Unassociated Document
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended June 30, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Transition Period From _________
to_________
Commission
File Number: 001-32623
CONVERSION
SERVICES INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
20-0101495
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
100
Eagle Rock Avenue, East Hanover, New Jersey
|
|
07936
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(973)
560-9400
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer ¨Accelerated filer ¨Non-accelerated filer
¨Smaller Reporting
Company x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at
August 9, 2010
|
Common Stock,
$0.001 par value per share
|
|
125,433,751 shares
|
CONVERSION
SERVICES INTERNATIONAL, INC.
FORM
10-Q
For
the three and six months ended June 30, 2010
INDEX
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Page
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Part I.
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Financial
Information
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Item
1.
|
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Financial
Statements |
3
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a)
|
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Condensed
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December
31, 2009 (unaudited)
|
3 |
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b)
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Condensed
Consolidated Statements of Operations for the three and six months ended
June 30, 2010 (unaudited) and 2009 (unaudited)
|
4 |
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c)
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Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
2010 (unaudited) and 2009 (unaudited)
|
5 |
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d)
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Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7 |
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12 |
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Item
4T.
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Controls
and Procedures |
19 |
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Part II.
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Other
Information
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Item
1.
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Legal
Proceedings |
20 |
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Item
6.
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Exhibits |
20 |
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Signature
|
20 |
PART
I. FINANCIAL INFORMATION
Item 1.
Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
7,792 |
|
|
$ |
96,957 |
|
Accounts
receivable, net
|
|
|
2,739,469 |
|
|
|
3,912,021 |
|
Accounts
receivable from related parties, net
|
|
|
259,135 |
|
|
|
236,233 |
|
Prepaid
expenses
|
|
|
96,328 |
|
|
|
124,764 |
|
TOTAL
CURRENT ASSETS
|
|
|
3,102,724 |
|
|
|
4,369,975 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, at cost, net
|
|
|
18,864 |
|
|
|
36,887 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
98,535 |
|
|
|
110,494 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
3,220,123 |
|
|
$ |
4,517,356 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$ |
2,057,631 |
|
|
$ |
2,541,900 |
|
Accounts
payable and accrued expenses
|
|
|
1,559,627 |
|
|
|
1,964,513 |
|
Deferred
revenue
|
|
|
294,024 |
|
|
|
240,606 |
|
Related
party note payable
|
|
|
95,956 |
|
|
|
92,236 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,007,238 |
|
|
|
4,839,255 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
500,000 |
|
|
|
500,000 |
|
Total
liabilities
|
|
|
4,507,238 |
|
|
|
5,339,255 |
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $0.001 par value, $100 stated value, 20,000,000 shares
authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, 19,000 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
|
|
|
1,678,331 |
|
|
|
1,488,332 |
|
|
|
|
|
|
|
|
|
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COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
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|
