Attached files

file filename
EX-32.2 - EX-32.2 - CTI GROUP HOLDINGS INCd915844dex322.htm
EX-31.2 - EX-31.2 - CTI GROUP HOLDINGS INCd915844dex312.htm
EX-32.1 - EX-32.1 - CTI GROUP HOLDINGS INCd915844dex321.htm
EX-31.1 - EX-31.1 - CTI GROUP HOLDINGS INCd915844dex311.htm
EXCEL - IDEA: XBRL DOCUMENT - CTI GROUP HOLDINGS INCFinancial_Report.xls
Table of Contents

 

 

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, 2015

OR

 

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

For the transition period from                      to                     

Commission file number 000-10560

 

 

CTI GROUP (HOLDINGS) INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   51-0308583

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

333 North Alabama Street, Suite 240, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)

(317) 262-4666

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 1, 2015, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,552,200.

 

 

 


Table of Contents

CTI GROUP (HOLDINGS) INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

ITEM

  NO.

   PAGE
NO.
 
Forward Looking Statements      3   
PART I – Financial Information   

1. Financial Statements - Unaudited

  

Consolidated Balance Sheets at March 31, 2015 and December 31, 2014

     4   

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March  31, 2015 and March 31, 2014

     5   

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014

     6   

Notes to Consolidated Financial Statements

     7   

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

     14   

3. Quantitative and Qualitative Disclosures about Market Risk

     20   

4. Controls and Procedures

     20   
PART II – Other Information   

1. Legal Proceedings

     21   

1A. Risk Factors

     21   

2. Unregistered Sales of Equity Securities and Use of Proceeds

     21   

3. Defaults Upon Senior Securities

     21   

4. Mine Safety Disclosures

     21   

5. Other Information

     21   

6. Exhibits

     21   

 

2


Table of Contents

Forward-Looking Statements

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

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, each reader of this Form 10-Q should carefully consider the risk factors stated in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially from those discussed herein, including, but not limited to: economic conditions, risks associated with conducting business outside the United States, ability to obtain a loan facility or receive additional advances from Fairford Holdings Limited, a British Virgin Islands Company, (“Fairford”) who, as of May 1, 2015, owned beneficially 62.7% of the Company’s Class A common stock, if needed, incurring additional losses, impact of accounting pronouncements, recording additional impairments, ability to maintain an effective system of internal controls over financial reporting and disclosure controls and procedures, effects of the recent U.S. recession and unstable global economy, ability to attract and retain customers to purchase its products, ability to develop or launch new software products, technological advances by third parties and competition, and ability to protect the Company’s patented technology. You should not place any undue reliance on any forward-looking statements. Except to the extent required by law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions or circumstances or assumptions underlying such statements, or otherwise.

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

 

3


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     March 31,
2015
    December 31,
2014
 

ASSETS

    

Cash and cash equivalents

   $ 4,668,046      $ 5,278,476   

Trade accounts receivable, less allowance for doubtful accounts of $65,567 and $66,705, respectively

     3,321,616        3,577,866   

Prepaid expenses

     408,615        368,965   

Other current assets

     191,022        243,862   
  

 

 

   

 

 

 

Total current assets

  8,589,299      9,469,169   

Property, equipment, and software, net

  2,237,576      2,280,493   

Intangible assets, net

  351,936      470,566   

Goodwill

  2,769,589      2,769,589   

Other assets

  16,841      29,218   
  

 

 

   

 

 

 

Total assets

$ 13,965,241    $ 15,019,035   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable

$ 272,590    $ 244,335   

Accrued expenses

  981,695      1,227,101   

Accrued wages and other compensation

  547,339      633,761   

Income tax payable

  714,374      635,980   

Deferred tax liability

  188,705      191,731   

Deferred revenue

  4,075,896      4,250,433   

Notes payable

  58,508      57,522   
  

 

 

   

 

 

 

Total current liabilities

  6,839,107      7,240,863   

Lease incentive – long term

  188,394      241,276   

Deferred revenue – long term

  219,108      799,559   

Deferred tax liability – long term

  8,521      45,722   

Note payable – long term

  15,107      30,138   
  

 

