TMCnet News

CTI GROUP HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
[August 14, 2014]

CTI GROUP HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.


(Edgar Glimpses Via Acquire Media NewsEdge) 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 $4.8 million and $5.0 million for the six months ended June 30, 2014 and 2013, respectively, and $2.5 million and $2.4 million for the three months ended June 30, 2014 and 2013, respectively. For the CAMRA segment, the Company recorded revenues of $3.2 million and $2.8 million for the six months ended June 30, 2014 and 2013, respectively, and $1.6 million and $1.5 million for the three months ended June 30, 2014 and 2013, respectively.

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

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.

16-------------------------------------------------------------------------------- Table of Contents Financial Condition In the six months ended June 30, 2014, stockholders' equity increased $762,579 from $4,227,144 as of December 31, 2013 to $4,989,723 as of June 30, 2014 primarily as a result of net income of $689,957. The Company realized an increase in net current assets (current assets, less current liabilities) of $2,865,689 which was primarily attributable to an increase in cash due to a large invoice in the EIM segment and a large invoice in the CAMRA segment generated in the first quarter of 2014. One of the two large invoices has a significant balance in long-term deferred revenue, thus contributing to the working capital increase.

At June 30, 2014, cash and cash equivalents were $5,337,994 compared to $1,271,514 at December 31, 2013, and such increase was primarily attributable to cash provided by operating activities for the three months ended June 30, 2014 of $6,241,387 offset by cash used in investing activities of $868,528 and cash flows used in financing activities of $1,426,594. The cash provided in operating activities in the six months ended June 30, 2014 of $6,241,387 was primarily attributable to an increase in deferred revenue of $4,962,763 and an increase in net income of $689,957. The increase in deferred revenue is primarily related to a large invoice in the EIM segment and a large invoice in the CAMRA segment generated in the first quarter of 2014 and increase in net income is primarily attributable to the patent settlement with net proceeds of $1,344,749 recognized in other income for the six months ended June 30, 2014. The cash used in investing activities for the six months ended June 30, 2014 of $868,528 related to additions to property, equipment and software. The cash used in financing activities for the six months ended June 30, 2014 of $1,426,594 was due primarily to the reduction of short-term debt. The Company generates approximately 73.0% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has strengthened by 3.2% in relation to the United States dollar during the six month period ended June 30, 2014.

Results of Operations (Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013) Revenues Revenues from operations for the six months ended June 30, 2014 increased $260,236, or 3.3%, to $8,029,538 as compared to $7,769,302 for the six months ended June 30, 2013. Overall revenues increased primarily as a result of increased sales in the CAMRA segment of $439,809. Revenues derived from the United Kingdom operations represented 73.0% and 77.4% of total revenues for the six months ended June 30, 2014 and 2013, respectively. The decrease in the percentage of total revenues attributable to United Kingdom operations was primarily related to decreased sales in the United Kingdom EIM segment due to a reduction in professional services revenue from existing customers. The United States revenues increased by $410,005, or 23.3%, to $2,167,184 for the six months ended June 30, 2014 compared to $1,757,179 for the six months ended June 30, 2013. Such increase was primarily related to an increase in revenue in the CAMRA segment sales in the United States due to an increase in license fees.

The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 22.1% of total revenues for the six months ended June 30, 2014 and approximately 19.6% for the six months ended June 30, 2013.

Cost of Products and Services Excluding Depreciation and Amortization Cost of products and services, excluding depreciation and amortization, for the six months ended June 30, 2014, increased $15,981, or 0.8%, to $2,067,948, as compared to $2,051,967 for the six months ended June 30, 2013. The increase was primarily related to costs associated with increased revenue. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $123,478 to $1,206,721 for the six months ended June 30, 2014 from $1,083,243 for the six months ended June 30, 2013. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $107,497 to $861,227 for the six months ended June 30, 2014 compared to $968,724 for the six months ended June 30, 2013. The cost of products and services, excluding depreciation and amortization, was 25.8% of revenue for the six months ended June 30, 2014, as compared to 26.4% of revenue for the six months ended June 30, 2013.