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STOCKHOLDERS'
DEFICIT
|
|
|
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|
Common
stock, $0.001 par value, 300,000,000 shares authorized; 124,732,251 and
122,295,838 issued and outstanding at June 30, 2010 and December 31, 2009,
respectively
|
|
|
124,732 |
|
|
|
122,296 |
|
Series
B convertible preferred stock, 20,000 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
|
|
|
1,352,883 |
|
|
|
1,352,883 |
|
Additional
paid in capital
|
|
|
68,084,024 |
|
|
|
68,260,325 |
|
Treasury
stock, at cost, 1,145,382 shares in treasury as of June 30, 2010 and
December 31, 2009, respectively
|
|
|
(423,869 |
) |
|
|
(423,869 |
) |
Accumulated
deficit
|
|
|
(72,103,216 |
) |
|
|
(71,621,866 |
) |
Total
Stockholders' Deficit
|
|
|
(2,965,446 |
) |
|
|
(2,310,231 |
) |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficit
|
|
$ |
3,220,123 |
|
|
$ |
4,517,356 |
|
See Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30,
(Unaudited)
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
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REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
3,956,413 |
|
|
$ |
5,069,329 |
|
|
$ |
8,260,762 |
|
|
$ |
8,173,422 |
|
Related
party services
|
|
|
474,390 |
|
|
|
493,301 |
|
|
|
936,135 |
|
|
|
1,036,069 |
|
Reimbursable
expenses
|
|
|
153,508 |
|
|
|
298,379 |
|
|
|
345,247 |
|
|
|
444,957 |
|
Other
|
|
|
63,500 |
|
|
|
1,560 |
|
|
|
82,500 |
|
|
|
18,560 |
|
|
|
|
4,647,811 |
|
|
|
5,862,569 |
|
|
|
9,624,644 |
|
|
|
9,673,008 |
|
COST
OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
2,722,360 |
|
|
|
3,627,969 |
|
|
|
5,930,406 |
|
|
|
6,478,069 |
|
Related
party services
|
|
|
418,262 |
|
|
|
444,187 |
|
|
|
849,260 |
|
|
|
943,052 |
|
Consultant
expenses
|
|
|
154,000 |
|
|
|
337,364 |
|
|
|
365,560 |
|
|
|
526,972 |
|
|
|
|
3,294,622 |
|
|
|
4,409,520 |
|
|
|
7,145,226 |
|
|
|
7,948,093 |
|
GROSS
PROFIT
|
|
|
1,353,189 |
|
|
|
1,453,049 |
|
|
|
2,479,418 |
|
|
|
1,724,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
631,835 |
|
|
|
755,734 |
|
|
|
1,317,491 |
|
|
|
1,558,422 |
|
General
and administrative
|
|
|
667,730 |
|
|
|
609,860 |
|
|
|
1,401,884 |
|
|
|
1,253,437 |
|
Depreciation
and amortization
|
|
|
23,099 |
|
|
|
29,279 |
|
|
|
47,481 |
|
|
|
56,404 |
|
|
|
|
1,322,664 |
|
|
|
1,394,873 |
|
|
|
2,766,856 |
|
|
|
2,868,263 |
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
30,525 |
|
|
|
58,176 |
|
|
|
(287,438 |
) |
|
|
(1,143,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in losses from investments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(103,298 |
) |
Interest
expense, net
|
|
|
(94,765 |
) |
|
|
(205,641 |
) |
|
|
(193,912 |
) |
|
|
(487,476 |
) |
|
|
|
(94,765 |
) |
|
|
(205,641 |
) |
|
|
(193,912 |
) |
|
|
(590,774 |
) |
LOSS
BEFORE INCOME TAXES
|
|
|
(64,240 |
) |
|
|
(147,465 |
) |
|
|
(481,350 |
) |
|
|
(1,734,122 |
) |
INCOME
TAXES
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(64,240 |
) |
|
|
(147,465 |
) |
|
|
(481,350 |
) |
|
|
(1,734,122 |
) |
Accretion
of issuance costs associated with convertible preferred
stock
|
|
|
(95,000 |
) |
|
|
(95,000 |
) |
|
|
(190,000 |
) |
|
|
(190,000 |
) |
Dividends
on convertible preferred stock
|
|
|
(45,000 |
) |
|
|
(45,000 |
) |
|
|
(90,000 |
) |
|
|
(90,000 |
) |
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$ |
(204,240 |
) |
|
$ |
(287,465 |
) |
|
$ |
(761,350 |
) |
|
$ |
(2,014,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Basic
and diluted loss per common share attributable to common
stockholders
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
123,570,367 |
|
|
|
119,851,548 |
|
|
|
123,470,726 |
|
|
|
119,772,594 |
|
See Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(481,350 |
) |
|
$ |
(1,734,122 |
) |
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment and amortization of leasehold
improvements
|
|
|
18,023 |
|
|
|
26,944 |
|
Amortization
of debt discounts
|
|
|
- |
|
|
|
69,070 |
|
Amortization
of relative fair value of warrants issued
|
|
|
- |
|
|
|
115,189 |
|
Amortization
of deferred financing costs
|
|
|
29,459 |
|
|
|
29,460 |
|
Stock
based compensation
|
|
|
16,134 |
|
|
|
112,422 |
|
Increase
