaults Upon Senior Securities		23
4. Mine Safety Disclosures		23
5. Other Information		23
6. Exhibits		23
Signatures		24

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking” statements. Forward-looking statements discuss matters that are not historical facts. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or board of directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words “anticipate”, “expect”, “may”, “project”, “intend”, “believe”, or similar expressions.

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, each reader of this Form 10-Q should carefully consider the risk factors stated in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially from those discussed herein, including, but not limited to: economic conditions, risks associated with conducting business outside the U.S., ability to obtain a loan facility or receive additional advances from Fairford Holdings, Limited, a British Virgin Islands Company, who, as of March 31, 2013, owned beneficially 60.7% of the Company’s Class A common stock (“Fairford”), if needed, incurring additional losses, impact of accounting pronouncements, recording additional impairments, ability to maintain an effective system of internal controls over financial reporting and disclosure controls and procedures, ability to attract and retain customers to purchase the Company’s products, ability to develop or launch new software products, technological advances by third parties and competition, ability to protect the Company’s patented technology, and ability to obtain settlements in connection with its patent enforcement activities. You should not place any undue reliance on any forward-looking statements. Except to the extent required by law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions or circumstances or assumptions underlying such statements, or otherwise.

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2013 (unaudited)			2012
ASSETS
Cash and cash equivalents	$	1,764,197		$	2,345,390
Trade accounts receivable, less allowance for doubtful accounts of $37,422 and $97,704, respectively		2,584,831			3,199,128
Prepaid expenses		527,530			456,957
Other current assets		202,935			248,721

Total current assets		5,079,493			6,250,196
Property, equipment, and software, net		2,027,003			2,026,228
Intangible assets, net		1,664,788			1,833,350
Goodwill		2,769,589			2,769,589
Other assets		228,474			228,515

Total assets	$	11,769,347		$	13,107,878

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	274,641		$	430,162
Accrued expenses		953,581			919,518
Accrued wages and other compensation		513,177			482,752
Income tax payable		887,117			727,370
Deferred tax liability – short term		175,600			116,482
Deferred revenue		3,560,381			3,886,152

Total current liabilities		6,364,497			6,562,436
Lease incentive – long term		86,649			64,953
Deferred revenue – long term		222,578			811,808
Deferred income tax liability – long term		265,337			410,444

Total liabilities		6,939,061			7,849,641

Commitments and contingencies
Stockholders’ equity
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,178,271 issued at March 31, 2013 and at December 31, 2012		291,783			291,783
Additional paid-in capital		26,133,199			26,117,670
Accumulated deficit		(21,895,391	)		(21,343,000	)
Other comprehensive income – foreign currency translation		492,838			383,927
Treasury stock, 140,250 shares, at cost		(192,143	)		(192,143	)

Total stockholders’ equity		4,830,286			5,258,237

Total liabilities and stockholders’ equity	$	11,769,347		$	13,107,878

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Three months ended March 31,
	2013			2012
Revenues:
Software sales, service fee and license fee revenue	$	3,885,326		$	4,367,837
Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		1,042,327			1,154,911
Selling, general and administration		1,867,824			1,841,002
Research and development		808,979			592,568
Depreciation and amortization		503,986			445,550

Total costs and expenses		4,223,116			4,034,031

Income / (loss) from operations		(337,790	)		333,806
Other (income) / expense
Interest income		(1,146	)		(2,924	)

Total other (income) / expense		(1,146	)		(2,924	)
Income / (loss) before income taxes		(336,644	)		336,730
Tax expense		215,747			223,200

Net income / (loss)		(552,391	)		113,530

Other comprehensive income / (loss)
Foreign currency translation adjustment		108,911			(88,811	)

Comprehensive income / (loss)	$	(443,480	)	$	24,719

Basic and diluted net income / (loss) per common share	$	(0.02	)	$	0.00

Basic weighted average common shares outstanding		29,038,021			29,038,021
Diluted weighted average common shares outstanding		29,038,021			29,258,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income / (loss)	$	(552,391	)	$	113,530
Adjustments to reconcile net income / (loss) to net cash (used in) / provided by operating activities:
Depreciation and amortization		503,986			445,550
Provision for doubtful accounts		7,780			10,891
Deferred income taxes		(53,595	)		(22,623	)
Recognition of rent incentive benefit		46,357			(23,343	)
Stock option grant expense		15,529			10,081
Changes in operating assets and liabilities:
Trade receivables		439,622			710,299
Prepaid expenses		(88,835	)		107,921
Income taxes		213,896			57,074
Other assets		46,706			21,835
Accounts payable		(139,549	)		(44,637	)
Accrued expenses		63,233			(71,291	)
Accrued wages and other compensation		53,096			162,625
Deferred revenue		(651,532	)		(517,508	)

