Item 1. Business
Background
CTI Group (Holdings) Inc. and subsidiaries (the “Company” or “CTI”) design, develop, market and support intelligent electronic invoice processing, enterprise communications management software and services solutions, and carrier class voice over internet protocol management applications.
The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of Delaware in 1988, pursuant to a merger into a wholly owned subsidiary formed as a Delaware corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.
Markets, Products, and Services
The Company is comprised of two business segments: Electronic Invoice Management (“EIM”), and Call Accounting Management and Recording (“CAMRA”)
Electronic Invoice Management
EIM designs, develops and provides electronic invoice presentment, 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. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while reducing the resource investment required to process, validate, approve, and pay their telecommunication invoices. The Company has historically marketed its EIM products and services in North America and Europe directly to telecommunication service providers who then market and distribute the product to their enterprise customers, which consist primarily of businesses, government agencies and institutions. The Company actively markets EIM products and services in both North America and Europe.
EIM Market
General. The telecommunications industry, as it relates to the EIM market segment, is comprised of those service providers who sell, resell, wholesale, or otherwise supply voice, data, video and other content delivery methods to consumers, businesses, government agencies and other end-users. Such providers perform a broad range of services including, but not necessarily limited to:
•
wireline and long distance;
•
wireless telephony and data;
•
messaging and paging;
•
IP telephony, video, and data;
•
DSL/cable/broadband services; and
•
satellite telephony and data.
Providers of these services are typically carriers who fall into regulatory categories that include:
•
multinational telecommunication carriers;
•
regional bell operating companies;
•
independent local exchange carriers;
•
competitive access providers;
•
competitive local exchange carriers;
•
interexchange carriers;
•
wireless carriers;
•
satellite service providers;
•
IP and data services providers; and
•
cable/broadband service providers.
Competition and integration continue to reshape the communications industry. Continued downward pressure on prices is driven by strong competition, the continued replacement of wireline services with wireless alternatives, the introduction of new technologies based on internet protocol (“IP”) including VoIP, video, and merger and acquisition activities of key service providers. As a result of such pricing pressures, the Company has been required to reduce its pricing and achieve product revenue growth through increased volume sales or processing of call detail records.
The industry dynamics noted above are expected to present opportunities for the Company’s software and service offerings. As service provider margins decline, the Company believes that it continues to deliver a value message that demonstrates how its EIM and Telemanagement solutions create competitive differentiation, stronger customer relationships, enhanced lifetime value and increased operational efficiencies.
The following market drivers are consistent across the telecommunications industry segments targeted by the Company. Each of these drivers is expected to positively impact the Company’s growth strategies and the Company’s strategic business positioning. The following trends are concurrent and are predicted to enhance the growing demand for the enhanced invoice delivery, and processing capabilities provided by the Company’s EIM products and services.
Convergence and Complexity. The nature, size, needs and complexity of the telecommunications industry continue to change. Consolidation and service expansion continue to narrow the playing field in the Tier 1 service provider segment that includes Verizon Communications, Inc., Sprint Nextel Corporation and AT&T Inc. Opportunity exists within the Tier 1 segment but is not the primary focus of the Company. Broad opportunities exist in the smaller Tier 2, 3 and 4 market segments that include the regional, niche, and smaller markets. Expanded/bundled service offerings (local and long distance, voice and data, wireline and wireless, broadband DSL and cable-based access) are valued by end customers but add significant complexity to the customer/provider relationship. The industry has evolved around the Integrated Communications Provider (“ICP”) model. Many service providers are achieving or have developed their ICP model via acquisition and third-party resale. The Company’s EIM and Telemanagement software and services enable the ICPs to deliver a viable, integrated and converged experience to their customers - even if the providers’ internal systems and infrastructure may not yet support such integration.
Customer Relationship Management. The Internet continues to redefine the relationship between service providers and their customers. The telecommunications industry has invested significant capital in an attempt to streamline its interaction with customers and prospects alike. Service providers and industry analysts view web-enabled customer self-care as the key to reducing costs by transitioning many service and support functions directly to customers. The Company believes that a provider who successfully migrates customer support functions onto the Web and into the hands of the customer consistently drives down costs, drives up profits and increases customer satisfaction by enabling the customer to save time, enhance convenience, and create the customer’s own “personalized” user experience. Adoption and use of the tools extended by service providers has been disappointing. By delivering a compelling process and cost advantage to enterprise customers, the Company believes it can drive adoption and improve the return on investment for service providers.
Customer Ownership. Managing the life cycle and maximizing the return from, and retention of, customers are increasingly recognized to be more important than to simply focus on acquiring more customers. In an industry experiencing increased acquisition costs, accelerating customer turnover, and declining margins, it is vital to focus on retention and revenue per customer. Service providers are seeking options enabling competitive differentiation in service delivery, product bundling and customer self-care. The Company’s electronic invoice presentment platform strengthens the service provider’s competitive position while optimizing key operational costs involving customer care and paper billing fulfillment.
Outsource/Service Bureau. The providers in the telecommunications industry today are demonstrating increasing interest in establishing third party relationships that add value to their product portfolio while allowing the provider to focus on its core competencies. The outsourcing/Application Service Provider (“ASP”) delivery model represents an alternative to the risks and costs associated with rapidly changing technologies. Service providers are migrating from in-house development to packaged vendor solutions. At no time in their history has competition been so prevalent and the need to extend service portfolios so important. Companies are seeking rapid systems acquisition and implementation from outside parties.
Single Vendor Relationships. As competition continues to intensify across virtually every communications segment, carriers and service providers are looking to their billing and customer management infrastructure as one of the key differentiators. The industry is moving toward vendor relationships that can offer integrated solutions. Critical to this requirement are speed of implementation, scalability, modularity, and seamless integration with other critical business support systems. As the global telecommunications market continues to evolve, end customers will be drawn to service providers who not only offer a broad array of services but who will enable them to see all telecommunication expenditures from a single point of contact (“360º Visibility”). Whether established incumbents or new market entrants, telecommunications providers require systems that allow all services to be bundled together into value plans that encourage customer retention and adoption of additional services. Furthermore, providers require customer management systems that enable increasingly complex customer relationships to be managed through a unified, user-friendly interface into the customer database.
EIM Products and Services
SmartBill® , SmartBill® Connect, and Analysis and Analysis Online.
The Company’s EIM product suite includes the SmartBill®, SmartBill® Connect, Analysis, and Analysis Online software and services solutions. CTI’s products support the integrated communications provider model and the related need to invoice and effectively and efficiently manage their relationships with customers. CTI’s software and services are designed to permit the telecommunications provider to collect and process data describing accounts receivable, to generate and deliver invoices, to support customer service call centers, and to interface with other business support systems. These products are mission-critical to telecommunications providers inasmuch as they can affect their cash flow, customer relationship management and the ability to rapidly define, design, package and market competitive services more quickly and efficiently than their competitors. All sales for billing software and services were completed through the Company’s direct sales force.
SmartBill® . SmartBill® is an electronic bill presentment and analysis tool. SmartBill® is currently sold through distributor relationships established with wireline telecommunications providers who offer the products as value-added elements of their service offerings to business customers. Under its agreements with its distributors, CTI is responsible for software design and development, on-going fulfillment of monthly cycle-based billings and, in many cases, direct technical support for the distributors’ end user customers.
Many times each month, CTI’s service provider clients deliver complete billing information for their SmartBill® customers to CTI. This data is then processed by CTI using its technology. The processed data is then made available to the service provider’s customers on CD-ROM or via the Internet. These customers utilize the end user application to create an array of standard reports or they can create customized reports through the application of filters that further refine their search for business support data. SmartBill® also enables customers to apply a flat rate or percentage mark-up for rebilling of communication charges to internal or external clients. Each month, CTI processes approximately 500 million call data records for more than 4,000 end users of CTI’s product suite.
Analysis. Analysis is an electronic bill presentment and analysis tool. Analysis is currently sold through distributor relationships established with wireless telecommunications providers who offer the products as value-added elements of their service offerings to business customers. Under its agreements with its distributors, the Company is responsible for software design and development, on-going fulfillment of monthly cycle-based billings and, in many cases, direct technical support for the distributors’ end user customers.
Many times each month, the Company’s service provider clients deliver complete billing information for their Analysis customers to CTI. This data is then processed by CTI using its technology. The processed data is then made available to the service provider’s wireless customers on CD-ROM or via the Internet. These customers utilize the end user application to create an array of standard reports or they can create customized reports through the application of filters that further refine their search for business support data.
SmartBill® Connect. SmartBill® Connect is an Internet-based software solution delivered by the Company under its historic ASP business/service delivery model offering service providers a full range of Electronic-Care (“E-Care”) capabilities that can strengthen and build on existing investments in technology - preserving the full functionality of current systems - while allowing them to service and support future customer growth. The solution offers an opportunity for customers to interactively perform reporting, analysis, cost allocation, and approval of their communications invoice. SmartBill® Connect empowers business customers with a tool providing 360° Visibility into communications expenditures, increased control of cost and usage information and optimization of the business processes involved in receipt, verification, and approval of their recurring operational expenses. The Company believes that improving the flow and control of these important business processes will promote adoption of self-care among business customers of wireline telecommunication service providers, increase customer satisfaction and retention while lowering customer service costs.
Analysis Online. Analysis Online is an Internet-based software solution delivered by the Company under its historic ASP business/service delivery model offering service providers a full range of E-Care capabilities that can strengthen and build on existing investments in technology - preserving the full functionality of current systems - while allowing them to service and support future customer growth. The solution offers an opportunity to customers to interactively perform reporting, analysis, cost allocation, and approval of their communications invoice. Analysis Online empowers business customers with a tool providing 360° Visibility into communications expenditures, increased control of cost and usage information and optimization of the business processes involved in receipt, verification, and approval of their recurring operational expenses. The Company believes that improving the flow and control of these important business processes will promote adoption of self-care among business customers of wireless telecommunication service providers, increase customer satisfaction and retention while lowering customer service costs.
Customers. The combination of services offered within the CTI product suite and the level of performance delivered by CTI create lasting relationships. CTI’s relationships with some of its largest customers have spanned more than a decade. For the year ended December 31, 2012, the Company had sales to a single customer aggregating $3,347,201 (20% of revenues) while another customer contributed $1,908,130 (11% of revenues), for the year ended December 31, 2011. Such customers represented 20% and 11% of software sales, service fee and license fee revenues for the years ended December 31, 2012 and 2011, respectively. The loss of these customers would have a substantial negative impact on the Company’s operations and financial condition. There are three EIM customers that totaled $7,537,621 (66% of EIM revenues) and $5,486,005 (53% of EIM revenues) for the years ended December 31, 2012 and 2011, respectively. A loss of any of these customers would have a negative impact on the EIM segment and CTI as a whole. Generally, the Company enters into multi-year service provider contracts which include auto-renewal clauses to alleviate production cessation.
SplitBill® and Dynamic Reports
SplitBill®. SplitBill® enables business administrators to identify, differentiate, and allocate non-commercial costs on their communications invoices. The product further includes an approval and workflow processing function that virtually eliminates the overhead and administration costs associated with such efforts. Finally, the approval process ensures appropriate levels of accountability within the organization while establishing a clear audit trail for financial control purposes.
Organizations that leverage mobility services typically find that their services are being used for a variety of commercial and non-commercial purposes. For example, an employee’s cellular phone may be used to make personal calls. Service providers benefit from personal usage of commercial services by recognizing an increase in average revenue per user (“ARPU”). The service provider’s customer, however, needs to be able to recover the personal expenditures on such services, appropriately manage the tax consequences, and accomplish this without incurring an increase in overhead and administration costs. The tax consequences of personal usage of commercial services is most apparent in the United Kingdom, where enterprises are statutorily required to disclose personal usage and receive tax benefits only for commercial usage.
Service providers distribute SplitBill® to organizations that need to recover personal expenditures related to commercial communications services. SplitBill® increases the ARPU of the provider in three ways. First, the product ensures that all communications usage, regardless of the personal nature of such usage, passes over the provider’s network, therefore increasing the service provider’s revenues and profitability. Second, the provider experiences reduced customer loss. By enabling enterprise end-users to leverage services for commercial and non-commercial purposes, the service is further entrenched into the organization. Finally, the product solves a key financial challenge for enterprise customers, delivering sustainable value, leading to an increase in revenue by the service provider.
Dynamic Reports. Dynamic Reports is a low-cost, analysis solution targeting small businesses and consumers. Dynamic Reports is delivered each billing period by email directly to the customer and provides a selection of reports that gives a comprehensive understanding of phone usage at a glance. Interactive functionality is an option with Dynamic Reports and allows users to select and change key usage reports and individual handsets to monitor activity from the homepage.
Customers. SplitBill® and Dynamic Reports customers are primarily Tier 1 and Tier 2 wireless telecommunication service providers.
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.
CAMRA Market, Products and Services
As voice and data services continue to commoditize, the Company anticipates that service providers will be seeking alternative business models to replace revenue lost directly as a result of pricing pressures. The Company believes that one such business model is the delivery of managed or hosted voice and video services. The Company’s CAMRA segment designs, develops and provides software and services that enable managed and hosted 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.
The Company’s primary CAMRA products and services are comprised of SmartRecord® IP, and the Proteus® suite of products including: Proteus® Office, Proteus® Trader, Proteus® Enterprise, and Proteus® Service Bureau.
SmartRecord® IP 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, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. SmartRecord® IP was released as enterprise grade product. The Company anticipates that customers will purchase this product when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered a provider-grade managed and hosted service application enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business.
The Proteus® suite of products are used by companies, institutions and government agencies for fiscal or legal purposes to track communications activity and to control costs associated with operating communications networks. Proteus® is a user friendly, Microsoft Windows® based product. Proteus® performs functions of call recording, call accounting, cost allocation, client bill-back, analyses of trunk traffic and calling and usage patterns, toll fraud detection, directory services and integration with other private branch exchange (“PBX”) peripheral products. Proteus® also integrates Internet, e-mail and mobile data analysis and reporting with its traditional voice capabilities. The Company’s Telemanagement products and services have been developed, and historically marketed, primarily in Europe. Proteus® product sales are made through direct and distributor sales channels.
The Company has also invested in enhancing its CAMRA solution for the new wave of IP telephony products and has already been approved by several leading telecom manufacturers to bundle Proteus® with their IP solution at the source. The Company believes that this strategy positions it for global expansion, as IP technology gains market share.
As well as creating new market opportunities, this IP telephony integration provides many operational benefits, in that it requires no site visit for installation and self learns organizational data. Both of these elements have traditionally been resource hungry and often a barrier to channel sales growth.
SmartRecord® IP was released in February 2007. SmartRecord® IP provides integrated call recording options to service providers for their hosted and managed service customers. Based upon patent pending technology, this application enables the service provider’s customers to record, monitor, and archive communications for regulatory and quality management purposes.
Service providers can distribute these products to their managed and hosted service customers by either directly reselling the product or by integrating it into an existing service bundle, increasing the value and price of the overall bundle offering. The Company believes that the overall VoIP market will grow.
Proteus® is an enterprise traffic analysis and communications management software solution that is available in four versions to meet the specific needs of corporate users: Proteus® Office, Proteus® Trader, Proteus® Enterprise, and Proteus® Service Bureau.
Proteus® Trader is aimed at the communications management requirements of the global financial investment and trading markets. Some investment banks are now using the product worldwide.
Proteus® Enterprise and Proteus® Office are specifically designed for general business use and respectively address the market requirements of large corporate users to small and medium sized companies.
Proteus® Service Bureau is a hosted enterprise traffic analysis and communications management solution that is provided to customers and billed on a month to month basis.
Proteus® is a Windows OS product that applies technology to upgrade and expand traditional call accounting and telemanagement market applications. Windows platform features, for example, include: call accounting report distribution via e-mail, call detail record polling via Internet, Intranets or wide area network, telephony applications programming interface dialer which facilitates point-and-click dialing from database-resident corporate and local directories, and 911 notification which allows organizations to assign any number of Windows-based PCs on their corporate local area network with an immediate screen-pop notification when a 911 call is made (the screen-pop pinpoints the caller’s exact location within the building).