(decrease) in allowance for doubtful accounts
|
|
|
15,247 |
|
|
|
(48,095 |
) |
Losses
from equity investments
|
|
|
- |
|
|
|
103,298 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
1,160,788 |
|
|
|
(854,453 |
) |
Increase
in accounts receivable from related parties
|
|
|
(26,385 |
) |
|
|
(217,486 |
) |
Decrease
in prepaid expenses
|
|
|
10,936 |
|
|
|
24,631 |
|
(Decrease)
increase in accounts payable and accrued expenses
|
|
|
(401,166 |
) |
|
|
229,956 |
|
Increase
in deferred revenue
|
|
|
53,418 |
|
|
|
738,876 |
|
Net
cash provided by (used in) operating activities
|
|
|
395,104 |
|
|
|
(1,404,310 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
- |
|
|
|
(10,173 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(10,173 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
(repayments) borrowings under the line of credit
|
|
|
(484,269 |
) |
|
|
1,092,385 |
|
Net
cash (used in) provided by financing activities
|
|
|
(484,269 |
) |
|
|
1,092,385 |
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(89,165 |
) |
|
|
(322,098 |
) |
CASH,
beginning of period
|
|
|
96,957 |
|
|
|
338,240 |
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$ |
7,792 |
|
|
$ |
16,142 |
|
See Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
190,191 |
|
|
$ |
313,269 |
|
Accretion
of Series A preferred stock liability
|
|
|
190,000 |
|
|
|
190,000 |
|
See Notes
to Condensed Consolidated Financial Statements.
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Accounting Policies
Organization
and Business
Conversion
Services International, Inc. (“CSI” or the “Company”) was incorporated in the
State of Delaware and has been conducting business since 1990. CSI and its
wholly owned subsidiaries (together the “Company”) are principally engaged in
the information technology services industry in the following areas: strategic
consulting, business intelligence/data warehousing and data management to its
customers principally located in the northeastern United States.
CSI was
formerly known as LCS Group, Inc. (“LCS”). In January 2004, CSI merged with and
into a wholly owned subsidiary of LCS. In connection with this transaction,
among other things, LCS changed its name to “Conversion Services International,
Inc.”
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared by
the Company and are unaudited. The results of operations for the three and six
months ended June 30, 2010 are not necessarily indicative of the results to be
expected for any future period or for the full fiscal year. In the opinion of
management, all adjustments (consisting of normal recurring adjustments unless
otherwise indicated) necessary to present fairly the financial position, results
of operations and cash flows at June 30, 2010, and for all periods presented,
have been made. Footnote disclosure has been condensed or omitted as permitted
by Securities and Exchange Commission rules over interim financial
statements.
These
condensed consolidated financial statements should be read in conjunction with
the annual audited consolidated financial statements and the notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2009 and other reports filed with the Securities and Exchange
Commission.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany transactions and
balances have been eliminated in the consolidation. Investments in business
entities in which the Company does not have control, but has the ability to
exercise significant influence (generally 20-50% ownership), are accounted for
by the equity method.
Revenue
recognition
Revenues
are principally derived from consulting and professional services and are
recognized as earned when the services are rendered, evidence of an arrangement
exists, the fee is fixed or determinable and collection is probable. For
projects charged on a time and materials basis, revenue is recognized based on
the number of hours worked by consultants at an agreed-upon rate per hour. For
large services projects where costs to complete the contract could reasonably be
estimated, the Company undertakes projects on a fixed-fee basis and recognizes
revenues on the percentage of completion method of accounting based on the
evaluation of actual costs incurred to date compared to total estimated costs.