 

   

 

 

 

Total liabilities

  7,270,237      8,357,558   

Commitments and contingencies

Stockholders’ equity:

Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,552,200 and 29,388,937 issued at March 31, 2015 and at December 31, 2014, respectively

  295,522      293,889   

Additional paid-in capital

  26,389,124      26,339,410   

Accumulated deficit

  (20,193,628   (20,203,616

Accumulated other comprehensive income

  396,129      423,937   

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

  (192,143   (192,143
  

 

 

   

 

 

 

Total stockholders’ equity

  6,695,004      6,661,477   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 13,965,241    $ 15,019,035   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

    

Three months ended

March 31,

 
     2015     2014  

Revenues:

    

Software sales, service fee and license fee revenue

   $ 4,099,324      $ 3,945,469   

Cost and Expenses:

    

Cost of products and services, excluding depreciation and amortization

     1,066,331        1,029,943   

Selling, general and administration

     1,829,347        1,929,991   

Research and development

     662,863        821,845   

Depreciation and amortization

     430,892        466,665   
  

 

 

   

 

 

 

Total costs and expenses

  3,989,433      4,248,444   
  

 

 

   

 

 

 

Income / (loss) from operations

  109,891      (302,975

Other (income) / expense

Interest expense

  728      19,869   

Other income

  —        (1,344,749
  

 

 

   

 

 

 

Total other (income) / expense

  728      (1,324,880
  

 

 

   

 

 

 

Income before income taxes

  109,163      1,021,905   

Tax expense

  99,175      42,043   
  

 

 

   

 

 

 

Net income

  9,988      979,862   

Other comprehensive income / (loss)

Foreign currency translation adjustment

  (27,807   (1,296
  

 

 

   

 

 

 

Comprehensive income / (loss)

$ (17,819 $ 978,566   
  

 

 

   

 

 

 

Basic net income per common share

$ 0.00    $ 0.03   
  

 

 

   

 

 

 

Diluted net income per common share

$ 0.00    $ 0.03   
  

 

 

   

 

 

 

Basic weighted average common shares outstanding

  29,250,524      29,212,021   

Diluted weighted average common shares outstanding

  31,610,265      30,656,438   

See accompanying notes to consolidated financial statements

 

5


Table of Contents

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Three months ended
March 31,
 
     2015     2014  

Cash flows from operating activities:

    

Net income

   $ 9,988      $ 979,862   

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

    

Depreciation and amortization

     430,892        466,665   

Provision for doubtful accounts

     1,145        (1,955

Deferred income taxes

     (29,782     (23,867

Recognition of rent incentive benefit

     (28,251     243,958   

Stock option grant expense

     30,400        15,209   

Changes in operating assets and liabilities:

    

Trade receivables

     130,726        (6,615,663

Prepaid expenses

     (46,064     65,196   

Income taxes

     111,442        (434,427

Other assets

     65,478        96,196   

Accounts payable

     34,486        165,420   

Accrued expenses

     (306,125     749,938   

Accrued wages and other compensation

     (76,470     211,747   

Deferred revenue

     (565,813     5,285,728   
  

 

 

   

 

 

 

Cash (used in) / provided by operating activities

  (237,948   1,204,007   
  

 

 

   

 

 

 

Cash flows used in investing activities:

Additions to property, equipment, and software

  (270,613   (435,378
  

 

 

   

 

 

 

Cash used in investing activities

  (270,613   (435,378
  

 

 

   

 

 

 

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

Payment on note payable

  (14,045   (13,262

Exercise Stock Option

  20,947      —     

Payment on note from shareholders

  —        (705,366
  

 

 

   

 

 

 

Cash (used in) / provided by financing activities

  6,902      (718,628
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

  (108,771   877   
  

 

 

   

 

 

 

Increase / (decrease) in cash and cash equivalents

  (610,430   50,878   

Cash and cash equivalents, beginning of period

  5,278,476      1,271,514   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 4,668,046    $ 1,322,392   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: Business and Basis of Presentation

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

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

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

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

Certain information in footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), has been condensed or omitted pursuant to the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2014 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.