Cash (used in) / provided by operating activities		(95,697	)		960,404

Cash flows used in investing activities:
Additions to property, equipment, and software		(348,699	)		(305,021	)

Cash used in investing activities		(348,699	)		(305,021	)

Cash flows used in financing activities:
Cash used in financing activities		—			—

Effect of foreign currency exchange rates on cash and cash equivalents		(136,797	)		113,963

(Decrease) / increase in cash and cash equivalents		(581,193	)		769,346
Cash and cash equivalents, beginning of period		2,345,390			2,945,182

Cash and cash equivalents, end of period	$	1,764,197		$	3,714,528

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: Business and Basis of Presentation

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

The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of Delaware in 1988, pursuant to a merger of CTI into a wholly owned subsidiary formed as a Delaware corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.

EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

Certain information in footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), has been condensed or omitted pursuant to the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.

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

Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense. Amortization expense of developed software amounted to $259,498 and $186,878 for the three months ended March 31, 2013 and 2012, respectively.

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

The Company paid income taxes of approximately $61,700 and $185,010 during the three months ended March 31, 2013 and 2012, respectively, for taxes on prior year income.

NOTE 3: Fair Value of Financial Instruments

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

NOTE 4: Debt Obligations and Liquidity

None.

NOTE 5: New Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This update further clarified the guidance previously issued under ASU No. 2011-11, which required both gross and net presentation of offsetting assets and liabilities. The new requirements were effective retrospectively for fiscal years beginning on or after January 1, 2013, and for interim periods within those fiscal years. As the guidance impacted disclosure requirements only, the Company’s adoption of the guidance on January 1, 2013 did not have an impact on its results of operations, financial position or cash flows.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance was issued in response to ASU No. 2011-05 and required disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items of net income, if the amounts reclassified are required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period. For other amounts not required to be reclassified to net income in their entirety in the same reporting period, or when a portion of the amount is reclassified to a balance sheet account instead of directly to income or expense, a cross reference to the related footnote disclosures for additional information should be provided. The new requirements were effective prospectively for fiscal years beginning on or after December 15, 2012, and for interim periods within those fiscal years. As the guidance impacted disclosure requirements only, the Company’s adoption of the guidance on January 1, 2013 did not have an impact on its results of operations, financial position or cash flows.

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405), Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The new requirements are effective for fiscal years that begin on or after December 15, 2013, and for interim periods within those fiscal years. Retrospective presentation for all comparative periods presented is required. The Company expects that the adoption of this guidance will not have a material impact on its results of operations, financial position or cash flows.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This guidance clarifies the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The new requirements are effective prospectively for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. The Company expects that the adoption of this guidance will not have a material impact on its results of operations, financial position or cash flows.

NOTE 6: Basic and Diluted Net Income Per Common Share

Basic earnings per share amounts are computed by dividing reported earnings available to common stockholders by the weighted average shares outstanding for the period. Diluted earnings per share amounts are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding for the period giving effect to securities considered to be potentially dilutive common shares, such as stock options.


	For the Three Months Ended March 31,
	2013			2012
Net income / (loss)	$	(552,391	)	$	113,530

Weighted average shares of common stock outstanding used to compute basic earnings per share		29,038,021			29,038,021
Additional common shares to be issued assuming exercise of stock options and stock warrants		—			220,000

Weighted average shares of common and common equivalent stock outstanding used to compute diluted earnings per share		29,038,021			29,258,021

Basic:
Net income / (loss) per share	$	(0.02	)	$	0.00

Weighted average common shares outstanding		29,038,021			29,038,021

Diluted:
Net income / (loss) per share	$	(0.02	)	$	0.00

Weighted average common and common equivalent shares outstanding		29,038,021			29,258,021

For the three months ended March 31, 2013, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss.

Note 7: Stock Based Compensation

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan included designated officers and other employees (including employees who also serve as directors), non-employee directors, independent contractors and consultants who perform services for the Company. The terms of each grant under the Plan were determined by the board of directors, or a committee of the board administering the Plan, in accordance with the terms of the Plan. Outstanding stock options become immediately exercisable upon a change of control of the Company as in accordance with the terms of the Plan. Stock options granted under the Plan typically become exercisable over a one to five year period. Generally, the options have various vesting periods, which include immediate and term vesting periods.

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

On December 8, 2005, the Company’s stockholders ratified the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”) at the Company’s 2005 Annual Meeting of Stockholders. In addition, the Company filed a registration statement on Form S-8 with the SEC. The Stock Incentive Plan replaced the Plan. No new grants will be granted under the Plan. Grants that were made under the Plan prior to the stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan.

The Stock Incentive Plan is administered by the Compensation Committee of the board of directors. Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the Stock Incentive Plan.