Customers. SmartRecord® IP is marketed to Tier 2 and Tier 3 service providers who have a hosted or managed communications service offering. These provider relationships are built either directly or indirectly through relationships with soft switch manufacturers. Proteus® products are marketed to organizations with internal telecommunications systems supporting an aggregate of telephone, fax and modem equipment, mobile, Internet and e-mail technologies. The Company’s clients include Fortune 500 companies, mid-size and small-cap companies, hospitals, universities, government agencies and investment banks. CTI anticipates that it can further expand its products and services through internal development of its own technological capabilities, by seeking to partner with companies offering complementary technology or by pursuing possible acquisitions.
CTI generates revenue through service bureau contracts, software licensing agreements and maintenance agreements supporting licensed software. Maintenance agreements are either on a time and material basis or full service agreements that are generally for a period of 1 year. For software licensing agreements on a direct distribution basis, payment terms are a 50% deposit upon receipt of order and the 50% balance upon installation, which is normally completed within 10 days. Occasionally, larger software orders may require up to 3 months to complete, custom software development and installation. For software licensing via distributor channels, payment terms are net 30 days. Service bureau contracts provide monthly recurring revenue. Generally, contracts of 12 to 36 months carry automatic 12-month renewals until canceled. CTI purchases data collection devices specifically designed for use with telecommunications switches and other hardware such as modems as are necessary to perform the CAMRA business. CTI rents or resells such equipment to end-users.
Patent Enforcement Activities
CTI’s two patents covering a method and process to prepare, display, and analyze usage and cost information for services including, but not limited to, telecommunications, financial card services, and utilities (e.g., electricity, oil, gas, water) expired in 2011. This technology is incorporated in the Company’s SmartBill® product. Other companies have developed programs to replicate this patented process that the Company believes violated its patents.
In 2012, Patent Enforcement was no longer material to the business and the Company no longer considered Patent Enforcement a business segment.
The Company is currently involved in a lawsuit regarding the patents and does not intend to seek further patent litigation once the current lawsuit is resolved. See Part I - Item 3. “Legal Proceedings.” As a matter of course, the defense in the outstanding lawsuit is attacking the validity of the patents. The Company does not anticipate that such attack will be successful but the results of litigation are difficult to predict.
Employees
As of December 31, 2012, CTI employed 111 people on a full-time basis and 2 on a part-time basis: 37 full-time employees were located in the United States and 74 full-time employees were located in the United Kingdom. There was 1 part-time employee located in the United Kingdom and 1 part-time employee in the United States. None of the Company’s employees are represented by a labor union. The Company believes it maintains a good relationship with its workforce.
Intellectual Property
Patents. See “Patent Enforcement Activities” above.
Trademarks. The Company maintains registered trademarks. The main registered trademarks relate to its EIM products: SmartBill®, SplitBill® and Atlas®; its Telemanagement product Proteus®; SmartRecord® its integrated call recording VoIP product for their hosted and managed service customers; and the CTI name. Trademark duration is up to ten years in length.
Technology, Research & Development
The Company’s product development efforts are focused on increasing and improving the functionality for its existing products and developing new products for eventual release. In 2012, research and development expenditures amounted to approximately $3,634,000 which included approximately $860,000 in capitalized software development costs that were primarily related to next generation releases of SmartRecord® and Analysis. In 2011, research and development expenditures amounted to approximately $3,103,000 which included approximately $496,000 in capitalized software development costs that were primarily related to next generation releases of SmartRecord®.
Governmental Regulations
CTI does not believe that compliance with federal, state, local or foreign laws or regulations has a material effect on its capital expenditures, operating results or competitive position, or that it will be required to make any material capital expenditures in connection with governmental laws and regulations. The Company is not subject to industry specific laws or regulations.
Competition
CTI competes with a number of companies that provide products and services that serve the same function as products and services provided by CTI.
EIM. The delivery of multiple telecommunications services from a single provider requires the service provider to present a single and comprehensive view of all of its services to the end customer. Prior to the release of SmartBill® Connect, the Company’s value message to the service provider focused on supporting the provider’s enterprise customers who had complex service mixes and difficult to manage billing hierarchies. As such, the Company competed in a very narrowly defined niche. The Company found itself competing against electronic bill presentment and payment providers whose web-based solutions were positioned as a single solution that could support large users while delivering presentment and payment to the entire spectrum of end customers. With SmartBill® Connect, the Company maintains its previous functional capabilities while now being able to scale functionality and deliver Internet-based presentment to the smallest of users. The Company believes that it is now able to compete directly with providers of electronic billing analysis and with providers of electronic bill presentment solutions. This combination positions the Company as a provider of electronic invoice management that delivers content-and-capability bundles that are defined differently for different market segments.
There are only a few competitors selling a product that directly compete with SmartBill®. These competitors may be larger and better capitalized than CTI. However, several telecommunications companies offer a similar product using in-house resources. The Company’s main source of differentiation from its competitors, in the EIM segment is its technology.
The Company’s major competitors include: CheckFree Services Corp., edocs, Inc., Amdocs Limited, Oracle Systems, Veramark Technologies, Inc., and Info Directions, Inc. In addition to these direct competitors, the Company faces intense competition from internal IT within the service providers’ business operations.
CAMRA. The Company’s CAMRA segment operates in an emerging and highly fragmented market. There are many competitors which may be better capitalized than the Company. The Company’s primary competitors of SmartRecord® IP include Telrex, Nice-Systems Ltd., and Orecx. emPulse competes against hosted call center applications such as CosmoCom and Contactual, Inc. The Company’s primary competitors of Proteus® are Mind CTI, BTS, Softech, Inc., Oak, Tiger, and Veramark Technologies, Inc. The Company differentiates itself from its competitors based on reporting capabilities and ease of user interface. Proteus® integrates with a wide variety of telephone systems and third party applications such as dealer boards and voice recording equipment. Proteus® also connects directly over the local area network, which eliminates the need for cables that are associated with similar products. The Company is able to compete by both technological advantages and pricing strategies.
Item 1A.
Item 1A. Risk Factors
Unless the context indicates otherwise, all references to “we,” “us,” “our,” in this subsection “Risk Factors” refer to the Company or CTI. We are subject to a number of risks listed below, which could have a material adverse effect on the value of the securities issued by us. You should carefully consider all of the information contained in, or incorporated by reference into, this Form 10-K and, in particular, the risks described below before investing in our Class A common stock or other securities. If any of the following risks actually occur, our business, financial condition or results of operations could be materially harmed and you may lose part or all of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.
Economic conditions could adversely affect our revenue and results of operations.
Our business may be affected by a number of factors that are beyond our control such as general geopolitical economic and business conditions, conditions in the financial services markets, and changes in the overall demand for networking products. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Uncertainty about current global economic conditions could cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for networking products.
The recent economic crisis affecting the banking system and financial markets and the uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit, equity, currency and fixed income markets. There could be a number of follow-on effects from these economic developments and negative economic trends on our business, including the inability of customers to obtain credit to finance purchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions; decreased customer demand; and decreased customer ability to pay their trade obligations. Additionally, we may not be able to borrow funds in a tightening credit market from financial institutions to fund future investing and operating activities which will prevent future growth.
If conditions in the global economy, United States and United Kingdom economies, or other geographic markets remain uncertain or weaken further, such conditions could have a material adverse impact on our business, operating results and financial condition. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business and results of operations.
We are subject to many risks associated with doing business outside the United States which could have a negative impact on our financial condition and results of operations.
The majority of our operations are conducted in the United Kingdom. We face many risks in connection with the majority of our operations outside the United States, including, but not limited to:
•
adverse fluctuations in currency exchange rates;
•
political and economic disruptions;
•
the imposition of tariffs and import and export controls;
•
increased customs or local regulations;
•
potentially adverse tax consequences;
•
restrictions on the repatriation of funds; and
•
increased government regulations related to increasing or reducing business activity in various countries.
The occurrence of any one or more of the foregoing could have a material negative effect on our financial condition and results of operations. For instance, in 2012 and 2011, we generated approximately 80% and 76%, respectively, of our revenues from operations in the United Kingdom. Revenues derived from operations in the United Kingdom were positively impacted in 2012 and 2011 as compared to 2010 and negatively impacted in 2010 as compared to 2009 due to the reduction in the average conversion rate of the British pound to the U.S. dollar. The conversion rate of the British pound increased in 2012 and 2011 as compared to 2010.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, the UK Bribery Act, and similar laws, and any determination that we violated any of these laws could have an adverse effect on our business.
Our operations outside the United States are subject to the U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act (“FCPA’”) and the UK Bribery Act (the “UK Act”). Generally, the FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. Generally, the UK Act prohibits us from making payments to private citizens as well as government officials for the purposes of obtaining or retaining business. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.
If we continue to incur losses, our business, financial condition, and results of operations will be negatively impacted.
We recognized a net income of approximately $0.6 million in the year ended December 31, 2012 and a net loss of approximately $0.6 million in the year December 31, 2011. Our accumulated deficit was approximately $21.3 million at December 31, 2012. Although we have returned to profitability and developed a business plan and implemented a number of programs, including the discontinuance of unprofitable product lines or supporting duplicative product platforms, and we have seen improvement in the bottom line, there can be no assurance that our business plan adequately addresses the circumstances and situations which will enable the Company to maintain profitability. If we continue to incur losses, our business, financial condition, and results of operations will be negatively impacted.
We may be required to record impairments on our intangible assets and goodwill which could have an adverse material impact on our financial condition and results of operations.
On December 22, 2006, we recorded intangible assets of approximately $6.0 million and goodwill of approximately $4.9 million related to the CTI Billing Solutions Limited acquisition. We continuously assess the value of the intangibles. In 2010, we recorded a $2.1 million impairment of goodwill. There can be no assurances that there will not be any further impairments on the value of such intangibles in the future. If these assets become impaired, such assets will be expensed in the periods they become impaired which could have a material adverse impact on our financial condition and results of operations.
Since we derive a substantial percentage of our revenue from contracts with a few customers, the loss of one or all of these customers could have a negative impact on our financial condition and results of operations.
We derive a substantial portion of our revenues from certain customers. In 2012 and 2011, the Company had revenues from a single customer aggregating $3,347,201 (20% of total revenues) while another customer contributed $1,908,130 (11% of total revenues), respectively. Such customers represent 20% and 11% of software sales, service fee and license fee revenues for the years ended December 31, 2012 and 2011. The loss of either of these customers would have a substantial negative impact on our financial condition and results of operations. Our largest three customers total $7.5 million (45% of total revenue) and $5.5 million (32% of total revenue) in fiscal years 2012 and 2011, respectively. A loss of any of these customers would have a negative impact on our financial condition and results of operations.
We may not be successful in developing or launching our new software products and services, which could have a negative impact on our financial condition and results of operations.
We invest significant resources in the research and development of new and enhanced software products and services. We incurred research and development expenses of approximately $2.8 million and $2.6 million during 2012 and 2011, respectively. In addition, we incurred and capitalized approximately $860 thousand in 2012 and $500 thousand in 2011 in internal software development costs which were primarily related to next generation releases of Analysis and SmartRecord® IP. The net book value of capitalized software amounted to approximately $1.4 million at December 31, 2012. We cannot provide assurances that we will be successful in our efforts selling new software products, which could result in an impairment of the value of the related capitalized software costs and corresponding adverse effect on our financial condition and operating results.
The telecommunications billing services industry is subject to continually evolving industry standards and rapid technological changes to which we may not be able to respond which, in turn, could have a negative impact on our financial condition and results of operations.
The markets for our software products and services are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Our business success will depend in part upon our continued ability to enhance our existing products and services, to introduce new products and services quickly and cost-effectively, to meet evolving customer needs, to achieve market acceptance for new product and service offerings and to respond to emerging industry standards and other technological changes. We may not be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that our competitors will not develop competitive products, or that any new competitive products will not have an adverse effect on our operating results. Our products are consistently subject to pricing pressure. Our patents expired in 2011.
We intend further to refine, enhance and develop some of our existing software and billing systems and change our billing and accounts receivable management services operations to reduce the number of systems and technologies that must be maintained and supported. There can be no assurance that:
•
we will be successful in refining, enhancing and developing our software and billing systems in the future;
•
the costs associated with refining, enhancing and developing these software products and billing systems will not increase significantly in future periods;
•
we will be able to successfully migrate our billing and accounts receivable management services operations to the most proven software systems and technology;
•
our existing software and technology will not become obsolete as a result of ongoing technological developments in the marketplace or
•
competitors will develop enhanced software and billing systems before us.
If any of the foregoing events occur, this could have a negative impact on our financial condition and results of operations.
Breaches of network or information technology security. natural disasters or terrorist attacks could have an adverse effect on our business.
Network and information systems-related events, such as computer hackings, cyber attacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing, or power outages, natural disasters, terrorist attacks or other similar events, could result in a degradation or disruption of our services. These events also could result in large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar events in the future. Further, any security breaches, such as misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems and networks, including customer, personnel and end-user data, could damage our reputation and require us to expend significant capital and other resources to remedy any such security breach. Moreover, the amount and scope of insurance we maintain against losses resulting from any such events or security breaches may not be sufficient to cover our losses or otherwise adequately compensate us for any disruptions to our businesses that may result, and the occurrence of any such events or security breaches could have a material adverse effect on our business and results of operations. While we develop and maintain systems seeking to prevent systems-related events and security breaches from occurring, the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Despite these efforts, there can be no assurance that these events and security breaches will not occur in the future.
We may not be able to compete successfully, which would have a negative impact on our financial condition and results of operations.
We compete with a number of companies, primarily in the United States and United Kingdom, that provide products and services that serve the same function as those provided by us, many of which are larger than us and have greater financial resources and better name recognition for their products than we do. Although we operate in a highly fragmented market, numerous competitors in the United States and the United Kingdom provide products and services comparable to our products and services which have the potential to acquire some or all of our market share in their respective geographic markets which could have a negative impact on our financial condition and results of operations.
We may not be successful when we enter new markets and that lack of success could limit the our growth.
As we enter into new markets outside the United States, including countries in Asia, Africa, and Europe, we face the uncertainty of not having previously done business in those commercial, political and social settings. Accordingly, despite our best efforts, the likelihood of success in each new market, which we enter, is unpredictable for reasons particular to each new market. For example, our success in any new market is based primarily on acceptance of our products and services in such market. It is also possible that some unforeseen circumstances could arise which would limit our ability to continue to do business or to expand in that new market. Our potential failure to succeed in the new markets would limit our ability to expand and grow.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to accurately report our financial results and comply with the reporting requirements under the Exchange Act. As a result, current and potential stockholders may lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business and we could be subject to regulatory scrutiny.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we are required to include in our annual reports on Form 10-K, our management’s report on internal control over financial reporting. Although we have completed our compliance for management’s report on internal control over financial reporting, we cannot guarantee that we will not have any “significant deficiencies” or “material weaknesses” within our processes. Failure to establish and maintain an effective system of disclosure controls and procedures could cause our current and potential stockholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.
Control of our stock is concentrated among our directors and executive officers and their respective affiliates who can exercise significant influence over all matters requiring stockholder approval.
As of March 12, 2013, our directors and executive officers and their respective affiliates beneficially owned 77.7% of the outstanding Class A common stock. These stockholders can exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of major corporate transactions, including any transaction in connection with the proposal made on March 7, 2013, by Fairford Holdings Limited, Michael Reinarts and John Birbeck, to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $0.29 per share. Such concentration of ownership may also delay or prevent a change in control of us.
We are subject to the penny stock rules which may adversely affect trading in our Class A common stock.