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

Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense. Amortization expense of developed software amounted to $237,282 and $182,277 for the three months ended March 31, 2015 and 2014, respectively.

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

The Company paid income taxes of approximately $19,000 and $498,200 during the three months ended March 31, 2015 and 2014, respectively, for taxes on prior year income in the United States and United Kingdom.

NOTE 3: Fair Value of Financial Instruments

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

NOTE 4: Debt Obligations and Liquidity

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

 

7


Table of Contents

NOTE 5: New Accounting Pronouncements

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

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

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,  
     2015      2014  

Net income

   $ 9,988       $ 979,862   
  

 

 

    

 

 

 

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

  29,250,524      29,212,021   

Additional common shares to be issued assuming exercise of stock options and stock warrants

  2,359,741      1,444,417   
  

 

 

    

 

 

 

Weighted average shares of common and common equivalent stock outstanding used to compute diluted earnings per share

  31,610,265      30,656,438   
  

 

 

    

 

 

 

Basic:

Net income per share

$ 0.00    $ 0.03   
  

 

 

    

 

 

 

Weighted average common shares outstanding

  29,250,524      29,212,021   
  

 

 

    

 

 

 

Diluted:

Net income per share

$ 0.00    $ 0.03   
  

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding

  31,610,265      30,656,438   
  

 

 

    

 

 

 

 

8


Table of Contents

Note 7: Stock Based Compensation

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

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

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

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

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

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

The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. As of March 31, 2015, there were 2,848,989 awards available for grant under the Stock Incentive Plan. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

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

 

9


Table of Contents

At March 31, 2015, there were options to purchase 3,057,171 shares of Class A common stock. There were exercisable options to purchase an aggregate of 2,828,838 shares of Class A common stock under the Plan and Stock Incentive Plan as of March 31, 2015.

At March 31, 2015, there were outstanding RSUs representing the right to receive up to 974,119 shares of Class A common stock at a future date.

Information with respect to options and RSUs was as follows:

 

     Options &
RSU Shares
    

Exercise

Price Range

Per Share

   Weighted
Average
Exercise Price
 

Outstanding, January 1, 2015

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

Granted

     —         —        —     

Exercised

     (165,305    $0.09 - $0.25    $ 0.127   

Expired

     (1,615,151    $0.00 - $0.40    $ 0.318   
  

 

 

    

 

  

 

 

 

Outstanding, March 31, 2015

  4,031,290    $0.08 - $0.39 $ 0.174   
  

 

 

    

 

  

 

 

 

The future compensation costs related to non-vested options and RSUs at March 31, 2015 is $50,075. The future costs will be recognized over the weighted average period of approximately 1.25 years.

The following table summarizes options exercisable at March 31, 2015:

 

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

March 31, 2015

     2,828,838       $0.08 - $0.39    $ 0.174       $ 1,175,138       3.22 years

The following table summarizes non-vested options and RSUs:

 

     Option/RSU
Shares
 

January 1, 2015

     1,376,832   

Granted

     —     

Expired

     (174,380

Vested

     —     
  

 

 

 

March 31, 2015

  1,202,452   
  

 

 

 

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

 

     2014  

Risk-free interest rate

     0.50

Dividend yield

     0.00

Volatility factor

     91.00

Expected lives

     5 years   

The fair value of each option and RSU award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula). Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

 

10


Table of Contents

The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

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

Pursuant to the Original Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Class A common stock at the exercise price of $0.34 per share, subject to adjustments as described in the Original Warrant, at any time prior to the 10th anniversary of the date of issuance. Pursuant to the Additional Warrant, Fairford Scandinavia is entitled to purchase 620,675 shares of Class A common stock at the exercise price of $0.22 per share, subject to adjustments as described in the Additional Warrant, at any time prior to the 10th anniversary of the date of issuance. On December 31, 2009, Fairford Scandinavia sold all of its owned Class A shares, or 355,099 shares to Fairford for SEK 2.80362 ($0.39) per share. As of March 31, 2015, Fairford beneficially owned 62.7% 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, 2015 and March 31, 2014 was $30,400 and $15,209, 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 the Company’s right to replace the infringing product. As of March 31, 2015, the Company did not experience any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations, and consequently, the Company has not established any related accruals.