Revenues recognized in excess of billings are recorded as costs in excess of
billings. Billings in excess of revenues recognized are recorded as deferred
revenues until revenue recognition criteria are met. Reimbursements, including
those relating to travel and other out-of-pocket expenses, are included in
revenues, and an equivalent amount of reimbursable expenses are included in cost
of services.
Fair
value of financial instruments
The
Company utilizes the fair value standards defined by generally accepted
accounting principles which provide guidance for measuring fair value and
requires certain disclosures. A fair value hierarchy is used which is
categorized into three levels based on the inputs to the valuation
techniques used to measure fair value. Certain valuation techniques are used,
such as the market approach (comparable market prices), the income approach
(present value of future income or cash flows) and the cost approach (cost to
replace the service capacity of an asset or replacement cost).
The
Company estimates that the carrying value of its financial instruments which
includes cash, line of credit and notes payable approximates fair value, as all
financial instruments are short term in nature or bear interest at variable
rates.
Concentrations
of credit risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk are cash and accounts receivable arising from its normal business
activities. The Company routinely assesses the financial strength of its
customers, based upon factors surrounding their credit risk, establishes an
allowance for doubtful accounts, and as a consequence believes that its accounts
receivable credit risk exposure beyond such allowances is limited. At June 30,
2010, receivables related to PNC Bank and receivables from Bank of America
comprised approximately 25.2% and 23.1% of the Company’s accounts receivable
balance, respectively.
Cash
balances in banks are secured by the Federal Deposit Insurance Corporation
subject to certain limitations.
Income
taxes
The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
The
Company records a valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. The Company’s current
valuation allowance primarily relates to benefits from the Company’s net
operating losses.
Prior to
recording its income tax liability, the Company makes a determination as to
whether it is more likely than not that a tax position will be sustained upon
examination based upon the technical merits of the position. If the
more-likely-than-not threshold is met, the tax position is measured to determine
the amount to recognize in the financial statements. At June 30, 2010, the
Company has no unrecognized tax benefits. As of June 30, 2010, the Company had
no accrued interest or penalties related to uncertain tax
positions.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Liquidity Issues and Going
Concern
The
Company has incurred a $481,350 net loss for the six months ended June 30, 2010
and, while the Company reported a profit of $31,956 for the fiscal year ended
December 31, 2009, it incurred significant losses for the years ended December
31, 2004 through 2008. Additionally, although the Company had positive cash flow
from operating activities during the year ended December 31, 2009 and the six
months ended June 30, 2010, it incurred negative cash flows from operating
activities for the years ended December 31, 2004 through 2009, and had an
accumulated deficit of $72.1 million at June 30, 2010. The Company has relied
upon cash from its financing activities to fund its ongoing operations as it has
not been able to generate sufficient cash from its operating activities in the
past, and there is no assurance that it will be able to do so in the future. Due
to this history of losses and operating cash consumption, the
Company cannot predict how long it will continue to incur further
losses or whether it will become profitable again, or if the Company’s
business will improve. These factors raise substantial doubt as to its
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As
of June 30, 2010, the Company had a cash balance of approximately $7,792,
compared to $96,957 at December 31, 2009, and a working capital deficiency of
$0.9 million.
The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments.
The
Company executed a revolving line of credit agreement in March 2008 with Access
Capital, Inc. (“Access Capital” or “Access”). As of June 30, 2008, the Company
was in default of the Loan and Security Agreement and remains in default as of
June 30, 2010. As a result of the default, Access had increased the interest
rate payable on borrowings under the line of credit to 18% per annum, has
notified the Company’s clients of their security interest in the amounts due to
the Company, and has provided instruction that payments are to be made directly
to Access Capital. Effective January 1, 2010, although the Company remains in
default with respect to the Access Capital Loan and Security Agreement, Access
Capital agreed to reduce the interest rate on borrowings under the line of
credit from 18%, to 12% per annum. Refer to footnote 4 of the Notes to Condensed
Consolidated Financial Statements for further discussion on the Line of
Credit.