17-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Costs Selling, general and administrative expenses for the six months ended June 30, 2014 increased $78,253, or 2.1%, to $3,857,440 compared to $3,779,187 for the six months ended June 30, 2013. The increase was primarily due to increased selling costs in the CAMRA segment in the United States due to an increased focus and activity as the Company continues to invest to increase licenses sold in this segment. Selling, general and administrative costs related to the CAMRA segment increased by $75,063 to $1,360,942 for the six months ended June 30, 2014 compared to $1,285,879 for the six months ended June 30, 2013. The increase in the CAMRA selling costs of $144,771 was partially offset by a decrease in the CAMRA general and administrative costs of $69,708. Selling, general and administrative costs related to the EIM segment increased by $106,836 to $1,609,137 for the six months ended June 30, 2014 compared to $1,502,301 for the six months ended June 30, 2013. Selling, general and administrative costs related to the corporate allocation decreased by $103,646 to $887,361 for the six months ended June 30, 2014 compared to $991,007 for the six months ended June 30, 2013 which was primarily due to an decrease in professional fees related to the evaluation of the Proposal which was rejected in 2014.

Research and Development Expense Research and development expense for the six months ended June 30, 2014 increased $173,021, or 11.4%, to $1,691,862 as compared to $1,518,841 for the six months ended June 30, 2013. Research and development costs related to the CAMRA segment decreased $117,397 to $554,883 for the six months ended June 30, 2014 compared to $672,280 for the six months ended June 30, 2013. Research and development expense related to the EIM segment increased $290,418 to $1,136,979 for the six months ended June 30, 2014 compared to $846,561 for the six months ended June 30, 2013. Research and development costs that were capitalized during the six months ended June 30, 2014 and June 30, 2013 amounted to $537,596 and $487,533, respectively. Research and development costs allocated to cost of goods sold during the six months ended June 30, 2014 and June 30, 2013 amounted to $215,142 and $253,093, respectively.

Depreciation and Amortization Depreciation and amortization for the six months ended June 30, 2014 decreased $49,505 to $928,667 from $978,172 in the six months ended June 30, 2013.

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 $377,732 and $455,856 for the six months ended June 30, 2014 and 2013, respectively.

Other Income and Expense The Company realized interest expense of $25,473 for the six months ended June 30, 2014 compared to interest income of $2,370 for the six months ended June 30, 2013. The change to interest income and expense was primarily due to the Company adding new debt during 2013.

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

Taxes The tax expense for the six months ended June 30, 2014 decreased $234,272, or 67.5%, to $112,940 as compared to $347,212 for the six months ended June 30, 2013. The tax expense for the six months ended June 30, 2014 and June 30, 2013 was due to the pre-tax income in the United Kingdom of $442,053 and $934,963, respectively. The effective tax rates for the six months ended June 30, 2014 and June 30, 2013 for the United Kingdom were 25.5% and 37.1%, respectively. The higher effective tax rate in 2013 was caused by a true-up of the prior year's tax provision related to a book to tax difference on fixed asset depreciation.

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of June 30, 2014, the Company's valuation allowance related to the net deferred tax assets in the United States.

Net Income / (Loss) The Company realized net income for the six months ended June 30, 2014 of $689,957 compared to net loss of $903,707 for the six months ended June 30, 2013. The change in net income was primarily associated with the other income of $1,344,749 related to the patent enforcement settlement.

18-------------------------------------------------------------------------------- Table of Contents Results of Operations (Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013) Revenues Revenues from operations for the three months ended June 30, 2014 increased $200,093, or 5.2%, to $4,084,069 as compared to $3,883,976 for the three months ended June 30, 2013. Overall revenues increased as a result of increased CAMRA segment sales of $148,504, or 10.1%, to $1,625,920 as compared to $1,477,416 for the three months ended June 30, 2013. The EIM segment increased $51,589, or 2.1%, to $2,458,149 for the three months ended June 30, 2014 as compared to $2,406,560 for the three months ended June 30, 2013. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 23.3% of the total revenues for the three months ended June 30, 2014 and approximately 19.6% for the three months ended June 30, 2013.