NOTE 9: Contingencies

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

The Company realized other income of $1,344,749 for the three months ended March 31, 2014. The other income of $1,344,749 was the net amount of a $3,100,000 patent settlement less legal fees related to the settlement of $1,755,251.

NOTE 10: Income Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of March 31, 2015, the Company’s valuation allowance related only to net deferred tax assets in the United States. The Company does not consider earnings related to non U.S. subsidiaries to be permanently 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.

 

11


Table of Contents

As of March 31, 2015 and March 31, 2014, the Company had $149,085 and $151,604 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, 2015.

For the three months ended March 31, 2015 and March 31, 2014, the Company had $99,175 and $42,043, 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 to the valuation allowance related to the net deferred tax assets in the United States.

NOTE 11: Segment Information

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

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

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

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

The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Summarized financial information concerning the Company’s reportable segments for the three months ended March 31, 2015 and 2014 is shown in the following tables.

 

     For Three Months Ended March 31, 2015  
     Electronic
Invoice
Management
     Call Accounting
Management and
Recording
     Corporate
Allocation
     Consolidated  

Revenues

   $ 2,177,206       $ 1,922,118         —           4,099,324   

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

     1,750,117         1,282,876         —           3,032,993   

Depreciation and amortization

     240,172         190,720         —           430,892   

Income (loss) from operations

     417,462         122,171         (429,742      109,891   

Long-lived assets

     3,911,175         1,427,020         37,747         5,375,942   
     For Three Months Ended March 31, 2014  
     Electronic
Invoice
Management
     Call Accounting
Management and
Recording
     Corporate
Allocation
     Consolidated  

Revenues

   $ 2,376,375       $ 1,569,094       $ —         $ 3,945,469   

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

     1,958,052         957,474         —           2,915,526   

Depreciation and amortization

     328,470         135,595         2,600         466,665   

Income (loss) from operations

     291,951         (118,358      (476,568      (302,975

Long-lived assets

     4,823,486         1,294,380         22,443         6,140,309   

 

12


Table of Contents

The following table presents net revenues by geographic location.

 

     For Three Months Ended March 31, 2015  
     United States      United Kingdom      Consolidated  

Revenues

   $ 1,067,082       $ 3,032,242       $ 4,099,324   

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

     698,167         2,334,826         3,032,993   

Depreciation and amortization

     183,887         247,005         430,892   

Income (loss) from operations

     (623,760      733,651         109,891   

Long-lived assets

     4,543,700         832,242         5,375,942   
     For Three Months Ended March 31, 2014  
     United States      United Kingdom      Consolidated  

Revenues

   $ 1,143,527       $ 2,801,942       $ 3,945,469   

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

     801,812         2,113,714         2,915,526   

Depreciation and amortization

     132,844         333,821         466,665   

Income (loss) from operations

     (469,191      166,216         (302,975

Long-lived assets

     5,081,769         1,058,540         6,140,309   

NOTE 12: Subsequent Events

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

The 2015 Stock Incentive Plan is administered by the Compensation Committee of the Board. Under the 2015 Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the 2015 Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the 2015 Stock Incentive Plan.

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

The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the 2015 Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments described in the 2015 Stock Incentive Plan.