In
February 2006, the Company issued Series A Preferred Stock, in the amount of
$1,900,000, which is redeemable for cash or common stock at the Company’s option
on February 1, 2011. The Company does not currently have the funds to repay this
debt upon maturity.
Additional
capital or financing will be needed to fund current working capital
requirements, ongoing debt service and to repay the obligations that are
maturing over the upcoming 12 month period. Our primary sources of liquidity are
cash flows from operations, borrowings under our revolving credit facility, and
various short and long term financings. We plan to continue to strive to
increase revenues and to control operating expenses in order to reduce, or
eliminate, the operating losses. Additionally, we will continue to seek equity
and/or debt financing in order to enable us to continue to meet our financial
obligations until we achieve profitability. There can be no assurance that any
such funding will be available to us on favorable terms, or at all. Failure to
obtain sufficient financing would have substantial negative ramifications to the
Company.
Note 3 - New Accounting
Standards
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements ("ASU 2009-13"). ASU 2009-13, amends existing revenue
recognition accounting pronouncements that are currently within the scope of
Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"). The consensus to ASU 2009-13 provides
accounting principles and application guidance on whether multiple deliverables
exist, how the arrangement should be separated, and the consideration allocated.
This guidance eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management's estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. EITF 00-21 previously required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under EITF 00-21, if the
fair value of all of the elements in the arrangement was not determinable, then
revenue was deferred until all of the items were delivered or fair value was
determined. This new approach is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 and allows for retroactive application. The Company is
currently evaluating the potential impact of this standard on its financial
position and results of operations.
In April
2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue
Recognition ("ASU 2010-17"). ASU 2010-17, updates guidance on the criteria that
should be met for determining whether the milestone method of revenue
recognition is appropriate with the scope of Codification Subtopic 605
(previously included within EITF 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"). The consensus to ASU 2010-17 provides
guidance on defining a milestone and determining when it may be appropriate to
apply the milestone method of revenue recognition in which arrangements include
payment provisions whereby a portion or all of the consideration is contingent
upon milestone events such as successful completion of phases or a specific
result. This new approach is effective prospectively for milestones achieved in
fiscal years beginning on or after June 15, 2010 and allows for retroactive
application. The Company is currently evaluating the potential impact of this
standard on its financial position and results of operations as there are not
currently any milestones that will be achieved.
Note
4 - Line of credit
The
Company executed a revolving line of credit agreement in March 2008 with Access
Capital. This line of credit provides for borrowing up to a maximum of
$3,500,000, based upon collateral availability, a 90% advance rate against
eligible accounts receivable, has a three year term, an interest rate of prime
(which was 3.25% as of June 30, 2010) plus 2.75% prior to a default, but 18%
upon default and matures on March 31, 2011. The Company must comply with a
minimum working capital covenant which requires the Company to maintain minimum
monthly working capital of $400,000. The Company was not in compliance with this
covenant as of June 30, 2008 and remains in default as of June 30, 2010 and, as
such, the amounts outstanding under the revolving line of credit are callable.
Additionally, during the third year of the three year term the Company must
maintain a minimum average monthly loan balance of $2,500,000. The Company must
also pay an annual facility fee equal to 1% of the maximum available under the
facility and a $1,750 per month collateral management fee. Further debt incurred
by the Company may need to be subordinated to Access Capital, Inc. Although the
Company remained in default of the Access Capital Loan and Security Agreement,
effective January 2010, Access Capital agreed to reduce the interest rate to be
charged on revolving line of credit borrowings from 18% to 12% per
annum.