On March 12, 2013, the closing price of our Class A common stock was $0.27. Our Class A common stock is a “penny stock” security under the rules promulgated under the Exchange Act. In accordance with these rules, broker-dealers participating in certain transactions involving penny stocks must first deliver a disclosure document that describes, among other matters, the risks associated with trading in penny stocks. Furthermore, the broker-dealer must make a suitability determination approving the customer for penny stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these determinations in writing to the customer and obtain specific written consent from the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our Class A common stock, decrease liquidity of our Class A common stock and increase transaction costs for sales and purchases of our Class A common stock as compared to other securities.
There is not presently an active market for shares of our Class A common stock, and, therefore, you may be unable to sell any shares of Class A common stock in the event that you need a source of liquidity.
Although our Class A common stock is quoted on the Over-the-Counter Bulletin Board, the trading in our Class A common stock has substantially less liquidity than the trading in the securities of many other companies listed on that market. A public trading market in the securities having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our securities at any time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. In the event an active market for the securities does not develop, you may be unable to resell your shares of Class A common stock at or above the price you pay for them or at any price.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2.
Item 2. Properties
Rent and lease expense was $411,757 and $462,119 for the years ended December 31, 2012 and 2011, respectively. The Company leases 15,931 square feet of office space in Indianapolis for an average cost of $257,643 per year. The Indianapolis lease expires in February 2014. The Company leases 2,323 square feet of office space near London in the United Kingdom at an annual rate equivalent approximately to $55,000 per annum. The London lease expires in December 2013. The Company leases 9,360 square feet of office space in Blackburn in the United Kingdom at an annual rate equivalent to approximately $122,000. The Blackburn lease expires December 2014. The Company believes that, although its facilities are adequate to meet its current level of sales, additional space may be required to support future growth. In connection with the Indianapolis lease and the Blackburn lease, the lessor contributed money for improvements to the leased premises. The amounts contributed for improvements are being amortized ratably over the life of the lease which reduces the average annual expense related to the leases.
Item 3.
Item 3. Legal Proceedings
Qwest Corporation
The Company filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq. against BellSouth Corporation (“BellSouth”), Citizens Communications, Inc., Convergys Corporation, Mid America Computer Corporation, Qwest, Telephone Data Systems, Inc. and Traq-Wireless, Inc. in the United States District Court for the Southern District of Indiana on January 12, 2004. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270.
The Company settled with defendants Telephone Data Systems, Inc., Traq-Wireless, Inc., BellSouth Corporation and Convergys Corporation independently and dismissed the complaint against such companies. The Company also dismissed its complaint against Mid America Computer Corporation and Citizens Communications, Inc.
The Company amended its complaint to substitute Qwest Corporation and Qwest Communications International, Inc. as defendants instead of Qwest.
On May 11, 2004, an action was brought against the Company in the United States District Court for the Western District of Washington by Qwest Corporation seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications Corporation to that action. The Company filed a motion with the United States District Court for the Western District of Washington seeking to dismiss that action or, in the alternative, to transfer it to the United States District Court for the Southern District of Indiana.
On November 12, 2004, the United States District Court for the Western District of Washington granted the Company’s motion to the extent of transferring the action to the United States District Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent infringement and the United States District Court for the Southern District of Indiana then consolidated the transferred action with the pending patent infringement lawsuit it filed in the United States District Court for the Southern District of Indiana.
Qwest Corporation filed a motion in the United States District Court for the Southern District of Indiana seeking to dismiss the complaint against it on jurisdictional grounds or, alternatively, to transfer the case to the United States District Court for the Western District of Washington. The parties then engaged in jurisdictional discovery. On February 14, 2005, the United States District Court for the Southern District of Indiana denied the motion as moot.
In May 2005, an anonymous request for reexamination of the Company’s U. S. Patent No. 5,287,270 was filed with the U.S. Patent Office (USPTO). The Company suspects that such request was filed as a tactical matter from one or more of the aforementioned defendants. The Company believes that the request for reexamination is without merit. In May of 2006, the USPTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate. Subsequent to that time, the Company has submitted numerous additional documents for consideration by the USPTO, the last such filing being in January 2009. On December 29, 2009, the USPTO issued an Ex Parte Reexamination Certificate confirming all of the claims of the Company’s U. S. Patent No. 5,287,270.
On May 13, 2005, Qwest Corporation, Qwest International and Qwest Communications Corporation filed a motion to stay the litigation in the United States District Court for the Southern District of Indiana, which was denied by the Court. On July 20, 2005, the foregoing Qwest entities filed a renewed motion for stay, which was denied by the Court.
On January 9, 2008, the United States District Court for the Southern District of Indiana issued its claim construction for U.S. Patent No. 5,287,270. On January 18, 2008, the Qwest entities filed a motion for stay and a summary judgment motion of invalidity based on the construction of one of the claim terms. The motions were fully briefed on an expedited basis and on February 26, 2008, the court denied the motions. Fact discovery closed on December 23, 2008. Expert discovery was completed on April 1, 2009. On April 15, 2009, the parties filed various summary judgment motions related to patent infringement and invalidity and immunity from suit concerning the Networx government contracts. On September 22, 2009, the Court granted the Qwest entities’ motion for summary judgment of immunity from suit concerning the Networx government contracts, thereby requiring the Company to sue the Government in the Court of Federal Claims. On October 29, 2009, the Court ruled on the parties’ patent invalidity and non-infringement summary judgment motions. The Court held that the Company’s U.S. Patent No. 5,287,270 was valid but not infringed by the Qwest entities. In November 2009, the Company filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit (Federal Circuit). The Qwest entities subsequently cross-appealed. On January 20, 2011, the Federal Circuit reversed the district court’s decision granting Qwest’s motion for summary judgment of non-infringement and granting Centillion’s motion for partial summary judgment of no anticipation. On February 22, 2011, the Qwest entities filed a petition for rehearing en banc. The Federal Circuit denied the petition on April 25, 2011, and remanded the case to the district court for further proceedings.
The district court subsequently allowed the parties to file new motions for summary judgment directed to infringement issues not presented to the Federal Circuit. The parties filed cross-motions for summary judgment on September 16, 2011, and completed the briefing process on November 21, 2011. The district court issued its order ruling on the cross-motions on October 15, 2012, granting Qwest’s motion for summary judgment of non-infringement. On October 30, 2012, the district court entered an order awarding Qwest litigation costs in the amount of approximately $250,000. Centillion filed a timely notice of appeal on November 13, 2012, and an amended notice of appeal on November 30, 2012. It also was ordered to post a supesedeas bond guaranteeing the payment of costs. The briefing process is ongoing and we anticipate that the Federal Circuit will issue its opinion in late 2013 or early 2014. As set forth in the appellate brief, filed on February 27, 2013, the Company and legal counsel believe that there are reasonable and persuasive grounds for the appellate court to overturn the district court’s order granting Qwest’s motion for summary judgment. The Company and the Company’s legal counsel believe it is more likely than not that the appellate court will overturn the district court’s order granting Qwest’s motion for summary judgment, which would vitiate the award of costs.
General
The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business that are unrelated to Patent Enforcement. These claims or administrative proceedings, even if not meritorious, could result in the expenditure of significant financial and management resources.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The shares of the Company’s Class A common stock, $0.01 par value per share, are quoted on the OTC Bulletin Board (Symbol “CTIG”). The table below sets forth for the indicated periods the high and low bid price ranges for the Company’s Class A common stock as reported by the OTC Bulletin Board. These prices represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily represent actual transactions.
At March 12, 2013, the closing price for a share of Class A common stock was $0.27.
At March 21, 2013, the number of stockholders of record of the Company’s Class A common stock was 392.
No dividends were paid on the Company’s Class A common stock in the fiscal years ended December 31, 2012 and 2011.
For the information regarding the Company’s equity compensation plans, see Part III, Item 11. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Item 6.
Item 6. Selected Financial Data
Not applicable
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Operations
Overview
The Company is comprised of two business segments: Electronic Invoice Management (“EIM”) and Call Accounting Management and Reporting (“CAMRA”). EIM designs, develops and provides services and software tools that enable telecommunication service providers to better meet the needs of their enterprise customers. EIM software and services are provided and sold directly to telecommunication service providers who then market and distribute such software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while driving internal efficiencies into their invoice receipt, validation, approval and payment workflow processes. As the Company’s Voice over Internet Protocol (“VoIP”) products continued to evolve, the Company has merged the VoIP segment with the Telemanagement segment. In 2012, the Company no longer viewed these as separate segments and instead combined the resources to develop and market these products into the CAMRA segment. CAMRA Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage and services that enable managed and hosted 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 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. Patent Enforcement involved the licensing, protection, enforcement and defense of the Company’s intellectual property and rights. In 2012, the Company no longer considered Patent Enforcement as a business segment.
The Company generates its revenues and cash from several sources: software sales, license fees, processing fees, implementation fees, training and consulting services, and enforcement revenues.
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 these 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 revenues from the CAMRA segment are derived from the Company’s United Kingdom operations.
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 alternative 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 recent U.S. recession and 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 disadvantage was organizations would experience significant capital and operational expenditures related to acquiring these advanced services. The second disadvantage was 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 to acquire new customers but to convert legacy customers onto the NGN platform. The Company believes that this conversion process could be 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 are intended to eliminate customer resistance to conversion to next generation platforms, while creating revenue opportunities for service providers through the delivery of compelling value added services. The Company primarily markets two applications, emPulse, 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 will also enable managed and hosted service customers of service providers to analyze voice, video, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications were released as enterprise-grade products. The Company anticipates that customers will purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business. Due to the recent U.S. recession and unstable global economy, the growth in the VoIP market has been slower than the Company anticipated but is slowly improving.
Financial Condition
In the fiscal year ended December 31, 2012, the stockholders’ equity increased $533,193 from $4,725,044 as of December 31, 2011 to $5,258,237 as of December 31, 2012 primarily as a result of the fiscal year 2012 net income of $596,266. At December 31, 2012, cash and cash equivalents were $2,345,390 compared to $2,945,182 at December 31, 2011. The Company realized a decrease in net current assets (current assets less current liabilities) of approximately $1,465,627 which was primarily attributable to decreases in cash and accounts receivable due to a decrease in revenue invoiced during the year ended December 31, 2012.
The Company generates approximately 80% of its revenues from operations in the United Kingdom where the functional currency is the United Kingdom pound. Revenues derived from operations in the United Kingdom were negatively impacted in 2012 as compared to 2011 due to the slight decline in the average conversion rate. The average conversion rate for the United Kingdom pound into a United States dollar for the year ended December 31, 2012 was 1.59 compared to 1.61 for the year ended December 31, 2011.
Results of Operations -Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue
Revenues from operations decreased $209,932 to $16,759,121 for the year ended December 31, 2012 as compared to $16,969,053 for the year ended December 31, 2011. Decreased revenues in 2012 were experienced by the CAMRA segment which were partially offset by an increase in the EIM segment. The EIM segment revenue increased $1,039,264 to $11,428,480 primarily due to recognition of a full twelve months of revenue from a large EIM contract entered into midyear in 2011 in the United Kingdom. CAMRA revenue decreased $1,249,196 to $5,330,641 for the year ended December 31, 2012 from $6,579,837 for the year ended December 31, 2011. The decrease in CAMRA segment revenue was due to a decrease in new systems installed in the United Kingdom and United States. For the years ended December 31, 2012 and 2011, the Company had revenues from a single customer aggregating $3,347,201 (20% of total revenues) while another customer contributed $1,908,130 (11% of total revenues), respectively. Such customers represent 20% and 11% of software sales, service fee and license fee revenues for the years ended December 31, 2012 and 2011, respectively.
Costs of Products and Services Excluding Depreciation and Amortization
Costs of products and services, excluding depreciation and amortization, decreased $348,220 to $4,277,131 as compared to $4,625,351 for the year ended December 31, 2011. The EIM segment cost of products and services, excluding depreciation and amortization, increased $61,609 primarily due to the costs related to the increase in installations and professional services. The CAMRA segment cost of products and services, excluding depreciation and amortization, decreased $409,829 primarily due to costs related to the decrease in revenue. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 25.5% of revenue for the year ended December 31, 2012 as compared to 27.3% of revenue for the year ended December 31, 2011. The decrease in the percentage was primarily due to a decrease in costs due to cost reduction measures undertaken in 2011.
Patent License Fee and Enforcement Costs
The Company no longer considers Patent Enforcement as a segment. The legal costs associated with patent enforcement activities are now classified as Selling, General and Administrative Costs. For comparative purposes the Company reclassified the $7,499 credit related to Patent License Fee and Enforcement Cost for the year ended December 31, 2011.
Selling, General and Administrative Costs
Selling, general and administrative expenses decreased $1,147,609 to $6,976,017 for the year ended December 31, 2012 compared to $8,123,626 for the year ended December 31, 2011. The decrease in selling, general and administrative expenses was primarily due to staff reductions undertaken in 2011.
Research and Development Expense
Research and development expense increased $167,278 to $2,774,604 for the year ended December 31, 2012 compared to $2,607,326 for the year ended December 31, 2011. The increase in expense was primarily due to a decrease of $565,467 in development costs that were allocated to cost of products and services. Research and development costs are allocated to cost of products and services when they relate to billable work or customer installations. There was a decrease in billable work and customer installations in 2012. Capitalized development costs related to internally developed software for resale was $859,617 and $496,005 for the years ended December 31, 2012 and 2011, respectively. Research and development expense relates primarily to personnel costs.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2012 decreased $68,541 to $1,825,483 for the year ended December 31, 2012 from $1,894,024 for the year ended December 31, 2011. This decrease was primarily due to a decrease in capitalized development costs in 2011. Approximately $759,115 and $851,352 of amortization expense were related to capitalized software costs for the years ended December 31, 2012 and 2011, respectively.
Interest Income and Other Income
The Company recognized interest income of $28,937 for the year ended December 31, 2012 compared to an interest expense of $21,476 for the year ended December 31, 2011. The change in interest was due to the payoff of all debt in 2011 and interest income recognized from investments of excess cash in 2012.
Other Income decreased to an expense of $244 for the year ended December 31, 2012 from an income of $308 for the year ended December 31, 2011.
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. At December 31, 2012, the Company provided a valuation allowance against the deferred tax assets related to the Company’s net operating loss carryforwards in the United States net of certain deferred tax liabilities. Given profitability from operations in the United Kingdom, the deferred tax assets related to the United Kingdom operations do not have a valuation allowance.
The net tax expense of $338,313 for the year ended December 31, 2012 was primarily attributable to the earnings before tax of $2,573,195 realized from the Company’s United Kingdom operations. The net tax expense of $338,309 for the year ended December 31, 2011 was primarily attributable to the earnings before tax of $1,180,778 realized from the Company’s United Kingdom operations. The Company’s effective tax rate in the United Kingdom decreased for the year ended December 31, 2011 due to a decrease in the statutory tax rate in the United Kingdom and a true-up of the Company’s deferred tax liability related to the lower tax rate.
Liquidity and Capital Resources
Historically, the Company’s principal need for funds has 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, cash equivalents, and short-term investments have been adequate to meet our business objectives. Cash, cash equivalents, and short-term investments decreased by $599,792 to $2,345,390 as of December 31, 2012 from $2,945,182 as of December 31, 2011. Cash provided by operations was $505,322, cash used in investing activity was $1,247,005, and cash used in financing activities was $0 for the year ended December 31, 2012. Cash flow provided by operations of $505,322 was primarily attributable to the net income, depreciation and amortization, and a decrease in trade receivables. Recognition of non-cash deferred revenue related to a large sale in 2011 resulted in a reduction of cash from operations. Cash flows used in investing activities of $1,247,005 related primarily to capitalized costs incurred in the development and enhancements of the Company’s products along with additional equipment required to support the future earning of deferred revenue. Cash generated from operations of the EIM segments of $3,056,068 was off-set by cash used in the CAMRA segment of $1,081,859 and Corporate expenses of $1,068,323.