The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the 2015 Stock Incentive Plan is 5,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. If any outstanding award is cancelled, forfeited, settled in cash or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the 2015 Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the 2015 Stock Incentive Plan. No stock option granted under the 2015 Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

The Compensation Committee of the Board, as administrator of the 2015 Stock Incentive Plan, is permitted to issue RSUs to certain eligible participants under the 2015 Stock Incentive Plan. The Compensation Committee of the Board may, in its sole discretion, determine (i) the participants under the 2015 Stock Incentive Plan who will receive RSUs, and (ii) the number of shares of the Company’s Class A common stock and/or the amount of cash or other property underlying each RSU. Further, each RSU will be subject to such terms and conditions consistent with the 2015 Stock Incentive Plan as are determined by the Compensation Committee of the Board and as set forth in the award agreement relating to such RSU. The Compensation Committee of the Board is also permitted to grant awards under the 2015 Stock Incentive Plan in substitution for stock and stock-based awards of an Acquired Entity held by such Acquired Entity’s former employees if such individuals become employees of the Company as a result of the Company’s merger or consolidation with or acquisition of the Acquired Entity.

 

13


Table of Contents
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, screen and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

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

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

The Company reported revenue in the EIM segment of $2.2 million and $2.4 million for the three months ended March 31, 2015 and 2014, respectively. For the CAMRA segment, the Company recorded revenues of $1.9 million and $1.6 million for the three months ended March 31, 2015 and 2014, respectively.

The Company believes that as voice and data services continue to commoditize, service providers will seek alternative business models to replace revenue lost as a result of pricing pressures. One such business model is the delivery of managed or hosted voice and video services. Although the Company has seen what it believes to be positive results in its CAMRA segment, due to the unstable global economy, the growth has been slower than anticipated but the Company continues to see improvement in the CAMRA segment.

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

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

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

The Company’s CAMRA applications will help eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. The Company’s call recording product SmartRecord® enables service providers to selectively intercept communications on behalf of their hosted and managed service customers. This application also enables managed and hosted service customers of service providers to analyze voice, video, screen and data usage, record and monitor communications, and perform administration and back office functions such as quality assurance and voice-of-customer analytics.

 

14


Table of Contents

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

The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream.

Financial Condition

In the three months ended March 31, 2015, the stockholders’ equity increased $33,527 from $6,661,477 as of December 31, 2014 to $6,695,004 as of March 31, 2015 primarily as a result of options exercised. The Company realized a decrease in working capital (current assets, less current liabilities) of $478,114 which was primarily attributable to an decrease in cash due to advanced payments on a large invoice in the EIM segment generated in the first quarter of 2014.

At March 31, 2015, cash and cash equivalents were $4,668,046 compared to $5,278,476 at December 31, 2014, and such decrease was primarily attributable to a decrease in deferred revenue due to recognition of revenue earned on the advance payment received in the quarter ended March 31, 2014. The decrease in net income is primarily attributable to the patent settlement with net proceeds of $1,344,749 recognized in other income for the three months ended March 31, 2014 and no additional settlements in the three months ended March 31, 2015. The cash used in investing activities for the three months ended March 31, 2015 of $270,613 related to additions to property, equipment and software. The cash provided by financing activities for the three months ended March 31, 2015 of $6,902 was due primarily to exercising of stock options. The Company generates approximately 73.9% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has weakened by 4.7% in relation to the United States dollar during the three month period ended March 31, 2015.

Results of Operations (Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014)

Revenues

Revenues from operations for the three months ended March 31, 2015 increased $153,855 or 3.8%, to $4,099,324 as compared to $3,945,469 for the three months ended March 31, 2014. Overall revenues increased primarily as a result of increased sales in the CAMRA segment of $353,024 which represented a 22.5% increase over the prior comparable period. Revenues derived from the United Kingdom operations represented 73.9% and 71.0% of total revenues for the three months ended March 31, 2015 and 2014, respectively. The strengthening of the U.S. Dollar contributed to a revenue decline in the UK revenue. The increase in the percentage of total revenues attributable to United Kingdom operations was primarily related to the increase experienced in the EIM segment in the UK. The United States revenues decreased by $76,445, or 6.7%, to $1,067,082 for the three months ended March 31, 2015 compared to $1,143,527 for the three months ended March 31, 2014. Such decrease was primarily related to a decrease in revenue in the EIM segment sales in the United States. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 22.0% of total revenues for the three months ended March 31, 2015 and 20.0% for the three months ended March 31, 2014.