Cost of Products and Services Excluding Depreciation and Amortization Cost of products and services, excluding depreciation and amortization, for the three months ended June 30, 2014, increased $28,365, or 2.8%, to $1,038,005, as compared to $1,009,640 for the three months ended June 30, 2013. The increase was primarily related to costs associated with increased revenue in the CAMRA segment. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment increased $51,170, or 9.4%, to $595,101 for the three months ended June 30, 2014 from $543,931 for the three months ended June 30, 2013. The increase was due to an increase in revenue in the CAMRA segment of 10.1% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $22,805, or 4.9%, to $442,904 for the three months ended June 30, 2014 compared to $465,709 for the three months ended June 30, 2013. The cost of products and services, excluding depreciation and amortization, was 25.4% of revenue for the three months ended June 30, 2014, as compared to 26.0% of revenue for the three months ended June 30, 2013.

Selling, General and Administrative Costs Selling, general and administrative expenses for the three months ended June 30, 2014 increased $16,086, or 0.8%, to $1,927,449 compared to $1,911,363 for the three months ended June 30, 2013. Selling, general and administrative costs related to the CAMRA segment increased by $50,207, or 7.9%, to $688,378 for the three months ended June 30, 2014 compared to $638,171 for the three months ended June 30, 2013. Selling, general and administrative costs related to the EIM segment increased by $138,080, or 20.0%, to $825,678 for the three months ended June 30, 2014 compared to $687,598 for the three months ended June 30, 2013.

Selling, general and administrative costs related to the corporate allocation decreased by $171,201, or 29.4%, to $413,393 for the three months ended June 30, 2014 compared to $584,594 for the three months ended June 30, 2013.

Research and Development Expense Research and development expense for the three months ended June 30, 2014 increased $160,155, or 22.6%, to $870,017 as compared to $709,862 for the three months ended June 30, 2013. Research and development costs related to the CAMRA segment increased $2,106 to $287,210 for the three months ended June 30, 2014 compared to $285,104 for the three months ended June 30, 2013. Research and development expense related to the EIM segment increased $158,049, or 37.2%, to $582,807 for the three months ended June 30, 2014 compared to $424,758 for the three months ended June 30, 2013. Research and development costs for software with established technological feasibility that were capitalized during the three months ended June 30, 2014 and June 30, 2013 amounted to $300,440 and $264,145, respectively. Research and development costs allocated to cost of goods sold during the three months ended June 30, 2014 and June 30, 2013 amounted to $83,436 and $115,651, respectively.

Depreciation and Amortization Depreciation and amortization for the three months ended June 30, 2014 decreased $12,184 to $462,002 from $474,186 in the three months ended June 30, 2013.

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 $195,455 and $196,358 for the three months ended June 30, 2014 and 2013, respectively.

19-------------------------------------------------------------------------------- Table of Contents Other Income and Expense The Company realized interest expense of $5,604 for the three months ended June 30, 2014 compared to interest income of $1,224 for the three months ended June 30, 2013. The change to interest income and expense was primarily due to the Company adding new debt during 2013.

Taxes The tax expense for the three months ended June 30, 2014 decreased $60,568, or 46.1%, to $70,897 as compared to an expense of $131,465 for the three months ended June 30, 2013. The tax expense for the three months ended June 30, 2014 and June 30, 2013 was due to the pre-tax income in the United Kingdom of $276,943 and $513,549, respectively. The effective tax rates for the three months ended June 30, 2014 and June 30, 2013 for the United Kingdom were 25.6% and 25.6%, respectively. The difference between the statutory rate and the actual rate is primarily due to the taxable income in the United States being off-set by the net operating loss carry-forward and the valuation allowance related to the United States.

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

Net Income / (Loss) The Company realized net loss for the three months ended June 30, 2014 of $289,905 compared to net loss of $351,316 for the three months ended June 30, 2013. The net loss was primarily associated with the losses generated from the corporate allocation segment and the CAMRA segment.

Liquidity and Capital Resources Historically, the Company's principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs) and capital expenditures, including software development. Cash flows from operations and existing cash and cash equivalents in the past have usually been adequate to meet the Company's business objectives. Cash and cash equivalents increased $4,066,480 to $5,337,994 as of June 30, 2014 compared to $1,271,514 as of December 31, 2013.