For December 31, 2012, income from operations on a geographical basis amounted to $2,540,260 for the United Kingdom and a loss of $1,634,374 for the United States. The Company anticipates that its cash needs will be met during the next twelve months primarily through cash on hand and cash from operations of the Company’s EIM segment. As of December 31, 2012, the Company did not and as of the date of this Form 10-K does not have an operating line of credit facility in place.
The following table presents selected financial results by business segment:
The following table presents selected financial results by geographic location based on location of customer:
The Company’s net income for the year ended December 31, 2012 of $596,266 was primarily due to income realized by the EIM segment. The income before taxes realized from the EIM segment for the year ended December 31, 2012 was $3,088,117.
The Company’s net loss for the year ended December 31, 2011 of $640,751 was primarily due to losses realized by the CAMRA segment. The loss before taxes realized from the CAMRA segment for the year ended December 31, 2011 was $904,692.
For the years ended December 31, 2012 and 2011, the Company had revenues from a single customer aggregating $3,347,201 (20% of total revenues) while another customer contributed $1,908,130 (11% of total revenues), respectively. Such customers represent 20% and 11% of software sales, service fee and license fee revenues for the years ended December 31, 2012 and 2011, respectively. The Company had receivables from these customers of $218,437 (6.8% of trade accounts receivable, net) and $143,009 (3.7% of the trade accounts receivable, net) as of December 31, 2012 and December 31, 2011, respectively. The loss of these customers would have a substantial negative impact on the Company.
In October 2010, in order to supplement the Company’s liquidity, Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.
Outstanding principal under a revolving loan with PNC Bank amounted to $825,000 on December 30, 2010. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the Revolving Loan, Fairford advanced $825,000 to the Company. As of December 31, 2012, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest under the promissory notes amounted to $23,919.
In March 2011, the Company received a purchase order for EIM licenses in the UK totaling approximately $6 million and received payment of approximately $7 million in May 2011, which includes VAT tax remittance. The EIM license agreement expands services provided to an existing customer and the revenue will be recognized over the term of the three-year license and service agreement. The license agreement does contain a termination clause which enables the customer to cancel the agreement after two years of service and return 80% of the unearned prepaid license fee. The maximum prepaid fee which could be claimed would be approximately $1.5 million. The Company believes that this source of liquidity along with the cash on hand, and anticipated increased cash generated from future operating activities will be sufficient to support its operations over the next twelve months.
The Company paid $483,645 in foreign income tax for the year ended December 31, 2012.
The Company paid $269,640 in foreign income tax for the year ended December 31, 2011.
Impairment
Accounting guidance on accounting for the costs of computer software to be sold, leased or otherwise marketed requires the periodic evaluation of capitalized computer software costs. The excess of any unamortized computer software costs over its related net realizable value at a balance sheet date shall be written down. The Company had a net book value of $1,364,220 of capitalized software costs as of December 31, 2012 which relates to active projects with current and future revenue streams.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of our 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 and accounts receivable reserves, depreciation and amortization, investments, income taxes, capitalized software, 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.
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 asset and liability method in accordance with accounting guidance for accounting for income taxes. Under this 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 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 will establish 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 comprehensive income / (loss).
At December 31, 2012, the Company provided a valuation allowance against the Company’s deferred tax assets of the Company’s net operating loss carryforwards in the United States net of certain deferred tax liabilities. Given profitability from operations in the United Kingdom, deferred tax assets related to the United Kingdom operations do not have a valuation allowance.
The Company accounts for uncertain income tax positions in accordance with accounting guidance. A tax position is recognized 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.
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 in accordance with accounting guidance. 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. Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. There was no impairment in 2012 and 2011. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer lists.
The Company 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 the U.S. dollar.
The Company’s goodwill and significant component of its intangible assets relate to CTI Billing Solutions Limited. That entity is considered a separate reporting unit under accounting guidance and the Company performed its internal annual impairment analysis on goodwill as of October 1, 2012 to coincide with the calendar date set in past years for this analysis. The Company’s analysis considered the projected cash flows of the reporting unit and gave consideration to appropriate factors in determining a discount rate to be applied to these cash flows. The results of this analysis indicated that there was no impairment as of our assessment date.
The Company recognizes that the market for its stock can be significantly below its book value which the Company attributes to a number of factors including very limited trading in the Company’s Class A common stock; the fact that a significant portion of the Company’s Class A common stock (approximately 78%) is beneficially owned by its majority shareholders, 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 impact 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, by itself, is sufficiently sophisticated to make a proper determination of the value of the Company’s Class A common stock such that it should drive the Company to reach a conclusion that further impairment of its goodwill has occurred when the Company believes that generally accepted valuation techniques using its most recent assessments as to the future performance of our business indicate that goodwill is not further impaired.
Long Lived Assets. In accordance with accounting guidance for accounting for the impairment or disposal of long-lived assets, the Company reviews the recoverability of the carrying value of its long-lived assets, including intangible assets with definite lives. 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 calculated using discounted expected future cash flows.
Accounting guidance requires the periodic evaluation of capitalized computer software costs. The excess of any unamortized computer software costs over its related net realizable value at a balance sheet date shall be written down. The Company periodically evaluates capitalized computer software costs for impairment. The capitalized software costs had a net book value of $1,364,220 as of December 31, 2012.
Revenue Recognition and Accounts Receivable Reserves. The Company’s revenue recognition policy is consistent with accounting guidance on revenue recognition. In general, 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 collectibility 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 as prescribed in accounting guidance for software revenue recognition. 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 accounting guidance. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with guidance related to long-term construction-type contracts, using the relevant guidance for accounting for performance of construction-type and certain production-type contracts. 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.
Depreciation and Amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Furniture, fixtures and equipment are depreciated over the estimated useful lives of three to five years. Leasehold improvements are amortized over the period of the lease or the useful lives of the improvements, whichever is shorter. All maintenance and repair costs are charged to operations as incurred.
Related Party Transactions
During the fiscal year ended December 31, 2012, options to purchase 100,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Osseiran and Mr. Garrison, members of the Company’s Board of Directors. During the fiscal year ended December 31, 2012, options to purchase 50,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2012, options to purchase 30,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant. During the fiscal year ended December 31, 2011, options to purchase 81,972 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2011, options to purchase 58,660 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant.
The Company incurred $92,000 in fees and $35,186 in expenses associated with the Board of Directors activities in 2012 and $54,000 in fees and approximately $9,282 in expenses associated with the Board of Directors activities in 2011.
In October 2010, in order to supplement the Company’s liquidity, Fairford advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the revolving loan facility with PNC, Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) advanced $825,000 to the Company. As of December 31, 2010, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock. Salah N. Osseiran, a director of the Company, is the primary owner of Fairford. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand notes had no term and were due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest under the promissory notes paid in 2011 amounted to $23,919.
Recently Issued and Adopted Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement Topic 820, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. As this update impacts disclosures only, the Company’s adoption of this guidance on January 1, 2012 did not impact the Company’s financial position, results of operations, or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220, Presentation of Comprehensive Income, which requires companies to include a statement of comprehensive income as part of its interim and annual financial statements. The new guidance gives companies the option to present net income and comprehensive income either in one continuous statement or in two separate but consecutive statements. This approach represents a change from prior GAAP, which allowed companies to report other comprehensive income (“OCI”) and its components in the statement of shareholders’ equity. The guidance also allows companies to present OCI either net of tax with details in the notes or shown gross of tax (with tax effects shown parenthetically). Under the new guidance, certain information included in the Condensed Consolidated Statements of Shareholders’ Equity would be shown in the new statement of comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning January 1, 2012 and should be applied retrospectively. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income. This Update defers changes in Update 2011-05 that relate to how, when, and where reclassification adjustments are presented. The amendments are being made to allow the Board time to deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and the other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance impacts presentation only and the Company’s adoption of this guidance on January 1, 2012 did not have an impact on its financial position, results of operations, or cash flows.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350, Testing of Goodwill for Impairment, which allows companies to assess qualitative factors to determine whether they need to perform the two-step quantitative goodwill impairment test. Under the option, an entity no longer would be required to calculate the fair value of a reporting unit unless it determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU may change how a company tests goodwill for impairment but should not change the timing or measurement of goodwill impairments. The ASU is effective for fiscal years beginning after December 15, 2011. The Company performed its annual goodwill impairment test as of October 31, 2011. The Company’s adoption of this guidance on January 1, 2012 has not had an impact on its results of operations, financial position, or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Topic 210, Disclosures about Offsetting Assets and Liabilities. This update is intended to improve the comparability of statements of financial position prepared in accordance with U.S. GAAP and IFRS, requiring both gross and net presentation of offsetting assets and liabilities. The new requirements are effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those fiscal years. As this guidance only affects disclosures, the adoption of this standard will not have an impact on the Company’s results of operations, financial position, or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
CTI Group (Holdings) Inc.
We have audited the accompanying consolidated balance sheets of CTI Group (Holdings) Inc. as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive income / (loss), cash flows, and stockholders’ equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTI Group (Holdings) Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance for reporting comprehensive income in 2012 and retrospectively presented this information as required. Adoption of this guidance did not have a material impact on the Company’s financial position or results of operations and our opinion in not modified with respect to this matter.
/s/ Crowe Horwath LLP
Crowe Horwath LLP
Indianapolis, Indiana
March 29, 2013
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
See accompanying notes to consolidated financial statements.
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
For the years ended December 31, 2012 and 2011
See accompanying notes to consolidated financial statements
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2012 and 2011
See accompanying notes to consolidated financial statements.
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2012 and 2011
See accompanying notes to consolidated financial statements.
CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES NOTE 1-DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: CTI Group (Holdings) Inc. and its wholly-owned subsidiaries (the “Company” or “CTI”) design, develop, market and support billing and data management software and services. The Company operates in two business segments: Electronic Invoice Management and Call Accounting Management and Recording. The majority of the Company’s business is in North America and Europe.
The Company’s future operations involve a number of risks and uncertainties. Factors that could affect future operating results and cause actual results to vary from historical results include, but are not limited to: adverse economic conditions, risks associated with doing business outside the United States, significant foreign currency fluctuations, restrictive loan covenants, impairments may be recorded on intangibles, loss of its significant customers, inability to enhance existing products and services to meet the evolving needs of customers, the Company’s inability to compete successfully, the Company’s inability to successfully enter new markets, the Company’s inability to maintain an effective system of internal controls, control of the Company’s stock is concentrated among directors and officers, the Company is subject to penny stock rules which may adversely affect trading of the Company’s Class A common stock, and there is not presently an active market for the Company’s Class A common stock.
BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its subsidiaries, after elimination of all significant intercompany accounts and transactions. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”) that the Company follows. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as a single source of authoritative non-SEC accounting and reporting standards to be applied by nongovernmental entities.
FOREIGN CURRENCY TRANSLATION: The consolidated financial statements include the accounts of the Company’s wholly owned United Kingdom-based subsidiaries. The financial statements of the Company’s foreign subsidiaries have been included in the consolidated financial statements and have been translated to U.S. dollars in accordance with accounting guidance on foreign currency translation. Assets and liabilities are translated at current rates in effect at the consolidated balance sheet date and stockholders’ equity is translated at historical exchange rates. Revenue and expenses are translated at the average exchange rate for the applicable period. Any resulting translation adjustments are made directly to accumulated other comprehensive income. Included in selling, general and administrative expenses is a transaction loss of approximately $90,000 for the year ended December 31, 2012 and a transaction loss of approximately $17,000 for the year ended December 31, 2011.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include the cash on hand, demand deposits and highly liquid investments. The Company considers all highly liquid investments, with maturity of three months or less, to be cash equivalents.
ADVERTISING COSTS: The Company expenses advertising costs as incurred. For the years ended December 31, 2012 and 2011, advertising expense was $2,452 and $55,242, respectively.
USE OF ESTIMATES: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Estimates utilized by the Company include the determination of the collectibility of receivables, valuation of stock options, recoverability and/or impairment of intangible assets, depreciation and amortization, accrued compensation and other liabilities, commitments and contingencies, and capitalization and impairment of computer software development costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. At December 31, 2012 and 2011, the book values of these financial instruments are considered to be representative of their respective fair values due to the short maturity of these instruments.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Furniture, fixtures and equipment are depreciated over the estimated useful lives of three to five years. Leasehold improvements are amortized over the period of the lease or the useful lives of the improvements, whichever is shorter. All maintenance and repair costs are charged to operations as incurred.
COMPUTER SOFTWARE: Expenditures for producing product masters incurred subsequent to establishing technological feasibility are capitalized and are amortized on a product-by-product basis ranging from three to four years. The amortization is computed using the greater of (a) the straight-line method over the estimated economic life of the product or (b) the ratio that the current gross revenue for the products bear to the total current and anticipated future gross revenue of the products. The accounting guidance requires the periodic evaluation of the net realizable value of capitalized computer software costs. The excess of any unamortized computer software costs over its related net realizable value at a balance sheet date shall be written down. See Note 4 - Property, Equipment and Software Development Costs. The Company capitalized $859,617 and $496,005 for the years ended December 31, 2012 and 2011, respectively, in costs related to its software development. The amortization expense for developed software which relates to cost of sales was $759,115 and $851,352 for the years ended December 31, 2012 and 2011, respectively.
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 the U.S. dollar. Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company did not record goodwill impairments in 2012 and 2011. An impairment charge is recognized when the fair value of the asset is less than its carrying amount. The Company’s fair value was determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. Purchased intangible assets other than goodwill are amortized on a straight line basis over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer lists.
LONG-LIVED ASSETS: The Company reviews the recoverability of the carrying value of its long-lived assets, including intangible assets with definite lives using the methodology prescribed in accounting guidance for the impairment or disposal of long-lived assets. 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: The Company’s revenue recognition policy is consistent with the requirements set forth in accounting guidance for revenue recognition. In general, the Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance of the software, 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 collectibility 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 following is a rollforward of the allowance for doubtful accounts
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 as prescribed in accounting guidance for software revenue recognition. 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. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with guidance related to long-term construction type contracts. 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 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.
PRIOR YEAR RECLASSIFICATIONS: Certain amounts in the Consolidated Statement of Comprehensive Income / (Loss) for the year ended December 31, 2011, have been reclassified to conform with current year presentation.
STOCK BASED COMPENSATION: Under accounting guidance on share-based payment, the Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.
INCOME TAXES: The Company accounts for income taxes following the accounting guidance for accounting for income taxes, which requires recording income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of net deferred tax assets. See Note 7 of the Notes to Consolidated Financial Statements.
Uncertain income tax positions are recognized 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.
BASIC AND DILUTED INCOME / (LOSS) PER COMMON SHARE: Net income (loss) per common share is computed in accordance with accounting guidance on earnings per share. Basic earnings (loss) per share is computed by dividing reported earnings (loss) available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing reported earnings (loss) available to common stockholders by adjusted weighted average shares outstanding for the year assuming the exercise of all potentially dilutive stock options and warrants.
For the year ended December 31, 2011, options and warrants to purchase 6,195,520 shares of Class A common stock with exercise prices ranging from $.08 to $.49 were outstanding. For the year ended December 31, 2011, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss. Additional common shares to be issued, assuming exercise of stock options for the year ended December 31, 2011, would have been 95,075 shares.
CONCENTRATION OF CREDIT RISK: The Company invests its cash primarily in deposits with major banks in the United States and United Kingdom. At times, these deposits may fluctuate significantly and may be in excess of statutory insured limits. As of December 31, 2012, such deposits exceeded statutory insured limits by $2,038,396. Concentration of credit risk with respect to trade receivables is moderate due to the relatively diverse customer base. Ongoing credit evaluation of customers’ financial condition is performed and generally no collateral is received. The Company maintains reserves for probable credit losses and such losses in the aggregate have not exceeded management’s estimates. The Company wrote-off $8,530 and $16,798 of receivables deemed to be uncollectible against the established allowance for doubtful accounts for the years ended December 31, 2012 and 2011, respectively.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the Consolidated Statement of Comprehensive Income / (Loss).