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, 2015, increased $36,388, or 3.5%, to $1,066,331, as compared to $1,029,943 for the three months ended March 31, 2014. The increase was primarily related to costs associated with the increase in revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $27,622, or 4.5%, to $639,242 for the three months ended March 31, 2015 from $611,620 for the three months ended March 31, 2014. The increase was due to an increase in revenue in the United States CAMRA segment of 22.5% for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The costs of products and services, excluding depreciation and amortization, related to the EIM segment increased by $8,766, or 2.0%, to $427,089 for the three months ended March 31, 2015 compared to $418,323 for the three months ended March 31, 2014 due to an increase in UK revenue of 6.0%. The cost of products and services, excluding depreciation and amortization, was 26.0% of revenue for the three months ended March 31, 2015, as compared to 26.1% of revenue for the three months ended March 31, 2014.

 

15


Table of Contents

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended March 31, 2015 decreased $100,644, or 5.2%, to $1,829,347 compared to $1,929,991 for the three months ended March 31, 2014. The decrease was primarily due to a reduction in general and administrative compensation expense. Selling, general and administrative costs related to the CAMRA segment increased by $6,864 to $679,428 for the three months ended March 31, 2015 compared to $672,564 for the three months ended March 31, 2014. Selling, general and administrative costs related to the EIM segment decreased by $59,283 to $724,176 for the three months ended March 31, 2015 compared to $783,459 for the three months ended March 31, 2014. Selling, general and administrative costs related to the corporate allocation decreased by $48,225 to $425,743 for the three months ended March 31, 2015 compared to $473,968 for the three months ended March 31, 2014 which was primarily due to a reduction in administrative salary expense.

Research and Development Expense

Research and development expense for the three months ended March 31, 2015 decreased $158,982, or 19.3%, to $662,863 as compared to $821,845 for the three months ended March 31, 2014. Research and development costs related to the CAMRA segment increased $27,611 to $295,284 for the three months ended March 31, 2015 compared to $267,673 for the three months ended March 31, 2014. Research and development expense related to the EIM segment decreased $186,593 to $367,579 for the three months ended March 31, 2015 compared to $554,172 for the three months ended March 31, 2014. Research and development costs for software with established technological feasibility that were capitalized during the three months ended March 31, 2015 and March 31, 2014 amounted to $224,107 and $237,156, respectively. Research and development costs allocated to cost of goods sold during the three months ended March 31, 2015 and March 31, 2014 amounted to $57,402 and $131,706, respectively. The decreases were primarily due to a decrease in headcount in research and development.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2015 decreased $35,773 to $430,892 from $466,665 in the three months ended March 31, 2014. The decrease was due primarily to a reduction in amortization of intangibles.

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 $237,282 and $182,277 for the three months ended March 31, 2015 and 2014, respectively. The increase is due to software releases made available for sale after the first quarter of 2014.

Other Income and Expense

The Company realized interest expense of $728 for the three months ended March 31, 2015 compared to interest expense of $19,869 for the three months ended March 31, 2014. The decrease in interest income from expense was primarily due to the Company paying off debt during 2014.

The Company realized other income of $1,344,749 for the three months ended March 31, 2014. The other income of $1,344,749 was the net amount of a $3,100,000 patent settlement less legal fees related to the settlement of $1,755,251.

Taxes

The tax expense for the three months ended March 31, 2015 increased $57,132 to $99,175 as compared to an expense of $42,043 for the three months ended March 31, 2014. The tax expense for the three months ended March 31, 2015 and March 31, 2014 was due to the pre-tax income in the United Kingdom of $732,923 and $165,110, respectively. The effective tax rates for the three months ended March 31, 2015 and March 31, 2014 for the United Kingdom were 13.5% and 19.4%, respectively. The lower effective tax rate in 2015 was due to an increase in capital allowances consisting primarily of expenditures for capital and research and development.