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

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

The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. As of March 31, 2013, there were 1,814,900 awards available for grant under the Stock Incentive Plan. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

At March 31, 2013, there were options to purchase 5,691,350 shares of Class A common stock outstanding consisting of 5,441,350 Plan and Stock Incentive Plan options and 250,000 Outside Plan Stock Options. There were exercisable options to purchase an aggregate of 4,391,302 shares of Class A common stock under the Plan and Stock Incentive Plan and options to purchase 250,000 shares of Class A common stock that were Outside Plan Stock Options as of March 31, 2013.

Information with respect to options was as follows:


	Options Shares		Exercise Price Range Per Share		Weighted Average Exercise Price
Outstanding, January 1, 2013		5,691,350		$0.08 — $ 0.40	$	0.25
Granted		—		—		—
Exercised		—		—		—
Expired		—		—		—

Outstanding, March 31, 2013		5,691,350		$0.08 — $ 0.40	$	0.25

The future compensation costs related to non-vested options at March 31, 2013 is $137,484. The future costs will be recognized over the weighted average period of approximately 2.50 years.

The following table summarizes options exercisable at March 31, 2013:


	Option Shares		Exercise Price Range Per Share		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Remaining Contractual Term
March 31, 2013		4,641,302	$	0.08-$ 0.40	$	0.27	$	262,733		4.17 years

The following table summarizes non-vested options:


	Option Shares
January 1, 2013		1,050,048
Granted		—
Expired		—
Vested		—

March 31, 2013		1,050,048

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the following table:


	2012
Risk-free interest rate		0.38	%
Dividend yield		0.00	%
Volatility factor		239.36	%
Expected lives		5 years

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula). Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

On February 16, 2007, the Company and Fairford Holdings Scandinavia AB (“Fairford Scandinavia”), a wholly-owned subsidiary of Fairford Holdings Limited (“Fairford”), entered into the Securities Purchase Agreement (the “Agreement”), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company issued to Fairford Scandinavia a Class A common stock Purchase Warrant (the “Original Warrant”) to purchase shares of Class A common stock of the Company in consideration for securing the issuance of a $2.6 million letter of credit (the “Letter of Credit”) from SEB Bank to National City Bank. Due to National City Bank’s receipt of the Letter of Credit, the Company was able to obtain the loan at a favorable cash-backed interest rate. Effective April 14, 2008, the Company entered into a new Securities Purchase Agreement with Fairford Scandinavia and issued an additional warrant to Fairford Scandinavia to purchase shares of Class A common stock based on the interest rate savings (the “Additional Warrant”).

Pursuant to the Original Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Class A common stock at the exercise price of $0.34 per share, subject to adjustments as described in the Original Warrant, at any time prior to the 10th anniversary of the date of issuance. Pursuant to the Additional Warrant, Fairford Scandinavia is entitled to purchase 620,675 shares of Class A common stock at the exercise price of $0.22 per share, subject to adjustments as described in the Additional Warrant, at any time prior to the 10th anniversary of the date of issuance. On December 31, 2009, Fairford Scandinavia sold all of its owned Class A shares, or 355,099 shares to Fairford for SEK 2.80362 ($0.39) per share. As of March 31, 2013, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock and Fairford Scandinavia owned warrants to purchase 1,040,170 shares of the Company’s Class A common stock. Mr. Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford Scandinavia. The Original Warrant and Additional Warrant vested immediately upon grant.

Included within selling, general and administrative expense for the three months ended March 31, 2013 and March 31, 2012 was $15,529 and $10,081, respectively, of stock-based compensation. Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts are not included in internal measures of segment operating performance.

NOTE 8: Indemnification to Customers

The Company’s agreements with customers generally require the Company to indemnify the customer against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard provisions including our right to replace the infringing product. As of March 31, 2013, the Company did not experience any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations, and consequently, the Company has not established any related accruals.

NOTE 9: Contingencies

The Company is subject to claims and lawsuits arising primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of any such pending claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq. against Qwest Corporation in the United States District Court for the Southern District of Indiana (“District Court”) on January 12, 2004. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270. On October 30, 2012, the District Court entered an order awarding Qwest Corporation litigation costs in the amount of approximately $250,000. The Company filed a timely notice of appeal on November 13, 2012, and an amended notice of appeal on November 30, 2012. It also was ordered to post a supesedeas bond guaranteeing the payment of costs. The briefing process is ongoing and we anticipate that the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) will issue its opinion in late 2013 or early 2014. As set forth in the appellate brief, filed on February 27, 2013, the Company and legal counsel believe that there are reasonable and persuasive grounds for the appellate court to overturn the District Court’s order granting Qwest Corporation’s motion for summary judgment. The Company and the Company’s legal counsel believe it is more likely than not that the appellate court will overturn the district court’s order granting Qwest Corporation’s motion for summary judgment, which would vitiate the award of costs. As a result, the Company has concluded that it is not probable that it has incurred a loss relating to this matter. The Company believes a range of possible loss, which cannot be reasonably estimated at this time, is between zero and the amount of the judgment. Because the Company believes that this potential loss is not probable or estimable, it has not recorded any reserves or contingencies related to this legal matter. In the event that the Company’s assumptions used to evaluate this matter as neither probable nor estimable change in future periods, it will be required to record a liability for an adverse outcome.