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. Total research and development costs expensed were $2,774,604 and $2,607,326 for the years ended December 31, 2012 and 2011, respectively.
SHIPPING AND HANDLING FEES AND COSTS: The Company bills customers for shipping and handling. Shipping and handling costs, which are included in cost of products and services in the accompanying consolidated statements of operations, include shipping supplies and third-party shipping costs.
RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS: In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement Topic 820, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. As this update impacts disclosures only, the Company’s adoption of this guidance on January 1, 2012 did not impact the Company’s financial position, results of operations, or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, Topic 220, Presentation of Comprehensive Income, which requires companies to include a statement of comprehensive income as part of its interim and annual financial statements. The new guidance gives companies the option to present net income and comprehensive income either in one continuous statement or in two separate but consecutive statements. This approach represents a change from prior GAAP, which allowed companies to report other comprehensive income (“OCI”) and its components in the statement of shareholders’ equity. The guidance also allows companies to present OCI either net of tax with details in the notes or shown gross of tax (with tax effects shown parenthetically). The Company’s disclosure of comprehensive income for the years ended December 31, 2012 and December 31, 2011 is presented in the Company’s Consolidated Statements of Comprehensive Income (Loss) in this Form 10-K. Under the new guidance, certain information included in the Condensed Consolidated Statements of Shareholders’ Equity would be shown in the new statement of comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning January 1, 2012 and should be applied retrospectively. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income. This Update defers changes in Update 2011-05 that relate to how, when, and where reclassification adjustments are presented. The amendments are being made to allow the Board time to deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and the other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance impacts presentation only and the Company’s adoption of this guidance on January 1, 2012 did not have an impact on its financial position, results of operations, or cash flows.
In September 2011, the FASB issued ASU No. 2011-08, Topic 350, Testing of Goodwill for Impairment, which allows companies to assess qualitative factors to determine whether they need to perform the two-step quantitative goodwill impairment test. Under the option, an entity no longer would be required to calculate the fair value of a reporting unit unless it determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU may change how a company tests goodwill for impairment but should not change the timing or measurement of goodwill impairments. The ASU is effective for fiscal years beginning after December 15, 2011. The Company performed its annual goodwill impairment test as of October 31, 2012. The Company’s adoption of this guidance on January 1, 2012 has not had an impact on its results of operations, financial position, or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Topic 210, Disclosures about Offsetting Assets and Liabilities. This update is intended to improve the comparability of statements of financial position prepared in accordance with U.S. GAAP and IFRS, requiring both gross and net presentation of offsetting assets and liabilities. The new requirements are effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those fiscal years. As this guidance only affects disclosures, the adoption of this standard will not have an impact on the Company’s results of operations, financial position, or cash flows.
NOTE 2-SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company paid $483,645 and $269,640 in foreign income tax, $0 and $0 for federal income tax in the United States, and $0 and $0 for state taxes in the United States for the years ended December 31, 2012 and 2011, respectively.
NOTE 3-GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS
Intangible assets consisted of the following:
Amortization expense on intangible assets amounted to $677,587 and $688,540 for the years ended December 31, 2012 and 2011, respectively. Amortization expense on intangible assets with a definite life for the next 5 years as of December 31 is as follows: 2013-$683,611; 2014-$679,173; 2015-$470,566; and thereafter-$0.
NOTE 4-PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS
Property, equipment and software development costs consisted of the following:
Depreciation and amortization expense on property, equipment, and software amounted to $1,147,896 and $1,205,484 for the years ended December 31, 2012 and 2011, respectively. Fixed assets no longer in use in 2012 with an original cost of $111,728 were written off. In 2011, fixed assets, with an original cost of $53,311, were written off.
Amortization expense of developed software amounted to $759,115 and $851,352 for the years ended December 31, 2012 and 2011, respectively. Amortization expense of developed software is a cost of sales.
Accumulated amortization related to developed software amounted to $6,720,007 and $5,962,401 as of December 31, 2012 and December 31, 2011, respectively.
NOTE 5-COMMITMENTS AND CONTINGENCIES
A. LEASE COMMITMENTS:
The Company leases its office facilities and certain equipment under long-term operating leases, which expire at various dates. Minimum aggregate annual rentals for the future five-year periods and thereafter, subject to certain escalation clauses, through long-term operating leases are as follows:
Rent and lease expense was $411,757 and $462,119 for the years ended December 31, 2012 and 2011, respectively. The Company leases 15,931 square feet of office space in Indianapolis for an average cost of $257,643 per year. The Indianapolis lease expires in February 2014. The Company leases 2,323 square feet of office space near London in the United Kingdom at an annual rate equivalent approximately to $55,000 per annum. The London lease expires in December 2013. The Company leases 9,360 square feet of office space in Blackburn in the United Kingdom at an annual rate equivalent to approximately $122,000. The Blackburn lease expires December 2014. The Company believes that, although its facilities are adequate to meet its current level of sales, additional space may be required to support future growth. In connection with the Indianapolis lease and the Blackburn lease, the lessor contributed money for improvements to the leased premises. The amounts contributed for improvements are being amortized ratably over the life of the lease which reduces the average annual expense related to the leases.
B. 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 such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
The Company filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq. against Qwest Corporation in the United States District Court for the Southern District of Indiana (“District Court”) on January 12, 2004. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270. On October 30, 2012, the District Court entered an order awarding Qwest Corporation litigation costs in the amount of approximately $250,000. The Company filed a timely notice of appeal on November 13, 2012, and an amended notice of appeal on November 30, 2012. It also was ordered to post a supesedeas bond guaranteeing the payment of costs. The briefing process is ongoing and we anticipate that the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) will issue its opinion in late 2013 or early 2014. As set forth in the appellate brief, filed on February 27, 2013, the Company and legal counsel believe that there are reasonable and persuasive grounds for the appellate court to overturn the District Court’s order granting Qwest Corporation’s motion for summary judgment. The Company and the Company’s legal counsel believe it is more likely than not that the appellate court will overturn the district court’s order granting Qwest Corporation’s motion for summary judgment, which would vitiate the award of costs. As a result, the Company has concluded that it is not probable that it has incurred a loss relating to this matter. The Company believes a range of possible loss, which cannot be reasonably estimated at this time, is between zero and the amount of the judgment. Because the Company believes that this potential loss is not probable or estimable, it has not recorded any reserves or contingencies related to this legal matter. In the event that the Company’s assumptions used to evaluate this matter as neither probable nor estimable change in future periods, it will be required to record a liability for an adverse outcome.
C. EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with certain members of management. The terms of these agreements generally include, but are not limited to, compensation, non-competition, severance and change in control clauses. As of December 31, 2012 and 2011, all relevant amounts have been accrued for under these agreements.
NOTE 6-DEBT OBLIGATIONS AND LIQUIDITY
In October 2010, in order to supplement the Company’s liquidity, Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.
Outstanding principal under a revolving loan with PNC Bank amounted to $825,000 on December 30, 2010. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the Revolving Loan, Fairford advanced $825,000 to the Company. As of December 31, 2012, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest under the promissory notes amounted to $23,919.
In March 2011, the Company received a purchase order for EIM licenses in the UK totaling approximately $6 million and received payment of approximately $7 million in May 2011, which includes VAT tax remittance. The EIM license agreement expands services provided to an existing customer and the revenue will be recognized over the term of the three-year license and service agreement. The license agreement does contain a termination clause which enables the customer to cancel the agreement after two years of service and return 80% of the unearned prepaid license fee. The maximum prepaid fee which could be claimed would be approximately $1.5 million. The Company believes that this source of liquidity along with the cash on hand, and anticipated increased cash generated from future operating activities will be sufficient to support its operations over the next twelve months.
As of December 31, 2012, the Company had working capital of $(312,240) and stockholders’ equity of $5,258,237. Included in current liabilities was deferred revenue of $3,886,152 which reflects revenue to be recognized in future periods. Therefore, the cash requirements associated with deferred revenue are expected to be less than the recorded liability.
NOTE 7-INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
A reconciliation of income tax expense (benefit) at the statutory rate to income tax expense (benefit) at the Company’s effective tax rate was as follows:
The permanent differences are primarily related to a deemed dividend in the United States due to the transfer of cash from the United Kingdom operations to the United States in 2011 and to the nondeductible meals and entertainment and dues partially off-set by additional relief for research and development expenditures in the United Kingdom.
The components of the overall net deferred tax assets were as follows:
The Company records a valuation allowance against its deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of December 31, 2012, the Company continued to provide a valuation allowance against the Company’s United States deferred tax assets which consist primarily of net operating loss carryforwards net of certain deferred tax liabilities.
The following is a rollforward of the Company’s liability for income taxes associated with unrecognized tax benefits:
If the unrecognized tax benefits were recognized, they would favorably affect the effective income tax rate in future periods. Consistent with the provisions of accounting guidance for uncertain tax positions, the Company has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled.
The Company and its subsidiaries file income tax returns in the U.S., the state of Indiana and other various states and the foreign jurisdiction of the United Kingdom. The Company remains subject to examination by taxing authorities in the jurisdictions the Company has filed returns for years after 2007. 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 accrued for interest and penalties at December 31, 2012 and 2011.
At December 31, 2012, the Company had available unused net operating losses of $12,347,878 and tax credit carryforwards of approximately $226,806 that may be applied against future taxable income and that expire from 2017 to 2032. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning in making these assessments. At December 31, 2012, the Company had a valuation allowance of $5,183,865 established against the U.S. deferred tax assets as utilization of these tax assets is not assured in the United States. In addition, at December 31, 2012, the Company considered its cumulative earnings related to non-U.S. subsidiaries to be permanently reinvested.
NOTE 8-STOCK BASED COMPENSATION
The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provided for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan included designated officers and other employees (including employees who also serve as directors), non-employee directors, independent contractors and consultants who perform services for the Company. The terms of each grant under the Plan were determined by the Board of Directors, 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 Securities Exchange Commission. 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 Securities Exchange Commission. The Stock Incentive Plan replaced the Plan. No new grants will be granted under the Plan. Grants that were made under the Plan prior to the stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan.
The Stock Incentive Plan is administered by the Compensation Committee of the board of directors. Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the Stock Incentive Plan.
The following types of awards or any combination of awards may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv) performance awards.
The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments described in the Stock Incentive Plan.
The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted.
At December 31, 2012, there were options to purchase 5,691,350 shares of Class A common stock outstanding consisting of 5,441,350 Plan and Stock Incentive Plan options and 250,000 outside plan stock options. There were options to purchase 4,391,302 shares of Class A common stock plus 250,000 outside plan stock options that were exercisable as of December 31, 2012. There are 1,814,900 options available to grant under the plan at December 31, 2012.
Information with respect to options was as follows on the date indicated:
The weighted-average grant-date fair value of options granted during the year 2012 was $0.23. The future compensation costs related to non-vested options at December 31, 2012 is $153,012. The future costs will be recognized over the weighted average period of approximately 3 years.
The following table summarizes options exercisable at December 31:
The following table summarizes non-vested options:
Included within selling, general and administrative expense for the years ended December 31, 2012 and December 31, 2011 is $56,178 and $40,525, 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 fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the table below. Because closed-form valuation models incorporate assumptions for inputs, those assumptions are disclosed. Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
NOTE 9-MAJOR CUSTOMERS
For the years ended December 31, 2012 and 2011, the Company had revenues from a single customer aggregating $3,347,201 (20% of total revenues) while another customer contributed $1,908,130 (11% of total revenues), respectively. Such customers represent 20% and 11% of software sales, service fee and license fee revenues for the years ended December 31, 2012 and 2011, respectively. The Company had receivables from these customers of $218,437 (6.8% of trade accounts receivable, net) and $143,009 (3.7% of the trade accounts receivable, net) as of December 31, 2012 and December 31, 2011, respectively. The loss of these customers would have a substantial negative impact on the Company.
NOTE 10-RETIREMENT PLAN
The Company maintains a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended, that covers certain eligible U.S., full-time employees. The Company matches 100% of participant contributions up to 5% of participant compensation for US employees. The Company made contributions of $101,826 in 2012 and $116,100 in 2011. The Company maintains a defined contribution plan for its U.K. employees. The Company matches for U.K. employees up to 100% of participant contributions up to 5%. The Company made contributions of approximately $168,683 in 2012 and $189,919 in 2011 for U.K. employees.
NOTE 11-SEGMENT INFORMATION
The Company designs, develops, markets and supports billing and data management software and services. In accordance with accounting guidance on disclosures about segments of an enterprise and related information, the Company has two reportable segments: Electronic Invoice Management (“EIM”) and Call Accounting Management and Recording (“CAMRA”). These segments are managed separately because the services provided by each segment require different technology and marketing strategies.
For the twelve months ended December 31, 2011, the Company had previously identified four reportable segments. Due to changes in the products and strategy, the Company has changed the way it views its segments and has reduced the number of segments to two. As the Company’s VoIP products evolved, the Company merged the former VoIP segment and Telemanagement segment. The Company believes that the market for these former segments has merged the product offerings. In 2012, the Company no longer viewed these as separate segments and therefore shared the resources to develop and market these products into the CAMRA segment. The Company shares distribution channels, marketing, sales and research and development resources within the segment. Patent enforcement involved the licensing, protection, enforcement and defense of the Company’s intellectual property and rights. In 2012, the Company determined to no longer show patent enforcement as a business segment as it had become immaterial due to a shift away from the marketing approach to patent enforcement activities as a business strategy. Segment information for the twelve months ended December 31, 2011 has been reclassified for comparative purposes.
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. The Company provided these services primarily through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom.
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.
The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. Summarized financial information concerning the Company’s reportable segments is shown in the following table. Reconciling items for operating income / (loss) on the following table represent corporate expenses and depreciation.
The following table presents selected financial results by business segment:
The following table presents selected financial results by geographic location based on location of customer:
NOTE 12-RELATED PARTY TRANSACTIONS
During the fiscal year ended December 31, 2012, options to purchase 100,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Osseiran and Mr. Garrison, members of the Company’s Board of Directors. During the fiscal year ended December 31, 2012, options to purchase 50,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2012, options to purchase 30,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant. During the fiscal year ended December 31, 2011, options to purchase 81,972 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2011, options to purchase 58,660 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant.
The Company incurred $92,000 in fees and $35,186 in expenses associated with the Board of Directors activities in 2012 and $54,000 in fees and approximately $9,282 in expenses associated with the Board of Directors activities in 2011.
In October 2010, in order to supplement the Company’s liquidity, Fairford advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the revolving loan facility with PNC, Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) advanced $825,000 to the Company. As of December 31, 2010, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock. Salah N. Osseiran, a director of the Company, is the primary owner of Fairford. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand notes had no term and were due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest under the promissory notes paid in 2011 amounted to $23,919.
On March 7, 2013, a proposal was made by Fairford, Michael Reinarts and John Birbeck, to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $0.29 per share.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. 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 design and operation of its disclosure controls and procedures as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, 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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the year ended December 31, 2012 that have materially affected or which are reasonably likely to materially affect the Company’s Internal Control. Based on that evaluation, there has been no such change during the year ended December 31, 2012.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.
Management’s Report on Internal Control over Financial Reporting
The management of CTI Group (Holdings) Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, our management believes that, as of December 31, 2012, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempt smaller-reporting companies from Section 404(b) of the Sarbanes-Oxley Act of 2002.
Item 9B.
Item 9B. Other Information
On March 29, 2012, the Board of Directors amended the Company’s Corporate Code of Ethics to update procedures for reporting violations or potential violations of the Code and adding provisions regarding anti-corruption and bribery as well as other technical, administrative and non-substantive changes.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance;
Our Certificate of Incorporation, as amended (the “Certificate of Incorporation”), divides our board of directors into three classes: Class I, Class II and Class III having staggered terms of office. Directors of each class of our board of directors serve for a term of three years and until their successors have been elected and qualified, except in the event of their earlier resignation or removal.