The
Company was in default of the Loan and Security Agreement as of June 30, 2010
since its working capital was below the minimum required working capital of
$400,000. In the event of a default under the Loan and Security Agreement,
Access Capital’s remedies include, but are not limited to, the
following:
|
·
|
Access
may perform or observe such covenant on behalf and in the name, place and
stead of the Company and may take actions which they deem necessary to
cure or correct such failure, including, but not limited to, payment of
taxes, satisfaction of liens, performance of obligations owed to debtors,
procurement of insurance, execution of assignments, security agreements
and financing statements and the endorsement of
instruments;
|
|
|
|
|
·
|
upon
the occurrence of, and for so long as any event of default exists, the
interest rate is increased to one and one-half percent (1.5%) per
month;
|
|
·
|
Access
may notify the Company’s account debtors of their security interest in the
accounts, collect them directly and charge the collection costs and
expenses to the Company’s account;
|
|
·
|
at
Access Capital’s election, following the occurrence of an event of
default, they may terminate the Loan and Security Agreement. In the event
of early termination after the occurrence of default, the Company would be
liable for various early payment fees, penalties and
interest;
|
|
·
|
Access
shall have the right to demand repayment in full of all obligations,
whether or not otherwise due, including required prepayment fees,
interest, and penalties.
|
As a
result of this default, to date, Access has increased the interest rate payable
on borrowings under the line of credit to 12% per annum beginning in January
2010, has notified the Company’s clients of their security interest in the
amounts due to the Company, and has provided instruction that payments are to be
made directly to Access Capital.
As of
June 30, 2010, $2.1 million was outstanding under the line of credit and the
Company had approximately $385,000 available under the line of
credit.
Note 5 - Stock Based
Compensation
The 2003
Incentive Plan (“2003 Plan”) authorizes the issuance of up to 10,000,000 shares
of common stock for issuance upon exercise of options. It also authorizes the
issuance of stock appreciation rights and restricted stock, however, none of
these shares have been issued. The options granted may be a combination of both
incentive and nonstatutory options, generally vest over a three year period from
the date of grant, and expire ten years from the date of grant.
To the
extent that CSI derives a tax benefit from options exercised by employees, such
benefit will be credited to additional paid-in capital when realized on the
Company’s income tax return. There were no tax benefits realized by the Company
during the six months ended June 30, 2010 or during the years ended December 31,
2009 or 2008.
The
following summarizes the stock option transactions under the 2003 Plan during
2010:
|
|
Shares
|
|
|
Weighted average
exercise
price
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2009
|
|
|
4,771,999 |
|
|
$ |
0.76 |
|
Options
granted
|
|
|
- |
|
|
|
- |
|
Options
exercised
|
|
|
- |
|
|
|
- |
|
Options
canceled
|
|
|
(324,000 |
) |
|
|
0.74 |
|
Options
outstanding at June 30, 2010
|
|
|
4,447,999 |
|
|
$ |
0.76 |
|
The
following table summarizes information concerning outstanding and exercisable
Company common stock options at June 30,
2010:
Range of exercise
prices
|
|
Options
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average
remaining
contractual life
|
|
|
Options
exercisable
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25-$0.30
|
|
|
1,920,000 |
|
|
$ |
0.260 |
|
|
|
5.6 |
|
|
|
1,920,000 |
|
|
$ |
0.260 |
|
$0.46-$0.60
|
|
|
1,005,000 |
|
|
|
0.461 |
|
|
|
5.5 |
|
|
|
1,005,000 |
|
|
|
0.461 |
|
$0.83
|
|
|
910,000 |
|
|
|
0.830 |
|
|
|
5.4 |
|
|
|
910,000 |
|
|
|
0.830 |
|
$2.475-$3.45
|
|
|
612,999 |
|
|
|
2.746 |
|
|
|
3.8 |
|
|
|
612,999 |
|
|
|
2.746 |
|
|
|
|
4,447,999 |
|
|
|
|
|
|
|
|
|
|
|
4,447,999 |
|
|
|
|
|
The
Company recorded approximately zero and $16,000 and $79,000 and $112,000 of
expense related to stock options which vested during the three and six months
ended June 30, 2010 and 2009, respectively.
Note 6 - Loss Per
Share
Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding. Diluted loss per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options using the “treasury stock” method and the effect of
convertible debt instruments as if they had been converted at the beginning of
each period presented.