NOTE 10: Income Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of March 31, 2013, the Company’s valuation allowance related only to net deferred tax assets in the United States. In addition, at March 31, 2013, the Company considered its cumulative earnings related to non-U.S. subsidiaries to be indefinitely reinvested.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. As of March 31, 2013 and March 31, 2012, the Company had $120,961 and $103,712 of unrecognized tax benefits, respectively, all of which would favorably affect the Company’s effective tax rate if recognized. The Company and its subsidiaries are subject to U.S. federal and state income taxes as well as foreign income tax in the United Kingdom. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had no amounts accrued for interest and penalties as of March 31, 2013.

For the three months ended March 31, 2013 and March 31, 2012, the Company recorded $215,747 and $223,200, respectively, of income tax expense. The income tax expense was primarily related to the United Kingdom operations. The difference between the statutory rate and the actual rate is primarily due the valuation allowance related to the net deferred tax assets in the United States and a true-up of prior year tax estimates in the United Kingdom due to a larger permanent difference in fixed asset depreciation than previously anticipated.

NOTE 11: Segment Information

The Company has two reportable segments: EIM and CAMRA. These segments are managed separately because the services provided by each segment require different technology and marketing strategies.

Electronic Invoice Management: EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries.

Call Accounting Management and Recording: CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

Reconciling items for operating income (loss) in the table below represent corporate expenses, legal costs for patent enforcement and depreciation all of which are in the United States.

The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Summarized financial information concerning the Company’s reportable segments for the three months ended March 31, 2013 and 2012 is shown in the following tables.


	For Three Months Ended March 31, 2013
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,607,537	$	1,277,789		$	—		$	3,885,326
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		2,104,522		738,477			—			2,842,999
Depreciation and amortization		359,602		143,285			1,099			503,986
Income (loss) from operations		509,414		(439,692	)		(407,512	)		(337,790	)
Long-lived assets		5,693,709		989,054			7,091			6,689,854


	For Three Months Ended March 31, 2012
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,949,225	$	1,418,612		$	—		$	4,367,837
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		2,349,354		863,572			—			3,212,926
Depreciation and amortization		343,833		100,703			1,014			445,550
Income (loss) from operations		892,169		(252,680	)		(305,683	)		333,806
Long-lived assets		6,348,405		784,861			11,452			7,144,718

The following table presents net revenues by geographic location.


	For Three Months Ended March 31, 2013
	United States			United Kingdom		Consolidated
Revenues	$	792,157		$	3,093,169	$	3,885,326
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		521,702			2,321,297		2,842,999
Depreciation and amortization		143,874			360,112		503,986
Income (loss) from operations		(758,058	)		420,268		(337,790	)
Long-lived assets		5,654,483			1,035,371		6,689,854


	For Three Months Ended March 31, 2012
	United States			United Kingdom		Consolidated
Revenues	$	992,749		$	3,375,088	$	4,367,837
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		720,175			2,492,751		3,212,926
Depreciation and amortization		104,679			340,871		445,550
Income (loss) from operations		(366,399	)		700,205		333,806
Long-lived assets		6,008,841			1,135,877		7,144,718

NOTE 12 – Related Party Transactions

On March 7, 2013, a proposal (the “Proposal”) was made by Fairford, Michael Reinarts who is the Chairman of the Company’s Board of Directors and John Birbeck who is the Company’s Chief Executive Officer, to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $0.29 per share. On March 8, 2013, the Company’s Board of Directors formed a Special Committee to, among other things, evaluate and determine the Company’s response to the Proposal.

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

Overview

The Company is comprised of two business segments: EIM and CAMRA. EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

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

The Company’s software products and services are subject to changing technology and evolving customer needs which require the Company to continually invest in research and development in order to respond to such demands. The limited financial resources available to the Company require the Company to concentrate on those business segments and product lines which the Company believes will provide the greatest returns on investment. The EIM segment, as compared to the other business segment, provides the predominant share of income from operations and cash flow from operations. The majority of CAMRA segment revenues are derived from its United Kingdom operations but the Company believes that most of the growth in the CAMRA segment will occur in the United States.

The Company reported revenue in the EIM segment of $2.6 million and $2.9 million for the three months ended March 31, 2013 and 2012, respectively. For the CAMRA segment, the Company recorded revenues of $1.3 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively.

The Company believes that as voice and data services continue to commoditize, service providers will seek alternative business models to replace revenue lost as a result of pricing pressures. One such business model is the delivery of managed or hosted voice and video services.