The following table sets forth information about our directors all of whom continue to serve in such capacity:
* The directors continue to serve as directors since successor directors have not been elected and qualified.
The following table sets forth information regarding the business experience of our current members of the board of directors during the past five years, unless indicated otherwise.
Name and Age (1)
Business Experience During Past Five Years
Michael J. Reinarts (58)
Chairman
Mr. Reinarts became our director in June 2009 and was appointed Chairman on June 9, 2011. He served as an advisor to our board of directors from October 2008 until June 2009. Mr. Reinarts began his career at Arthur Andersen & Co in 1976. Since 1999, he has served as Executive Vice President for the Pohlad Companies. Pohlad Companies include large sports franchises, financial companies, commercial real estate companies, entertainment and media development and distribution. Mr. Reinarts is actively involved in acquisition due diligence, financial and management restructuring and credit facilitation. Mr. Reinarts experience with mergers and acquisitions and his industry experience, both from an investment banking perspective and an executive perspective, provides CTI with insight on acquisition and corporate strategies
John Birbeck (58)
President and Chief Executive Officer
Mr. Birbeck served as our Chairman from July 5, 2005 through June 9, 2011. Mr. Birbeck was appointed as our President and Chief Executive Officer on September 13, 2005. Mr. Birbeck, a citizen of the United Kingdom, has served as our director since June, 2001. In 1997, Mr. Birbeck founded Network Achemy Ltd. From 1997 until 2001, Mr. Birbeck served as director of Network Achemy Ltd. From 2000 until 2001, Mr. Birbeck served as director of Avaya Communications. Since 2001, Mr. Birbeck has been working as a consultant advising new technology start-up companies in the United Kingdom. Mr. Birbeck also was a founder of Seer Ltd. in 2000 and serves as its director. Mr. Birbeck’s management experience at CTI and director experience in the technology services industry provides unique insight about the challenges CTI faces due to a rapidly changing competitive marketplace.
Name and Age (1)
Business Experience During Past Five Years
Bengt Dahl (64)
Mr. Dahl, a citizen of Sweden, has served as our director since July 2005. He served as an advisor to our board of directors from 2003 until July 2005. Mr. Dahl is also a director of Fairford Holdings Limited, a company which owned approximately 64% of the Company’s Class A common stock as of April 23, 2012. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Mr. Dahl also serves as a director of a number of private and public European companies, which are affiliated with Mr. Osseiran, our director and majority stockholder. Mr. Dahl’s international management and investment banking experience provides valuable insight on international capital markets and management oversight. His experience with mergers and acquisitions provides CTI with insight on acquisition and corporate strategies.
Harold D. Garrison (64)
Mr. Garrison became our director in February, 2001 in connection with the merger between Centillion Data Systems, LLC (“Centillion”) and CTI Group (Holdings) Inc. (the “Centillion Merger”). Mr. Garrison served as Chairman of Centillion from 1988 until the Centillion Merger in February 2001. He also has served as Chairman and Chief Executive Officer of HDG Mansur Group, an international real estate company, since 1982 and served as Chairman of Xila Communications, Inc. from 1983 to 1999. Mr. Garrison has served as the Managing Member of Sunset, LLC. Mr. Garrison’s experience in international capital markets and operations brings global management oversight perspective to CTI.
Thomas W. Grein (61)
Mr. Grein became our director in February 2001 in connection with the Centillion Merger. Mr. Grein served as director of Centillion from October, 1999 until the Centillion Merger. Mr. Grein has been Senior Vice-President and Treasurer of Eli Lilly and Company, a pharmaceutical company, since January, 2000. He served as Executive Director of Investor Relations and Assistant Treasurer from 1994 to 1998 and Executive Director of Finance from 1998 to 2000 in Eli Lilly and Company. Mr. Grein is a member of the board of directors of the Indiana Chamber of Commerce, Walther Cancer Institute, LYNX Capital Corporation, Park Tudor School Board of Trustees, Fuqua School, Health Sector Advisory Board at Duke University and Indianapolis Symphony Investment Committee. Mr. Grein’s financial leadership and international experience provides valuable insight on corporate governance, financial reporting and capital market matters.
Salah N. Osseiran (57)
Mr. Osseiran, a Lebanese citizen, became our director in February 2001, in connection with the Centillion Merger, and served until his resignation in September 2001. He was a director of Centillion from 1987 until the Centillion Merger. Since September 2002, Mr. Osseiran has served as our director. Mr. Osseiran has been the President and Chief Executive Officer of Business Projects Company (“BPC”), a Lebanese company located in Beirut, since 1995. BPC owns a bottled water company operating in Lebanon and interests in other business activities in the Middle East. Mr. Osseiran has also been since 1995 a director of the holding companies: Salsel Corporation Limited, Hawazen (BVI) Corp. and Fairford Holdings Limited. Mr. Osseiran brings global perspective from his leadership positions and experience in international enterprises and transactions.
(1) As of March 12, 2013.
Non-Director Executive Officer
The following table sets forth information regarding the business experience of our non-director executive officer:
(1) As of March 12, 2012.
Audit Committee
We have a separately-designated standing Audit Committee. The audit committee consists of two directors, Messrs. Grein and Reinarts. Mr. Grein serves as our audit committee’s chairman, and the board has determined that Messrs. Grein and Reinarts are audit committee financial experts.
Code of Ethics
The Company’s board of directors adopted the Corporate Code of Ethics that applies to the Company’s directors, officers and employees, including the Company’s Chief Executive Officer (i.e., the principal executive officer), Chief Financial Officer (i.e., the principal financial officer), Principal Accounting Officer, Controller and any other person performing similar functions. A copy of the Code of Ethics is available on the Company’s website at www.ctigroup.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), requires the Company’s directors, officers and persons who beneficially own more than 10% of the Company’s Class A common stock (collectively referred to as “insiders”) to file reports of ownership and changes in ownership of the Company’s Class A common stock with the SEC. The SEC regulations require insiders to furnish the Company with copies of all Section 16(a) forms filed. Based solely on the Company’s review of the copies of such forms received by the Company, the Company believes that the insiders complied with all applicable Section 16(a) filing requirements for fiscal year 2012 except John Birbeck filed one late Form 4 to report a share purchase transaction.
Item 11.
Item 11. Executive Compensation
Executive Officers
Summary Compensation Table
The following table sets forth information regarding compensation awarded to, earned by or paid to CTI’s chief executive officer and the other executive officer (collectively referred to as “named executive officers”) whose total compensation for the fiscal year ended December 31, 2012 exceeded $100,000 for all services rendered in all capacities to CTI and our subsidiaries.
(1) Represents grant date fair value of options granted in each year in accordance with the Financial Accounting Standards Board’s Accounting Standards Topic 718. See Part II, Item 8 - Notes to the Consolidated Financial Statements for the year ended December 31, 2012, Note 8, “Stock Based Compensation” for a description of valuation assumptions used in the calculation of grant date fair value. In fiscal 2012, Mr. Birbeck was granted options to purchase 50,000 shares of CTI’s Class A common stock at an exercise price of $0.2475 per share. In fiscal 2012, Mr. Hanuschek was granted options to purchase 30,000 shares of CTI’s Class A common stock at an exercise price of $0.2475 per share. In fiscal 2011, Mr. Birbeck was granted options to purchase 81,972 shares of CTI’s Class A common stock at an exercise price of $0.10 per share. In fiscal 2011, Mr. Hanuschek was granted options to purchase 58,660 shares of CTI’s Class A common stock at an exercise price of $0.10 per share.
(2) Fiscal year performance bonus for 2012 was paid in 2013. There were no performance bonuses awarded in fiscal years 2011.
(3) In fiscal 2012, CTI paid the following amounts as 401(k) Plan employer contributions, insurance premiums, annual automobile allowance, club membership dues, temporary housing and personal travel, to Messrs. Birbeck and Hanuschek: Mr. Birbeck-$0, $6,503, $6,947, $0, $16,428, and $13,442, respectively; Mr. Hanuschek-$12,500, $20,870, $7,158, $5,438, $0, and $0, respectively. In fiscal 2011, CTI paid the following amounts as 401(k) Plan employer contributions, insurance premiums, annual automobile allowance, club membership dues, temporary housing and personal travel, to Messrs. Birbeck and Hanuschek: Mr. Birbeck-$0, $6,752, $6,947, $0, $15,955, and $10,015, respectively; Mr. Hanuschek-$12,250, $21,401, $6,882, $5,438, $0, and $0, respectively.
Employment Agreements
John Birbeck
On February 1, 2006, we entered into an employment agreement with Mr. Birbeck, effective as of September 13, 2005, pursuant to which Mr. Birbeck serves as our President and Chief Executive Officer and in such other positions as reasonably may be assigned by the Board or the executive committee of the Company (“Executive Committee”).
The employment agreement with Mr. Birbeck commenced on September 13, 2005 for a term of one year. The agreement renews automatically for additional one-year terms unless either party gives the other party written notice of non-renewal at least 90 days prior to any anniversary date. Mr. Birbeck’s salary will be reviewed at least annually by the Board to determine if an increase is appropriate in its sole discretion. His salary may not be decreased under the terms of the employment agreement, and Mr. Birbeck agreed to waive any fee otherwise payable to him for his services as Chairman or as a Director of the Board.
No later than January 31 of each calendar year that Mr. Birbeck is employed by us pursuant to the employment agreement, Mr. Birbeck and the Board must confer and agree on performance targets and goals to be achieved for that calendar year and the amount of a bonus to be paid to Mr. Birbeck depending on the extent of attainment of such targets and goals. The agreement reached by Mr. Birbeck and the Board will be attached as an addendum to the Agreement each calendar year. Since 2006, however, the Board and Mr. Birbeck have historically achieved this result through direct discussions without amending his employment agreement. The parties agree that the amount of bonus payable to Mr. Birbeck for full achievement of all targets and goals in any calendar year will be no less than $250,000 and may exceed that amount if deemed appropriate by the Board in its sole discretion. The Board determined that targets and goals were not achieved and as a result, a partial bonus was awarded for 2012 and no bonus was awarded for 2011. In the event that Mr. Birbeck’s employment with the Company ends during the course of a calendar year, Mr. Birbeck will be eligible for a pro rata amount of the any bonus he would have received if he had remained employed for the full calendar year.
Mr. Birbeck is entitled to five weeks of paid vacation per year, with no right to carry over vacation to the next year, but unused vacation may be sold back to us. Mr. Birbeck’s employment agreement provides that he will receive a non-accountable automobile allowance of $500 per month, initially, for each full month during the term of the employment agreement. In addition, the employment agreement requires us to reimburse Mr. Birbeck’s life partner for her annual airfare expenses for up to twelve round trips each calendar year from the United States to the United Kingdom and for her health insurance coverage. We must also reimburse Mr. Birbeck for his housing expenses in the United States, not to exceed $1,800 per month without our prior approval, until such time as he obtains permanent housing in the United States. To date, Mr. Birbeck has not obtained permanent housing in the United States. Mr. Birbeck was paid a furnishing and household goods allowance in the amount of $12,000 for his temporary housing. Mr. Birbeck was to be reimbursed up to $80,000 to transport his personal goods from the United Kingdom to the United States once his permanent housing was obtaining which was never utilized.
We were required to grant to Mr. Birbeck an option to purchase 500,000 shares of Class A common stock within 30 days of entering into the agreement, which option immediately vested in full upon grant. We were also required to grant to Mr. Birbeck options to purchase 250,000 shares of Class A common stock on September 13, 2006 and September 13, 2007, which options vested in full on the respective dates of the grants. The exercise price per share for each such option was the fair market value of our Class A common stock on the dates of each of the grants.
Mr. Birbeck is subject to confidentiality restrictions and is not permitted to compete with us during the term of his employment with us and for 90 days thereafter.
Mr. Birbeck may terminate his employment at any time by giving at least 90 days’ advance written notice of his voluntary resignation to the Board. We may terminate Mr. Birbeck’s employment for any reason upon the approval of the Board or the Executive Committee by giving Mr. Birbeck 90 days’ advance written notice. Mr. Birbeck’s employment will be immediately terminated upon his death or disability, as defined in the employment agreement, or upon the mutual agreement of the parties.
If the Board or Executive Committee terminates Mr. Birbeck’s employment, we must pay Mr. Birbeck three months’ salary at Mr. Birbeck’s then current base annual salary and an additional amount of the greater of $62,500 or 25% of the maximum annual bonus. As a condition to receiving such separation pay, Mr. Birbeck must execute a release in a form satisfactory to us.
If Mr. Birbeck’s employment otherwise terminates pursuant to death, disability or a notice of non-renewal sent by either party prior to any anniversary date of the employment agreement, we will pay Mr. Birbeck all accrued and unpaid salary and benefits, as well as all unreimbursed business expenses that may be paid to Mr. Birbeck, through the date of termination of employment.
Manfred Hanuschek
We entered into an employment agreement with Manfred Hanuschek as of May 30, 2000, which was amended as of January 18, 2002. The employment agreement renews for successive periods of one year, subject to termination as described below. The current agreement term automatically renewed on January 18, 2013. Mr. Hanuschek’s base salary is subject to yearly review. In addition to the salary, Mr. Hanuschek may receive cash bonuses, as determined by our president or the Board, in his or its sole discretion. Under the employment agreement, Mr. Hanuschek is entitled to receive an automobile allowance, reimbursement of specified expenses and to participate in any savings, 401(k), pension, group medical and other similar plans.
The employment agreement may be terminated upon notice of termination sent by either party to the agreement at least six months prior to the end of the term. Mr. Hanuschek will be entitled to a severance payment equal to half of his then current annual salary and to continued group medical and dental benefits and an automobile allowance for a six month period following termination of his employment.
Mr. Hanuschek may terminate the employment agreement in the event of a change of control or change of management and, in such an event, would be entitled to a severance payment equal to his then current annual salary, payable over a twelve-month period after the termination date, and group medical and dental benefits during that twelve-month period.
We may terminate Mr. Hanuschek’s employment for cause. Pursuant to the employment agreement, the term “cause” means: materially failing to perform his duties under the agreement, other than the failure due to Mr. Hanuschek’s physical or mental illness; committing an act of dishonesty or breach of trust, or acting in a manner that is inimical or injurious to our business or interests; violating or breaching any of the provisions of the employment agreement, and failing to cure such breach within 30 days after the receipt of written notice identifying the breach; intentionally acting or failing to act, resulting directly in gain to or personal enrichment of Mr. Hanuschek and injury to us; or being indicted for or convicted of a felony or any crime involving larceny, embezzlement or moral turpitude.
Mr. Hanuschek is subject to confidentiality restrictions and is not permitted to compete with us during the term of his employment with us and for 180 days thereafter so long as the Company makes the required severance payment.
Non-Equity Incentive Plan Compensation Awards in 2012
Messrs. Birbeck and Hanuschek were entitled to receive a cash bonus, at the discretion of the Board, if the Company achieved objective financial performance targets based upon the 2012 budget, which required the Company to grow revenue compared to 2011 and become profitable in 2012, and other accomplishments during fiscal 2012. In considering whether to pay these cash bonuses, and the amount of such payments, our compensation committee had the discretion to award a bonus even if some or all of the objective performance criteria were not met. The compensation committee considered the financial performance of the Company, the significance and nature of the activities of the named executive officer, and the quality of the named executive officer’s performance, during fiscal 2012. Although the Company did not meet the revenue growth in the 2012 budget, the compensation committee determined to award Messrs. Birbeck and Hanuschek a partial bonus for 2012 due to the Company’s return to profitability in 2012.