Basic and
diluted loss per share was determined as follows:
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes (A)
|
|
$ |
(64,240 |
) |
|
$ |
(147,465 |
) |
|
$ |
(481,350 |
) |
|
$ |
(1,734,122 |
) |
Net
loss (B)
|
|
$ |
(64,240 |
) |
|
$ |
(147,465 |
) |
|
$ |
(481,350 |
) |
|
$ |
(1,734,122 |
) |
Net
loss attributable to common stockholders (C)
|
|
$ |
(204,240 |
) |
|
$ |
(287,465 |
) |
|
$ |
(761,350 |
) |
|
$ |
(2,014,122 |
) |
Weighted
average outstanding shares of common stock (D)
|
|
|
123,570,367 |
|
|
|
119,851,548 |
|
|
|
123,470,726 |
|
|
|
119,772,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
income taxes (A/D)
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Net
loss per common share (B/D)
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Net
loss per common share attributable to common stockholders
(C/D)
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
For the
three and six months ended June 30, 2010 and 2009, 4,447,999 and 4,864,998
shares attributable to outstanding stock options were excluded from the
calculation of diluted loss per share because the effect was antidilutive,
respectively. Additionally, the effect of warrants to purchase 68,627,885 shares
which were issued between June 7, 2004 and June 30, 2009, and were outstanding
as of June 30, 2010, were excluded from the calculation of diluted loss per
share for the three and six months ended June 30, 2010 and 2009 because the
effect was antidilutive. Also excluded from the calculation of loss per share
because their effect was antidilutive were 666,667 shares of common stock
underlying the $1,050,000 convertible line of credit note to Taurus as of June
30, 2009, 16,666,667 shares underlying the $500,000 convertible line of credit
note to TAG Virgin Islands, Inc. as of June 30, 2010, 7,800,000 shares
underlying the Series A and Series B convertible preferred stock, and options to
purchase 36,596 shares of common stock outstanding to Laurus as of June 30, 2010
and 2009.
Note
7 – Preferred Stock
In
February 2006, we entered into a Securities Purchase Agreement with investors
represented by TAG Virgin Islands, Inc. (“TAG”), pursuant to which
we issued 19,000 shares of our newly created Series A Convertible Preferred
Stock, $.001 par value (the “Series A Preferred”). Each share of Series A
Preferred has a stated value of $100.00. We received proceeds of $1,900,000. The
Series A Preferred has a cumulative annual dividend equal to five percent (5%),
which is payable semi-annually in cash or common stock, at our election,
and is convertible into shares of the Company’s common stock at any time at a
price equal to $0.50 per share (subject to adjustment). In addition, the Series
A Preferred has no voting rights, but has liquidation preferences and certain
other privileges. All shares of Series A Preferred not previously converted
shall be redeemed by the Company, in cash or common stock, at the election of
the Company, on February 1, 2011. Pursuant to the Securities Purchase Agreement,
the TAG investors were also granted a warrant to purchase 1,900,000 shares of
our common stock exercisable at a price of $0.60 per share (subject to
adjustment), exercisable for a period of five years.
Using the
Black-Scholes option pricing model, the Company calculated the relative fair
value of the warrant to purchase 1,900,000 shares of Company common stock to be
approximately $1,128,000. This relative fair value has been recorded as a
reduction of the $1,900,000 mezzanine equity balance for the preferred stock and
an addition to additional paid-in capital. Additionally, the Company calculated
a beneficial conversion feature charge related to the conversion price for the
preferred stock to common stock of approximately $772,000.
Note
8 - Major Customers
During
the three months ended June 30, 2010, the Company had sales relating to three
major customers, PNC Bank, Bank of America and LEC, a related party,
comprising 37.2%, 12.9% and 10.2% of revenues, respectively, and totaling
approximately $1,730,560, $599,266 and $474,390, respectively. Amounts due from
services provided to these customers included in accounts receivable was
approximately $1,724,675 at June 30, 2010. As of June 30, 2010, receivables
related to services performed for PNC Bank, Bank of America and LEC accounted
for approximately 25.2%, 23.1% and 9.3% of the Company’s accounts receivable
balance, respectively.