Traditionally, organizations that required advanced voice and video services would purchase enabling communications hardware and software, operate and maintain this equipment, and depreciate the associated capital expense over time. This approach had two major disadvantages for such organizations. The first being that organizations would experience significant capital and operational expenditures related to acquiring these advanced services. The second being that the capabilities of the acquired equipment would not materially improve as voice and video service technology evolved.

Service providers recognized these challenges and began, as part of their next generation network (“NGN”) strategies, to deliver managed and hosted service offerings that do not require the customer to purchase expensive equipment up-front and virtually eliminate the operational expenditures associated with managing and maintaining an enterprise-grade communications network. Service providers incrementally improve revenue by enabling competitive voice and video features while reducing costs by delivering these services on high-capacity, low-cost NGNs.

Due to the profitability and average revenue per user advantage possible by delivering such managed and hosted service offerings, providers not only look at acquiring new customers but converting legacy customers onto the NGN platform. The Company believes that this conversion process is significant. Many legacy features and functions are not available on NGN platforms, primarily due to the immaturity of the service delivery model.

The Company’s CAMRA applications will help eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. In 2007, the Company marketed two applications, emPulse, a web-based communications traffic analysis solution, and SmartRecord^® IP, which enable service providers to selectively intercept communications on behalf of their hosted and managed service customers. These applications also enable managed and hosted service customers of service providers to analyze voice, video, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications were released as enterprise-grade products. The Company anticipates that customers will purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business or vertical.

Financial Condition

In the three months ended March 31, 2013, the stockholders’ equity decreased $427,951 from $5,258,237 as of December 31, 2012 to $4,830,286 as of March 31, 2013 primarily as a result of the net loss of $552,391, partially off-set by other comprehensive gain, related to foreign currency translation adjustment, of $108,911, for the three months ended March 31, 2013. The Company realized a decrease in net current assets (current assets, less current liabilities) of $972,764 which was primarily attributable to a decrease in cash and accounts receivable in the three months ended March 31, 2013.

At March 31, 2013, cash and cash equivalents were $1,764,197 compared to $2,345,390 at December 31, 2012, and such decrease was primarily attributable to cash used in investing activities of $348,699 along with cash used in operating activities for the three months ended March 31, 2013 of $95,697. The cash used in operating activities in the three months ended March 31, 2013 of $95,697 was primarily attributable to the net loss of $552,391 and a decrease in deferred revenue of $651,532 which was partially offset by depreciation and amortization of $503,986 and a decrease in receivables of $439,622. Cash utilized in investing activities of $348,699 related to additions to property, equipment and software. The Company generates approximately 79.6% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has weakened by 6.5% in relation to the United States dollar during the three month period ended March 31, 2013.

Results of Operations (Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012)

Revenues

Revenues from operations for the three months ended March 31, 2013 decreased $482,511, or 11.0%, to $3,885,326 as compared to $4,367,837 for the three months ended March 31, 2012. Overall revenues decreased primarily as a result of decreased sales in the EIM segment. Revenues derived from the United Kingdom operations represented 79.6% and 77.3% of total revenues for the three months ended March 31, 2013 and 2012, respectively. The increase in the percentage of total revenues attributable to United Kingdom operations was primarily related to decreased sales in the United States CAMRA segment. The United States revenues decreased by $200,592, or 20.2%, to $792,157 for the three months ended March 31, 2013 compared to $992,749 for the three months ended March 31, 2012. Such decrease was primarily related to a decrease in revenue in the CAMRA segment sales in the United States due to fewer installations in 2013. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 24.9% of the total revenues for the three months ended March 31, 2013 and approximately 25.3% for the three months ended March 31, 2012.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended March 31, 2013, decreased $112,584, or 9.7%, to $1,042,327, as compared to $1,154,911 for the three months ended March 31, 2012. The decrease was primarily related to costs associated with decreased revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment decreased $15,728 to $539,312 for the three months ended March 31, 2013 from $555,040 for the three months ended March 31, 2012. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $96,856 to $503,015 for the three months ended March 31, 2013 compared to $599,871 for the three months ended March 31, 2012. The cost of products and services, excluding depreciation and amortization, was 26.8% of revenue for the three months ended March 31, 2013, as compared to 26.4% of revenue for the three months ended March 31, 2012.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended March 31, 2013 increased $26,822, or 1.5%, to $1,867,824 compared to $1,841,002 for the three months ended March 31, 2012. The increase was primarily due to professional fees incurred. Selling, general and administrative costs related to the CAMRA segment decreased by $86,441 to $647,708 for the three months ended March 31, 2013 compared to $734,149 for the three months ended March 31, 2012. Selling, general and administrative costs related to the EIM segment increased by $11,519 to $813,703 for the three months ended March 31, 2013 compared to $802,184 for the three months ended March 31, 2012. Selling, general and administrative costs related to the Corporate allocation increased by $101,744 to $406,413 for the three months ended March 31, 2013 compared to $304,669 for the three months ended March 31, 2012 which was primarily due to an increase in professional fees.