Non-Equity Incentive Plan Compensation Awards in 2011
Messrs. Birbeck and Hanuschek were entitled to receive a cash bonus, at the discretion of the Board, if the Company achieved objective financial performance targets based upon the 2011, which required the Company to grow revenue compared to 2010 and become profitable in 2011, and other accomplishments during fiscal 2011. In considering whether to pay these cash bonuses, and the amount of such payments, our compensation committee had the discretion to award a bonus even if some or all of the objective performance criteria were not met. The compensation committee considered the financial performance of the Company, the significance and nature of the activities of the named executive officer, and the quality of the named executive officer’s performance, during fiscal 2011. Based on the reported 2011 performance of the Company, the compensation committee determined not to award Messrs. Birbeck or Hanuschek a bonus for 2011.
Terms of Equity Awards
During the fiscal year ended December 31, 2012, Mr. Birbeck was granted an option under the CTI Group (Holdings) Inc. Stock Incentive Plan to purchase 50,000 shares of Class A common stock at an exercise price of $0.2475 per share. This option vests in three equal annual installments beginning on the first anniversary of the date of grant. During the fiscal year ended December 31, 2012, Mr. Hanuschek was granted an option under the Stock Incentive Plan to purchase 30,000 shares of Class A common stock, at an exercise price of $0.2475 per share. This option vests in three equal annual installments beginning on the first anniversary of the date of grant. All of these options expire 10 years from the date of grant.
During the fiscal year ended December 31, 2011, Mr. Birbeck was granted an option under the CTI Group (Holdings) Inc. Stock Incentive Plan to purchase 81,972 shares of Class A common stock at an exercise price of $0.10 per share. This option vests in three equal annual installments beginning on the first anniversary of the date of grant. During the fiscal year ended December 31, 2011, Mr. Hanuschek was granted an option under the Stock Incentive Plan to purchase 58,660 shares of Class A common stock, at an exercise price of $0.10 per share. This option vests in three equal annual installments beginning on the first anniversary of the date of grant. All of these options expire 10 years from the date of grant.
Amended and Restated Stock Option and Restricted Stock Plan
Our stockholders approved the Amended and Restated Stock Option and Restricted Stock Plan at our 2002 Annual Meeting of Stockholders held on May 30, 2002. The option plan provided incentives to our subsidiaries’ designated officers and other employees, members of our Board and independent contractors and consultants who perform services for us. The option plan enabled us to attract and retain personnel and to encourage them to obtain a proprietary interest in us. The option plan has been replaced with the Stock Incentive Plan. No new grants are being made under the option plan. Grants that were made under the option plan prior to date our stockholders approved the stock incentive plan will continue to be administered under the option plan.
The Board or a committee thereof comprised of at least two members administer and interpret the option plan. Each committee member must meet the definition of a “non-employee director” within the meaning of Rule 16b-3(b)(3) of the Exchange Act.
Awards that were eligible to be made under the option plan included:
• incentive stock options (except that we are no longer permitted to grant incentive stock options under the option plan);
• nonqualified stock options, including director’s grants, as described below; and
• restricted stock grants, defined as grants of shares of Class A common stock pursuant to an incentive or long range compensation plan, program or contract approved by the committee.
The option plan provided for special director’s grants of nonqualified stock options to purchase up to 30,000 shares of Class A common stock vesting over a three-year period for each of the non-employee members of the Board who served on the committee. Upon a change of control, a sale or exchange of our assets, or our dissolution, liquidation, merger or consolidation in which we are not the surviving corporation, any vesting restrictions imposed under a director’s grant will immediately lapse.
The maximum number of shares of Class A common stock that was able to be subject to grants awarded to any single individual under the option plan was 4,000,000 shares, except in the case of a director’s grant, which could not exceed 30,000 shares during any three-year period.
If any change is made to the Class A common stock as a result of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, or exchange of shares, or any other change in capital structure without receipt of consideration, and this change does not result in the termination of all outstanding grants, the committee will preserve the value of outstanding grants by adjusting the maximum number and class of shares issuable under the option plan and the number and class of shares, or the exercise price of each outstanding option.
A participant may exercise an option during a period of ten years from the date of the grant, unless a different exercise period was provided for by the committee. However, the exercise period may terminate earlier if we terminate his or her employment relationship with us or if he or she dies or becomes disabled. The aggregate fair market value of Class A common stock, determined as of the date of the grant, with respect to which incentive stock options were exercisable for the first time by the participant during any calendar year under the option plan cannot exceed $100,000.
The board may amend or terminate the option plan at any time. However, amendments that materially increase the benefits accruing to participants under the option plan, increase the aggregate number of shares of Class A common stock that may be issued or transferred under the option plan, modify the requirements as to eligibility for participation in the option plan or modify the provisions for determining the fair market value of a share of Class A common stock require stockholder approval.
In the event of a change of control (as defined in the option plan), a participant may immediately exercise all outstanding stock options, and all restrictions on the transfer of the shares of restricted stock will lapse, provided such shares have not been forfeited. Upon a sale or exchange of all or substantially all of our assets or upon our dissolution, liquidation, merger or consolidation where we are not the surviving corporation, participants will have the right to exercise in full any grants, including director’s grants, not previously exercised, subject to certain conditions.
CTI Group (Holdings) Inc. Stock Incentive Plan
On December 8, 2005, the Company’s stockholders approved the Stock Incentive Plan at the Company’s 2005 Annual Meeting of Stockholders and on May 28, 2008 the Company’s stockholders approved an amendment to the Stock Incentive Plan. The Stock Incentive Plan may be administered by the Compensation Committee of the Board or another committee of the Board appointed from among its members as provided in the Stock Incentive Plan. Presently, however, the Stock Incentive Plan is currently administered by the entire Board. As used throughout this section, the term “Compensation Committee” may also be deemed to refer to the entire Board in its role as administrator of the Stock Incentive Plan.
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. The purpose of the Stock Incentive Plan is to provide incentives to attract, retain, motivate and reward highly competent persons as outside directors, executive officers and other employees, or consultants or advisors to, CTI or any of its subsidiaries by providing them with opportunities to acquire shares of Class A common stock or to receive other awards under the Stock Incentive Plan, as applicable. Furthermore, the Stock Incentive Plan is intended to assist in further aligning the interests of participants in the Stock Incentive Plan with those of its stockholders.
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. 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.
During the year ended December 31, 2012, there were 905,000 options to purchase shares of Class A common stock granted under the Stock Incentive Plan. As of December 31, 2012, options to purchase 5,691,350 shares of Class A common stock had been awarded under the Stock Incentive Plan. Options to purchase 4,641,302 shares of Class A common stock were exercisable as of December 31, 2012.
Awards
The following types of awards or any combination of them may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv) performance awards. The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000, subject to certain adjustments.
Stock Options
Stock Options granted under the Stock Incentive Plan may be either Incentive Stock Options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) or Non-Qualified Stock Options that do not qualify as Incentive Stock Options.
The Compensation Committee determines the exercise price at which shares underlying a Stock Option may be purchased, whether an Incentive Stock Option or a Non-Qualified Stock Option. However, the exercise price of a Stock Option may not be less than the fair market value of the shares of common stock on the date the Stock Option is granted. No Stock Option will be exercisable later than ten years after the date it is granted. Stock Options granted under the Stock Incentive Plan are exercisable at such times as specified in the Stock Incentive Plan and the award agreement. A participant in the Stock Incentive Plan must pay the option exercise price in cash.
Incentive Stock Options may be granted only to executive officers and other employees of CTI or any of its subsidiaries. The aggregate market value (determined as of the date of grant) of Class A common stock with respect to which Incentive Stock Options are exercisable for the first time by a participant during any calendar year may not exceed $100,000. Furthermore, Incentive Stock Options may not be granted to any participant who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all outstanding classes of stock of CTI or any of its subsidiaries, unless the exercise price is fixed at not less than 110% of the fair market value of the Class A common stock on the date of grant, and such an Incentive Stock Option cannot be exercised more than five years after the date of grant.
Stock Grants
Stock Grant may be granted to executive officers and other employees of, or consultants or advisors to, CTI or any of its subsidiaries. A Stock Grant may include restrictions on the sale or other disposition of the shares covered by the award, and CTI may have the right to reacquire such shares for no consideration upon termination of the participant’s employment within specified periods. The award agreement will specify whether the participant will have, with respect to the shares of common stock subject to a Stock Grant, all of the rights of a holder of shares of Class A common stock, including the right to receive dividends, if any, and to vote the shares.
Performance Awards
Performance Awards may be granted to executive officers and other employees of CTI or any of its subsidiaries. The Compensation Committee will set performance targets at its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Awards that will be paid out to the participants and may attach to such Performance Awards one or more restrictions. Performance targets may be based upon company-wide, business unit and/or individual performance.
Payment of earned Performance Awards may be made in shares of Class A common stock or in cash and will be made in accordance with the terms and conditions prescribed or authorized by the Compensation Committee. The participant may elect to defer, or the Compensation Committee may require or permit the deferral of, the receipt of Performance Awards upon such terms as the Compensation Committee deems appropriate.
Effect of Change in Control
The Stock Incentive Plan provides for the acceleration of certain benefits in the event of a “Change in Control” of CTI. The meaning of a “Change in Control” is either defined in the participant’s employment agreement or change-in-control agreement, if one exists, or by the Stock Incentive Plan. The Stock Incentive Plan definition includes, among other things, such events as the sale of all assets of CTI, any person becoming the beneficial owner of more than 50% of CTI voting stock, and a merger of CTI where CTI stockholders own less than 51% of the voting stock of the surviving entity.
All unvested awards granted under the Stock Incentive Plan will become fully vested immediately upon the occurrence of the Change in Control and such vested awards will be paid out or settled, as applicable, within 60 days upon the occurrence of the Change in Control, subject to requirements of applicable laws and regulations. The Compensation Committee may determine that upon the occurrence of a Change in Control, each Stock Option outstanding will terminate and the holder will receive, within 60 days upon the occurrence of the Change in Control, an amount equal to the excess of the fair market value of the shares underlying the award immediately prior to the occurrence of such Change in Control over the exercise price per share of such award. This cashout amount is payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction) or in a combination thereof.
Adjustments to Awards Due to Changes in CTI’s Capital Structure
In the event of any change in the shares of Class A common stock by reason of a merger, consolidation, reorganization, recapitalization, stock split, stock dividend, exchange of shares, or other similar change in the corporate structure or distribution to stockholders, each outstanding Stock Option will be adjusted. The adjustments will make each award exercisable thereafter for the securities, cash and/or other property as would have been received in respect of the Class A common stock subject to such award had the Stock Option been exercised in full immediately prior to the change or distribution. Furthermore, in the event of any such change or distribution, in order to prevent dilution or enlargement of participants’ rights under the Stock Incentive Plan, the Compensation Committee has the authority to make equitable adjustments to, among other things, the number and kind of shares subject to outstanding awards and exercise price of outstanding awards.
Termination of Employment
If a participant’s employment is terminated due to death or disability, then the participant’s unvested Stock Grants and unexercisable Stock Options become vested or exercisable, as applicable, immediately as of the date of the termination of the participant’s employment. All Stock Options that were or became exercisable as of the date of the participant’s death or termination of employment, will remain exercisable until the earlier of (i) the end of the one-year period following the date of the participant’s death or the date of the termination of his or her employment, as the case may be, or (ii) the date the Stock Option would otherwise expire. All unearned or unvested Performance Awards held by the participant on the date of the participant’s death or the date of the termination of his or her employment, as the case may be, will immediately become earned or vested as of such date and will be paid out or settled based on the participant’s performance immediately prior to the date of the participant’s death or the date of the termination of his or her employment on a pro-rated basis with a minimum of at least one year into a performance period.
A participant whose employment is terminated for cause, as defined in the Stock Incentive Plan, forfeits all awards, whether or not vested, exercisable or earned, granted to the participant. A participant whose employment is terminated for any reason, other than for cause, death or disability, including, without limitation, retirement, forfeits all unvested, unexercisable and unearned awards granted to the participant. All exercisable Stock Options held by the participant on the date of the termination of his or her employment for any reason other than for cause, death or disability will remain exercisable until the earlier of (i) the end of the 90-day period following the date of the termination of the participant’s employment, or (ii) the date the Stock Option would otherwise expire. The Stock Incentive Plan’s provisions relating to termination of employment may be modified in the discretion of the Compensation Committee.
Outstanding Equity Awards at Fiscal Year-End 2012
The following table sets forth information concerning unexercised options outstanding as of December 31, 2012 for each named executive officer.
(1) Mr. Birbeck’s options vest as follows:
(a) an option to purchase 6,250 shares of CTI’s Class A common stock granted on November 5, 2003 vested in four equal annual installments beginning on the first anniversary of the grant date.
(b) an option to purchase 500,000 shares of CTI’s Class A common stock granted on September 29, 2005 vested immediately upon grant.
(c) an option to purchase 250,000 shares of CTI’s Class A common stock granted on October 9, 2006 vested immediately upon grant.
(d) an option to purchase 100,000 shares of CTI’s Class A common stock granted on February 16, 2007 vested in three equal annual installments beginning on the first anniversary of the grant date.
(e) an option to purchase 340,782 shares of CTI’s Class A common stock granted on June 12, 2007 vested immediately upon grant.
(f) an option to purchase 250,000 shares of CTI’s Class A common stock granted on October 9, 2007 vested immediately upon grant.
(g) an option to purchase 50,000 shares of CTI’s Class A common stock granted on October 9, 2009 vests in three equal annual installments beginning on the first anniversary of the grant date.
(h) an option to purchase 81,972 shares of CTI’s Class A common stock granted on September 8, 2011 vests in three equal annual installments beginning on the first anniversary of the grant date.
(i) an option to purchase 50,000 shares of CTI’s Class A common stock granted on June 29, 2012 vests in three equal annual installments beginning on the first anniversary of the grant date.
(2) Mr. Hanuschek’s options vest as follows:
(a) an option to purchase 25,000 shares of CTI’s Class A common stock granted on November 5, 2003 vested in four equal annual installments beginning on the first anniversary of the grant date.
(b) an option to purchase 100,000 shares of CTI’s Class A common stock granted on October 11, 2005 with 50% vesting immediately upon grant, 25% vesting on the first anniversary of the grant date, and 25% vesting on the second anniversary of the grant date.
(c) an option to purchase 300,000 shares of CTI’s Class A common stock granted on February 16, 2007 vesting in three equal annual installments beginning on the first anniversary of the grant date.
(d) an option to purchase 200,000 shares of CTI’s Class A common stock granted on July 10, 2009 vests in three equal annual installments beginning on the first anniversary of the grant date.
(e) an option to purchase 58,660 shares of CTI’s Class A common stock granted on September 8, 2011 vests in three equal annual installments beginning on the first anniversary of the grant date.
(f) an option to purchase 30,000 shares of CTI’s Class A common stock granted on June 29, 2012 vests in three equal annual installments beginning on the first anniversary of the grant date.
Retirement Plans and Arrangements
We have established a 401(k) plan for our U.S. employees and a defined contribution plan benefit for our U.K. employees. The employees may participate through salary deductions and contributions. Under the terms of the plans, we may make employer contributions to a participant’s plan account. Such contributions under the plan applicable to the U.S. employees are, for 2012, equal to 100% of the first 5% of each participant’s compensation during the year. All employee contributions are vested immediately. U.S. participants are vested in employer contributions over a three-year period pursuant to a graduated vesting schedule and subject to annual deferral limitations under the Code. U.K. participants are vested in employer contributions immediately and are not subject to deferral limitations. U.K. senior management are entitled to employer contributions of the first 10% of each participant’s contributions to a participant’s plan account.
Termination and Change in Control Arrangements
We do not have any contracts, arrangements, agreements or plans providing for payments to a named executive officer at, following or in connection with the resignation, retirement or other termination of a named executive officer, or in connection with a change in control of the Company, other than:
• as described above in “ - Employment Agreements” with respect to each named executive officer’s employment agreement; and
• as described above in “ - Amended and Restated Stock Option and Restricted Stock Plan” and as described in “CTI Group (Holdings) Inc. Stock Incentive Plan” with respect to awards that have been granted to each named executive officer under those plans.