The increase in cash and cash equivalents, during the six months ended June 30, 2014 was predominately related to cash flows provided by operations of $6,241,387. The cash provided in operating activities in the six months ended June 30, 2014 of $6,241,387 was primarily attributable to an increase in deferred revenue of $4,962,763 and an increase in net income of $689,957. The increase in deferred revenue is primarily related to a large invoice in the EIM segment and a large invoice in the CAMRA segment generated in the first quarter of 2014 and the net income is primarily attributable to the patent settlement with net proceeds of $1,344,749 recognized in other income for the six months ended June 30, 2014. Cash used in investing activities for the six months ended June 30, 2014 of $868,528 was primarily related to capitalization of internally developed software of $537,596 and the purchase of equipment. The cash used in financing activities for the six months ended June 30, 2014 of $1,426,594 related to the pay down of debt. The effect of foreign currency exchange rates on cash and cash equivalents was a gain of $120,215.

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 six months ended June 30, 2014 of $583,352 and $(207,240), respectively and for the three months ended June 30, 2014 of $291,401 and $(88,882), respectively. The Corporate Allocation expense was $(892,491) for the six months ended June 30, 2014 and $(415,923) for the three months ended June 30, 2014. The United States location generated a loss from operations for the six and three months ended June 30, 2014 of $(963,105) and $(493,914), respectively, which was primarily associated with losses generated in the CAMRA segment and the Corporate Allocations expense. The United Kingdom location generated income from operations for the same periods of $446,726 and $280,510, respectively.

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

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

20 -------------------------------------------------------------------------------- Table of Contents 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, 2013.

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

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

The Company's deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company has established a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations. As of June 30, 2014, the Company's valuation allowance related only to net deferred tax assets in the United States. As a result, the Company's tax expense relates to the United Kingdom operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company's United States operations. Due to the Company transferring cash from its non-U.S. subsidiaries to the US in both 2012 and 2013, the Company no longer considers earnings related to non-U.S. subsidiaries to be permanently reinvested. The impact of adoption of this policy has not had a material impact on the Company's results of operations, financial position or cash flows.

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

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

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at June 30, 2014.

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

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

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

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. No impairment was identified in 2013. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of purchased technology, trademarks and trade names, and customer lists.

The Company has allocated goodwill and a significant component of its intangible assets to CTI Billing Solutions Limited, as that entity is considered a separate reporting unit. The Company performed its last annual impairment analysis on goodwill as of October 1, 2013, to coincide with the calendar date set in past years for this analysis. The Company's analysis considered the projected cash flows of the reporting unit and gave consideration to appropriate factors in determining a discount rate to be applied to these cash flows. The results of this analysis indicated that there was no impairment as of the date of our annual impairment determination and that further impairment analysis was not required.

The Company recognizes that the market for our stock can be below our book value which the Company attributes to a number of factors including very limited trading in the Company's Class A common stock, a significant portion of the Company's Class A common stock (approximately 64%) is beneficially owned by a majority stockholder, an overall "flight to quality" by investors in which many "penny stocks" such as CTI's have been significantly downgraded in terms of pricing and an overall lack of public awareness of its operations. While the Company cannot quantify the impacts of these factors in terms of how they impact the difference between book value and our stock's "market cap," the Company does not believe that the market in its Class A common stock is sufficiently sophisticated to make a proper determination of the value of the Company's Class A common stock.

Because of the Company's continued relatively low "market cap", the Company reviewed the assumptions utilized in the impairment determination and again found that there existed no impairment. As of November 1, 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 Company believes that the year-end analysis is sufficiently current and no formal analysis has been performed at June 30, 2014. If the Company assesses market condition changes in our business, it may be required to reflect additional goodwill impairment in the future.

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

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

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

22-------------------------------------------------------------------------------- Table of Contents 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 June 30, 2014 and June 30, 2013 was $64,757 and $15,528, respectively, of stock-based compensation. Included within selling, general and administrative expense for the six months ended June 30, 2014 and June 30, 2013 was $79,966 and $31,057, 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.

The Company estimates it will recognize approximately $123,000, $106,000, $69,000 and $24,000 for the fiscal years ending December 31, 2014, 2015, 2016 and 2017, respectively, of compensation costs for non-vested stock options previously granted to employees.

New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 Revenue from Contracts with Customers a new standard on revenue recognition that supersedes previously issued revenue recognition guidance. This guidance provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. This new standard is effective for us beginning in fiscal year 2018. 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.

23-------------------------------------------------------------------------------- Table of Contents

[ Back To TMCnet.com's Homepage ]