Research and Development Expense

Research and development expense for the three months ended March 31, 2013 increased $216,411, or 36.5%, to $808,979 as compared to $592,568 for the three months ended March 31, 2012. Research and development costs related to the CAMRA segment increased $105,776 to $387,176 for the three months ended March 31, 2013 compared to $281,400 for the three months ended March 31, 2012. Research and development expense related to the EIM segment increased $110,635 to $421,803 for the three months ended March 31, 2013 compared to $311,168 for the three months ended March 31, 2012. Research and development costs that were capitalized during the three months ended March 31, 2013 and March 31, 2012 amounted to $223,388 and $257,051, respectively. Research and development costs allocated to cost of goods sold during the three months ended March 31, 2013 and March 31, 2012 amounted to $137,442 and $219,966, respectively.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2013 increased $58,436 to $503,986 from $445,550 in the three months ended March 31, 2012.

Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense. Amortization expense of developed software which amounted to $259,498 and $186,878 for the three months ended March 31, 2013 and 2012, respectively.

Other Income and Expense

The Company realized interest income of $1,146 for the three months ended March 31, 2013 compared to interest income of $2,924 for the three months ended March 31, 2012. The reduction in interest income was primarily associated with a decrease in the amount of invested cash.

Taxes

The tax expense for the three months ended March 31, 2013 decreased $7,453, or 3.3%, to $215,747 as compared to $223,200 for the three months ended March 31, 2012. The tax expense for the three months ended March 31, 2013 and March 31, 2012 was due to the pre-tax income in the United Kingdom of $421,414 and $707,127, respectively. The increase in the effective tax rate in 2013 was caused by a true-up of the prior year provision.

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of March 31, 2013, the Company’s valuation allowance related to the net deferred tax assets in the United States.

Net Income / (Loss)

The Company realized a net loss for the three months ended March 31, 2013 of $552,391 compared to net income of $113,530 for the three months ended March 31, 2012. The change to a net loss was primarily associated with the reduction of revenue of $482,511 for the three months ended March 31, 2013 when compared to the three months ended March 31, 2012.

Liquidity and Capital Resources

Historically, the Company’s principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs) and capital expenditures, including software development. Cash flows from operations and existing cash and cash equivalents have been adequate to meet the Company’s business objectives. Cash and cash equivalents decreased $581,193 to $1,764,197 as of March 31, 2013 compared to $2,345,390 as of December 31, 2012. The decrease in cash and cash equivalents, during the three months ended March 31, 2013 was predominately related to cash spent on property, equipment, and software of $348,699 along with cash flows used in operations of $95,697. The effect of foreign currency exchange rates on cash and cash equivalents was a loss of $136,797.

Cash is generated from (or utilized in) the income/(loss) from operations for each segment (see Note 11 to the Consolidated Financial Statements (unaudited) of Part I, Item 1 of this Form 10-Q). The EIM and CAMRA segments represented income / (loss) from operations for the three months ended March 31, 2013 of $509,414 and $(439,692), respectively. The Corporate Allocation expense was $(407,512) for the three months ended March 31, 2013. The United States location generated a loss from operations for the three months ended March 31, 2013 of $(758,058), which was primarily associated with losses generated in the CAMRA segment and the Corporate Allocations expense. The United Kingdom location generated income from operations for the same period of $420,268.

The Company anticipates that its cash needs will be met during the next twelve months primarily through cash from operations of the Company’s EIM segment and if necessary from the cash balance at March 31, 2013. As of March 31, 2013, the Company did not and as of the date of this Form 10-Q does not have an operating line credit facility in place.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, depreciation and amortization, investments, income taxes, capitalized software, goodwill, restructuring costs, accrued compensation, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For the description of other critical accounting policies used by the Company, see Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Income Taxes. The Company is required to estimate its income taxes. This process involves estimating the Company’s actual current tax obligations together with assessing differences resulting from different treatment of items for tax and accounting purposes which result in deferred income tax assets and liabilities.

The Company accounts for income taxes using the liability method. Under the liability method, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences are expected to reverse.

The Company’s deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company has established a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations. As of March 31, 2013, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense relates to the United Kingdom operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company’s United States operations. In addition, at March 31, 2013, the Company considered its cumulative earnings related to non-U.S. subsidiaries to be indefinitely reinvested.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Indiana and foreign income tax in the United Kingdom. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at March 31, 2013.

The Company’s tax filings are subject periodically to regulatory review and audit.