Director Compensation
The following table sets forth information concerning the compensation earned by non-employee directors during the fiscal year ended December 31, 2012. Mr. Birbeck, our President, and Chief Executive Officer, does not receive any compensation for his services as our director. The Board appointed Michael Reinarts as Chairman in June 2011.
(1) As of December 31, 2012, Mr. Dahl held options to purchase 225,000 shares of CTI’s Class A common stock.
(2) As of December 31, 2012, Mr. Garrison held options to purchase 287,500 shares of CTI’s Class A common stock.
(3) As of December 31, 2012, Mr. Grein held options to purchase 156,250 shares of CTI’s Class A common stock.
(4) As of December 31, 2012 Mr. Osseiran held options to purchase 262,500 shares of CTI’s Class A common stock.
(5) As of December 31, 2012 Mr. Reinarts held options to purchase 50,000 shares of CTI’s Class A common stock.
The Board agreed to compensate Mr. Reinarts $2,000 a month upon his appointment as Chairman of the Board in June 2011 for his duties as Chairman. Mr. Reinarts also continues to receive fees for his attendance of board or committee meetings as described below.
In fiscal 2012, fees were paid to directors based on attendance of board or committee (other than audit committee) meetings in person or attendees at audit committee meetings either in person or by means of remote communications (e.g. video conferencing, teleconferencing or internet conferencing) plus reasonable expenses, as follows:
(i) $2,000 for in person attendance at board and committee meetings;
(iii) $2,000 for in person or remote attendance at audit committee meetings; and
(iv) $0 for attendance at stockholders’ meetings.
During the fiscal year ended December 31, 2012, Messrs. Dahl, Garrison, Grein, Osseiran, and Reinarts earned non-employee 2012 director fees for their services on the board of directors and committees of the board of directors as applicable, of $8,000, $8,000, $18,000, $6,000 and $44,000, respectively, plus expenses. Total cash reimbursed out of pocket director expenses amounted in the aggregate to approximately $35,186 in the fiscal year ended December 31, 2012.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of March 23, 2013 with respect to the beneficial ownership of CTI’s Class A common stock by: (i) each person who is known to us to be the beneficial owner of more than five percent of CTI’s outstanding Class A common stock, (ii) each of CTI’s directors, (iii) each of CTI’s named executive officers, and (iv) all of CTI’s directors and executive officers as a group. As of March 23, 2013, 29,178,271 shares of CTI’s Class A common stock were outstanding, which excludes 140,250 shares of treasury stock.
The securities “beneficially owned” by an individual, as shown in the table below, are determined in accordance with the definition of “beneficial ownership” set forth in the SEC’s regulations. Accordingly, beneficially-owned securities may include securities to which the individual or entity has or shares voting or investment power or has the right to acquire under outstanding stock options, warrants or other convertible securities or rights within 60 days after March 12, 2013. Shares subject to stock options, warrants or other convertible securities or rights, which an individual has the right to acquire within 60 days after March 12, 2013, are deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the class owned only by such individual or any group including such individual. The same shares may be beneficially owned by more than one person, and beneficial ownership may be disclaimed as to any or all of a person’s securities.
* Less than 1%.
** The business address of CTI’s directors and executive officers is CTI Group (Holdings) Inc., 333 North Alabama Street, Suite 240, Indianapolis, Indiana 46204.
(1) Represents 747,100 shares of Class A common stock held by Mr. Birbeck directly and exercisable options to purchase 1,524,355 shares of CTI’s Class A common stock.
(2) Represents exercisable options to purchase 225,000 shares of CTI’s Class A common stock.
(3) Represents exercisable options to purchase 187,500 shares of CTI’s Class A common stock.
(4) Represents exercisable options to purchase 156,250 shares of CTI’s Class A common stock.
(5) Represents 45,000 shares of CTI’s Class A common stock owned by Salsel Corporation Limited, 17,776,306 shares of CTI’s Class A common stock owned by Fairford Holdings Limited, 355,099 shares of Class A common stock and 1,040,170 shares of Class A common stock issuable upon the exercise of warrants owned by Fairford Scandinavia, and exercisable options to purchase 162,500 shares of CTI’s Class A common stock. Salah N. Osseiran Trust, a revocable trust, of which Mr. Osseiran is the grantor and sole beneficiary, is the sole stockholder of Salsel Corporation Limited and Fairford Holdings Limited. Mr. Osseiran is the managing director of Salsel Corporation Limited, a director of Fairford Holdings Limited and the President of Fairford Scandinavia. Bengt Dahl is a director of Fairford Holdings Limited and the chairman of Fairford Scandinavia. However, Mr. Dahl does not have, or share, the voting or investment power over the shares of CTI’s Class A common stock owned by Fairford Holdings Limited or Fairford Scandinavia. The address of the principal office of Fairford Holdings Limited is Ground Floor, Sir Walter Raleigh House, 48/50 Esplanade, St. Helier, Jersey, Channel Islands JE1 4HH. The Fairford Scandinavia address is A.B. Box 40. 831 21 Ostersund, Sweden.
(6) Represents 2,759,645 shares of Class A common stock held by Mr. Reinarts directly and exercisable options to purchase 50,000 shares of CTI’s Class A common stock.
(7) Represents exercisable options to purchase 619,553 shares of CTI’s Class A common stock.
(8) Includes exercisable options to purchase 3,965,328 shares of CTI’s Class A common stock and warrants to purchase 1,040,170 shares of Class A common stock.
Equity Compensation Plan Information
The following table details information regarding CTI’s equity compensation plans as of December 31, 2012:
(1) As of December 8, 2005, the Company’s Stock Incentive Plan replaced the Company’s prior Amended and Restated Stock Option and Restricted Stock Plan. Of the 5,441,350 options listed in column (a) above, 1,103,000 shares of Class A common stock may be issued upon exercise of outstanding options which were issued under the Company’s prior Amended and Restated Stock Option and Restricted Stock Plan and 4,338,350 shares of Class A common stock may be issued upon exercise of outstanding options which were issued under the Stock Incentive Plan.
(2) The equity compensation plans not approved by security holders are represented by options granted pursuant to individual compensation arrangements (referred to as “outside plan stock options”). Outside plan stock options to purchase 250,000 shares of Class A common stock at an exercise price of $0.31 per share were granted to Mr. Birbeck in 2007. This option expires in 2017. Outside plan warrants to purchase in the aggregate 419,495 shares of Class A common stock at an exercise price of $0.34 per share were granted to Fairford Holdings Scandinavia in 2007. This warrant expires in 2017. Outside plan warrants to purchase 620,675 shares of CTI’s Class A common stock at an exercise price of $0.22 per share, subject to adjustments, were granted to Fairford Holdings Scandinavia in 2008. This warrant expires in 2018. As of December 31, 2012, all of the foregoing outside plan stock options were fully vested.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the fiscal year ended December 31, 2012, options to purchase 100,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Osseiran and Mr. Garrison, members of the Company’s Board of Directors. During the fiscal year ended December 31, 2012, options to purchase 50,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2012, options to purchase 30,000 shares of the Company’s Class A common stock were granted at an exercise price of $0.2475 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant. During the fiscal year ended December 31, 2011, options to purchase 81,972 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Birbeck, the Company’s Chief Executive Officer. During the fiscal year ended December 31, 2011, options to purchase 58,660 shares of the Company’s Class A common stock were granted at an exercise price of $0.10 per share to Mr. Hanuschek, the Company’s Chief Financial Officer. All of the options granted vest ratably over three years on the anniversary date of the grant.
The Company incurred $92,000 in fees and $35,186 in expenses associated with the Board of Directors activities in 2012 and $54,000 in fees and approximately $9,282 in expenses associated with the Board of Directors activities in 2011.
On March 7, 2013, a proposal was made by Fairford, Michael Reinarts and John Birbeck, to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $0.29 per share.
Independence of the Board of Directors
CTI is not a “listed issuer” as such term is defined in Rule 10A-3 under the Exchange Act. CTI uses the definition of independence of The NASDAQ Stock Market LLC. As required under applicable NASDAQ listing standards, a majority of the members of a company’s board of directors must qualify as “independent” unless CTI is a controlled company. A controlled company is a company in which more than 50% of the voting power is held by an individual, group or other company. CTI is a controlled company because Mr. Osseiran beneficially holds more than 50% of the voting power of CTI Class A common stock and CTI as such is not required to have a majority of the members of the board be independent.
The board has three standing committees: an Audit Committee, a Compensation Committee and a Nominating Committee. The current members of the Compensation Committee are Mr. Reinarts and Mr. Dahl. The current members of the Audit Committee and the Nominating Committee are Mr. Reinarts and Mr. Grein. The board has determined that each current member of the Audit Committee and the Nominating Committee is independent and meets the applicable rules and regulations regarding independence for such committee, including those set forth in pertinent NASDAQ listing standards, and that each member is free of any relationship that would interfere with his individual exercise of independent judgment but Mr. Dahl of the Compensation Committee fails to meet the independence standards.
Consistent with these considerations, after review of all relevant transactions and relationships between each director or any of his family members, and our senior management, our independent registered public accounting firm and us, the board has determined that Messrs. Reinarts and Grein are independent directors within the meaning of the applicable NASDAQ listing standards and Messrs. Birbeck, Osseiran, Dahl, and Garrison fail to meet the independence standards.
Item 14.
Item 14. Principal Accounting Fees and Services
Crowe Horwath LLP served as our independent public accountants and conducted the audit of our consolidated financial statements for each of the fiscal years ended December 31, 2012 and 2011
Audit Fees. The foregoing table presents the aggregate fees billed by Crowe Horwath LLP of $170,426 for the audit of CTI’s annual financial statements and review of financial statements included in CTI’s Forms 10-Q for the fiscal year ended December 31, 2012. The foregoing table presents the aggregate fees billed by Crowe Horwath LLP of $194,140 for the audit of CTI’s annual financial statements and review of financial statements included in CTI’s Forms 10-Q for the fiscal year ended December 31, 2011.
Audit-Related Fees. There were no audit related fees in 2012 or 2011.
Tax Fees. The aggregate fees billed by Crowe Horwath LLP in the fiscal years ended December 31, 2012 and December 31, 2011 for professional services rendered to CTI’s UK subsidiaries for tax compliance, tax advice and tax planning were $14,984 and $15,200, respectively. We use another accountant for U.S. corporate income tax compliance, advice and planning.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit and permissible non-audit services provided by Crowe Horwath LLP in fiscal 2012 and 2011. The Audit Committee had authorized the Chief Financial Officer to engage Crowe Horwath LLP at his discretion for additional audit-related and non audit-related services of up to $25,000 for 2012 and 2011. None of the services pre-approved by the Audit Committee during 2012 and 2011 utilized the de minimis exception to pre-approval.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(b) Exhibits
2.1 Agreement and Plan of Merger, dated April 5, 2000, including amendments thereto, between CTI Group (Holdings) Inc., CTI Billing Solutions, Inc., David A. Warren, Frank S. Scarpa, Valerie E. Hart and Richard J. Donnelly, incorporated by reference to Annex H to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on January 23, 2001.
2.2 Agreement amending Agreement and Plan of Merger, dated May 15, 2001, among CTI Group (Holdings) Inc., CTI Billing Solutions, Inc. and David A. Warren, incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 14, 2001.
3.1 Certificate of Incorporation, incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on February 19, 1988.
3.2 Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 15, 1991.
3.3 Certificate of Amendment of the Certificate of Incorporation dated November 16, 1995 incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2004.
3.4 Certificate of Amendment of the Certificate of Incorporation dated November 3, 1999 incorporated by reference to Exhibit 3.4 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2004.
3.5 Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3.1(i) to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2001.
3.6 Amended Bylaws adopted July 15, 2004, incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 16, 2004.
10.1 Amended and Restated Stock Option and Restricted Stock Plan, incorporated by reference to Appendix II to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 6, 2002. *
10.2 Employment Agreement, dated May 30, 2000, between Manfred Hanuschek and CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *
10.2.1 Amendment No. 1 to Employment Agreement, dated May 30, 2000, between Manfred Hanuschek and CTI Group (Holdings) Inc., dated January 18, 2002, incorporated by reference to Exhibit 10.6.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *
10.3 Adjustment to base compensation of CFO, Manfred Hanuschek, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2004. *
10.4 Lease Agreement, dated April 20, 2005, by and between Spherion Technology (UK) Limited and CTI Data Solutions Limited, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.
10.5 Underlease agreement between CTI Data Solutions Limited and Interim Technology (UK) Limited dated August 10, 2000, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.
10.6 Lessee covenants contained in Superior Lease, dated April 4, 1989, by and between Conifer Court Limited (superior landlord), GN Elmi Limited and G N Elmi a.s., incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.
10.7 Chief Executive Employment Agreement between John Birbeck and CTI Group (Holdings) Inc. dated September 13, 2005, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *
10.8 CTI Group (Holdings) Inc. Stock Incentive Plan, incorporated by reference to Appendix III to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on November 23, 2005. *
10.9 Form of Incentive Stock Option Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan, incorporated by reference to Exhibit 10.3 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on
February 3, 2006. *
10.10 Form of Nonqualified Stock Option Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan, incorporated by reference to Exhibit 10.4 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on
February 3, 2006. *
10.11 Form of Stock Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan, incorporated by reference to Exhibit 10.4 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *
10.12 Compensation arrangements for the Board of Directors of CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.2 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *
10.13 Office Lease dated October 18, 2006, between DH Realty, LLC and CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2006.
10.14 Tenancy Agreement dated February 8, 2006, between European Settled Estates PLC Ryder Systems Limited, incorporated by reference to the Annual Report on Form 10-KSB filed with the Securities Exchange Commission on April 2, 2007.
10.15 Loan Agreement, dated as of December 22, 2006, by and between CTI Group (Holdings) Inc. and National City Bank, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.
10.16 CTI Group (Holdings) Inc. Security Agreement, dated as of December 22, 2006, incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.
10.17 Debenture, dated as of December 22, 2006, between CTI Group (Holdings) Inc. and National City Bank, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.
10.18 Charge Over Shares in CTI Data Solutions Ltd., dated as of December 22, 2006, between CTI Group (Holdings) Inc. and National City Bank, incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.
10.19 Reaffirmation of Guaranty dated November 13, 2007, by and between the subsidiaries of CTI Group (Holdings) Inc. and National City Bank, incorporated by reference to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on November 14, 2007.
10.20 Reaffirmation of Guaranty dated November 18, 2008, by and between the subsidiaries of CTI Group (Holdings) Inc. and National City Bank, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2008.
10.21 Office Lease dated April 24, 2009, between CTI Billing Solutions Limited and British Waterways Board, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30 2009.
10.22 Demand Promissory Note between Fairford Holdings, Ltd. and CTI Group (Holdings) Inc dated October 6, 2010 incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K filed with the Securities Exchange Commission on March 30, 2011.
10.23 Demand Promissory Note between Fairford Holdings, Ltd. and CTI Group (Holdings) Inc dated January 3, 2010, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 21, 2011.
10.24 Office Lease dated October 29, 2012, between CTI Data Solutions Limited and Spherion Technology (UK) Limited.
10.25 Office Lease Dated October 23, 2012, between CTI Billing Solutions Limited and Canal & River Trust.
11.1 Statement re computation of per share earnings, incorporated by reference to Note 1 to Consolidated Financial Statements
21.1 List of subsidiaries of CTI Group (Holdings) Inc. as of December 31, 2009.
23.1 Consent of Crowe Horwath LLP.
31.1 Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Exchange Act.
31.2 Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Exchange Act.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350.
101.INS XBLR Instance Document
101.SCH Taxonomy Extension Schema
101.CAL Taxonomy Extension Calculation Linkbase
101.LAB Taxonomy Extension Label Linkbase
101.PRE Taxonomy Extension Presentation Linkbase
101.DEF Taxonomy Extension Defeinition Linkbase
* Management contract or compensatory plan or agreement.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report was signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.