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

Net Income / (Loss)

The Company realized net income for the three months ended March 31, 2015 of $9,988 compared to net income of $979,862 for the three months ended March 31, 2014. The decrease in net income was primarily associated with the other income of $1,344,749 for the three months ended March 31, 2014 related to a patent enforcement settlement.

 

16


Table of Contents

Liquidity and Capital Resources

Historically, the Company’s principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs) and capital expenditures, including software development. Cash flows from operations and existing cash and cash equivalents in the past usually have been adequate to meet the Company’s business objectives. Cash and cash equivalents decreased $610,430 to $4,668,046 as of March 31, 2015 compared to $5,278,476 as of December 31, 2014. The decrease in cash and cash equivalents, during the three months ended March 31, 2015 was predominately related to an advanced payment on a large invoice in the EIM segment in 2014 and the reduction in deferred revenue as the revenue for the advanced payment is recognized. Cash used by operations of $237,948 was primarily related to recognition of deferred revenue from an advanced payment received in 2014. Cash used in investing activities for the three months ended March 31, 2015 of $270,613 was primarily related to capitalization of internally developed software of $224,017 and the purchase of equipment. The cash provided by financing activities for the three months ended March 31, 2015 of $6,902 related to the exercising of stock options. The effect of foreign currency exchange rates on cash and cash equivalents was a loss of $(108,771).

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 from operations for the three months ended March 31, 2015 of 417,462 and $122,171, respectively. The Corporate Allocation expense was $(429,742) for the three months ended March 31, 2015. The United States location generated a loss from operations for the three months ended March 31, 2015 of $(623,760), 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 $733,651.

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, 2015. As of March 31, 2015, the Company did not and, as of the date of this Form 10-Q, does not have an operating line credit facility in place.

As previously disclosed, in October 2013, in order to supplement the Company’s liquidity, Fairford, Michael Reinarts and John Birbeck (the “Lenders”) agreed to advance to the Company up to $1,400,000. The Company believes that the primary sources of liquidity over the next twelve months will be cash on hand and cash from operations. However, if the Company is unable to generate adequate cash from operations, the Company may, as it has done in the past, seek funds from Fairford or other related-party lenders. There can be no assurance that the Company will be successful in such efforts.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For the description of other critical accounting policies used by the Company, see Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

 

17


Table of Contents

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, 2015, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense relates to the United Kingdom operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company’s United States operations. The Company does not consider earnings related to non-U.S. subsidiaries to be permanently 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, 2015.

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

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

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

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. No impairment was identified in 2014. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of purchased technology, trademarks and trade names, and customer lists.

The Company has allocated goodwill and a significant component of its intangible assets to CTI Billing Solutions Limited, as that entity is considered a separate reporting unit. The Company performed its last annual impairment analysis on goodwill as of October 1, 2014, 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 63%) 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.

 

18


Table of Contents

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.

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

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

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

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

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

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

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

Included within selling, general and administrative expense for the three months ended March 31, 2015 and March 31, 2014 was $30,400 and $15,209, 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.

 

19


Table of Contents

The Company estimates it will recognize approximately $60,909, $59,050, and $20,331 for the fiscal years ending December 31, 2015, 2016 and 2017, respectively, of compensation costs for non-vested stock options previously granted to employees.

New Accounting Pronouncements

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

 

Item 4. Controls and Procedures.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, the principal executive officer and principal financial officer concluded that as of March 31, 2015, the Company’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

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

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

 

20


Table of Contents

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings.

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

Item 1A – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 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 3Defaults 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, 2015, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, (iii) Consolidated Statements of Cash Flows for each of the three months ended March 31, 2015 and 2013, and (iv) Notes to Consolidated Financial Statements.

 

21


Table of Contents

SIGNATURES

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

 

CTI Group (Holdings) Inc.

/s/ Manfred Hanuschek

Manfred Hanuschek Date: May 14, 2015
Chief Executive Officer
(Principal Executive Officer)

/s/ Nathan Habegger

Nathan Habegger Date: May 14, 2015
Chief Financial Officer
(Principal Financial Officer)

 

22