Research and Development and Software Development Costs. Research and development costs are charged to operations as incurred. Software Development Costs are considered for capitalization when technological feasibility is established. The Company bases its determination of when technological feasibility is established based on the development team’s determination that the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including, functions, features, and technical performance requirements.

Goodwill and Intangible Assets. The Company considers the goodwill and related intangible assets related to CTI Billing Solutions Limited to be the premium the Company paid for CTI Billing Solutions Limited. For accounting purposes, these assets are maintained at the corporate level and the Company considers the functional currency with respect to these assets as the United States dollar.

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. No impairment was identified in 2012. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer lists.

The Company has allocated goodwill and a significant component of its intangible assets to CTI Billing Solutions Limited, as that entity is considered a separate reporting unit. The Company performed its last annual impairment analysis on goodwill as of October 1, 2012, to coincide with the calendar date set in past years for this analysis. The Company’s analysis considered the projected cash flows of the reporting unit and gave consideration to appropriate factors in determining a discount rate to be applied to these cash flows. The results of this analysis indicated that there was no impairment as of the date of our annual impairment determination and that further impairment analysis was not required.

The Company recognizes that the market for our stock can be below our book value which the Company attributes to a number of factors including very limited trading in the Company’s Class A common stock, a significant portion of the Company’s Class A common stock (approximately 67%) is beneficially owned by a majority stockholder, an overall “flight to quality” by investors in which many “penny stocks” such as CTI’s have been significantly downgraded in terms of pricing and an overall lack of public awareness of its operations. While the Company cannot quantify the impacts of these factors in terms of how they impact the difference between book value and our stock’s “market cap,” the Company does not believe that the market in its Class A common stock is sufficiently sophisticated to make a proper determination of the value of the Company’s Class A common stock.

Because of the Company’s continued relatively low “market cap”, the Company reviewed the assumptions utilized in the impairment determination and again found that there existed no impairment. As of May 7, 2013, the Company’s “market cap” was above the Company’s book value. The Company’s operations of the business unit are primarily based on recurring revenues and have not experienced an adverse change in anticipated performance considered in the impairment analysis. The business unit’s operating performance subsequent to the goodwill impairment analysis has exceeded anticipated performance through the most recent period that information is available. The Company believes that the year-end analysis is sufficiently current and no formal analysis has been performed at March 31, 2013.

The Company believes the year-end analysis is sufficiently current and no formal analysis has been performed at March 31, 2013. If the Company assesses market condition changes in our business, it may be required to reflect additional goodwill impairment in the future.

Long-Lived Assets. The Company reviews the recoverability of the carrying value of its long-lived assets on an annual basis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events occur, the Company compares the carrying amount of the assets to the undiscounted expected future cash flows. If this comparison indicates there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows.

Revenue Recognition and Accounts Receivable Reserves. The Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined in the sales agreement provided there are no significant remaining vendor obligations to be fulfilled and collectability is reasonably assured. Software sales revenue is generated from licensing software to new customers and from licensing additional users and new applications to existing customers.

The Company’s sales arrangements typically include services in addition to software. Service revenues are generated from support and maintenance, processing, training, consulting, and customization services. For sales arrangements that include bundled software and services, the Company accounts for any undelivered service offering as a separate element of a multiple-element arrangement. Amounts deferred for services are determined based upon vendor-specific objective evidence of the fair value of the elements. Support and maintenance revenues are recognized on a straight-line basis over the term of the agreement. Revenues from processing, training, consulting, and customization are recognized as provided to customers. If the services are essential to the functionality of the software, revenue from the software component is deferred until the essential service is complete.

If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in the guidance related to software revenue recognition. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with guidance related to contract accounting. The Company carefully evaluates the circumstances surrounding the implementations to determine whether the percentage-of-completion method or the completed-contract method should be used. Most implementations relate to the Company’s Telemanagement products and are completed in less than 30 days once the work begins. The Company uses the completed-contract method on contracts that will be completed within 30 days since it produces a result similar to the percentage-of-completion method. On contracts that will take over 30 days to complete, the Company uses the percentage-of-completion method of contract accounting.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company continuously monitors collections and payments from its customers and the allowance for doubtful accounts is based on historical experience and any specific customer collection issues that the Company has identified. If the financial condition of its customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. Where an allowance for doubtful accounts has been established with respect to customer receivables, as payments are made on such receivables or if the customer goes out of business with no chance of collection, the allowances will decrease with a corresponding adjustment to accounts receivable as deemed appropriate.

Stock Based Compensation. The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. The Company uses the Black-Scholes-Merton formula to calculate the fair value of the stock options.

The Company recognizes compensation cost net of a forfeiture rate and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. The Company estimated the forfeiture rate based on its historical experience and its expectations about future forfeitures.

The Company estimates it will recognize approximately $62,000, $60,000, $31,000 and $0 for the fiscal years ending December 31, 2013, 2014, 2015 and 2016, respectively, of compensation costs for non-vested stock options previously granted to employees.

New Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This guidance clarifies the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The new requirements are effective prospectively for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. The Company expects that the adoption of this guidance will not have a material impact on its results of operations, financial position or cash flows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4. Controls and Procedures.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, the principal executive officer and principal financial officer concluded that as of March 31, 2013, the Company’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter covered by this report that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this Form 10-Q.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

PART II—OTHER INFORMATION

Item 1 – Legal Proceedings.

The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business and are unrelated to Patent Enforcement.

Qwest Corporation

The Company previously disclosed that on May 11, 2004, an action was brought against the Company in the United States District Court for the Western District of Washington by Qwest Corporation seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications Corporation to that action. The Company filed a motion with the United States District Court for the Western District of Washington seeking to dismiss that action or, in the alternative, to transfer it to the United States District Court for the Southern District of Indiana.

On November 12, 2004, the United States District Court for the Western District of Washington granted the Company’s motion to the extent of transferring the action to the United States District Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent infringement and the United States District Court for the Southern District of Indiana then consolidated the transferred action with the pending patent infringement lawsuit previously disclosed under “BellSouth Corporation et al.”

On January 9, 2008, the United States District Court for the Southern District of Indiana issued its claim construction for U.S. Patent No. 5,287,270. On January 18, 2008, the Qwest entities filed a motion for stay and a summary judgment motion of invalidity based on the construction of one of the claim terms. The motions were fully briefed on an expedited basis and on February 26, 2008, the court denied the motions. Fact discovery closed on December 23, 2008. Expert discovery was completed on April 1, 2009. On April 15, 2009, the parties filed various summary judgment motions related to patent infringement and invalidity and immunity from suit concerning the Networx government contracts. On September 22, 2009, the Court granted the Qwest entities’ motion for summary judgment of immunity from suit concerning the Networx government contracts, thereby requiring the Company to sue the Government in the Court of Federal Claims. On October 29, 2009, the Court ruled on the parties’ patent invalidity and noninfringement summary judgment motions. The Court held that the Company’s U.S. Patent No. 5,287,270 was not invalid due to certain prior art but not infringed by the Qwest entities. In November 2009, the Company filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit (Federal Circuit). The Qwest entities subsequently cross appealed. Briefing before the Federal Circuit was completed, and, on January 20, 2011, the Federal Circuit reversed the district court’s decision. On February 22, 2011, the Qwest entities filed a Petition for a Rehearing en banc. The Federal Circuit denied the petition on April 25, 2011, and remanded the case to the district court. The district court subsequently allowed the parties to file new motions for summary judgment directed to infringement issues not presented to the Federal Circuit. The parties filed cross-motions for summary judgment on September 16, 2011, and completed the briefing process on November 21, 2011.

The district court subsequently allowed the parties to file new motions for summary judgment directed to infringement issues not presented to the Federal Circuit. The parties filed cross-motions for summary judgment on September 16, 2011, and completed the briefing process on November 21, 2011. The district court issued its order ruling on the cross-motions on October 15, 2012, granting Qwest’s motion for summary judgment of non-infringement. On October 30, 2012, the district court entered an order awarding Qwest litigation costs in the amount of approximately $250,000. Centillion filed a timely notice of appeal on November 13, 2012, and an amended notice of appeal on November 30, 2012. It also was ordered to post a supesedeas bond guaranteeing the payment of costs. The briefing process is ongoing and we anticipate that the Federal Circuit will issue its opinion in late 2013 or early 2014. As set forth in the appellate brief, filed on February 27, 2013, the Company and legal counsel believe that there are reasonable and persuasive grounds for the appellate court to overturn the district court’s order granting Qwest’s motion for summary judgment. The Company and the Company’s legal counsel believe it is more likely than not that the appellate court will overturn the district court’s order granting Qwest’s motion for summary judgment, which would vitiate the award of costs.

Item 1A – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed. The risks in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3 – Defaults Upon Senior Securities.

None.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 – Other Information.

None.

Item 6 – Exhibits.



Exhibit 11.1		Statement re computation of per share earnings, incorporated by reference to Note 6 to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q

Exhibit 31.1 -		Chief Executive Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 -		Chief Financial Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 -		Section 1350 Certification of the Chief Executive Officer

Exhibit 32.2 -		Section 1350 Certification of the Chief Financial Officer

Exhibit 101 -		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for each of the three months ended March 31, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for each of the three months ended March 31, 2013 and 2012, and (iv) Notes to Consolidated Financial Statements.*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


CTI Group (Holdings) Inc.

/s/ John Birbeck
John Birbeck				Date: May 15, 2013
Chief Executive Officer
(Principal Executive Officer)

/s/ Manfred Hanuschek
Manfred Hanuschek				Date: May 15, 2013
Chief Financial Officer
(Principal Financial Officer)

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