During
the six months ended June 30, 2010, the Company had sales relating to two major
customers, PNC Bank and Bank of America, comprising 33.2% and 11.7% of revenues,
respectively, and totaling approximately $3,197,722 and $1,127,416,
respectively. Amounts due from
services provided to these customers included in accounts receivable was
approximately $1,446,385 at June 30, 2010. As of June 30, 2010, receivables
related to PNC Bank and Bank of America accounted for approximately 25.2% and
23.1% of the Company’s accounts receivable balance, respectively.
During
the three months ended June 30, 2009, the Company had sales relating to two
major customers, PNC Bank and NDMA, comprising 26.9% and 13.4% of revenues,
respectively, and totaling approximately $1,580,776 and $785,600, respectively.
Amounts due from services provided to these customers included in accounts
receivable was approximately $2,381,486 at June 30, 2009. As of June 30, 2009,
receivables related to services performed for PNC Bank and NDMA accounted for
approximately 25.4% and 23.8% of the Company’s accounts receivable balance,
respectively.
During
the six months ended June 30, 2009, the Company had sales relating to four major
customers, PNC Bank, Bank of America, Church & Dwight and LEC, a related
party, comprising 16.3%, 14.6% 11.9% and 10.7% of revenues, respectively, and
totaling approximately $1,580,776, $1,409,293 $1,147,707 and $1,036,069,
respectively. Amounts due from services provided to these customers included in
accounts receivable was approximately $2,489,105 at June 30, 2009. As of June
30, 2009, receivables related to PNC Bank, Bank of America, Church & Dwight
and LEC accounted for approximately 25.4%, 9.0% 6.8% and 10.2% of the Company’s
accounts receivable balance, respectively.
Note
9 - Commitments and Contingencies
Legal Proceedings
From time
to time, the Company is either a defendant or the plaintiff in various claims
and lawsuits. Although there can be no assurances, management believes that the
disposition of such matters will not have a material adverse impact on the
results or operations or financial position of the Company.
Lease
Commitments
Years Ending June 30
|
|
Office
|
|
|
|
|
|
2011
|
|
$ |
187,145 |
|
2012
|
|
|
141,873 |
|
2013
|
|
|
141,873 |
|
2014
|
|
|
141,873 |
|
2015
|
|
|
141,873 |
|
Thereafter
|
|
|
70,937 |
|
|
|
$ |
825,574 |
|
The
Company's corporate headquarters are located at 100 Eagle Rock Avenue, East
Hanover, New Jersey 07936, where it operates under an amended lease agreement
expiring December 31, 2015. This amendment requires the Company to
surrender approximately 9,137 square feet of its office space to the landlord
effective July 1, 2010, leaving the Company with approximately 7,467 square feet
of office space in this facility. Monthly rent with respect to our East Hanover,
New Jersey facility is approximately $16,582 until December 31, 2010. Monthly
rent for the period beginning January 1, 2011 and ending December 31, 2015 will
be approximately $11,823. In addition to minimum rentals, the Company is
liable for its proportionate share of real estate taxes and operating expenses,
as defined. The Company’s CSI DeLeeuw division has an office at Suite
1460, Charlotte Plaza, 201 South College Street, Charlotte, North Carolina
28244. DeLeeuw leases this space which had an original expiration date of
December 31, 2005, but has been extended until December 31, 2010. Monthly
rent with respect to our Charlotte, North Carolina facility is $2,787 per month
effective January 1, 2010 through December 31, 2010.
Note 10 - Related Party
Transactions
Refer to
footnote 8 for the related party transaction disclosure as a major
customer.
As of
June 30, 2010, the balance outstanding with respect to the loan from Glenn
Peipert, our former Executive Vice President, Chief Operating Officer and
Director, to the Company was approximately $0.1 million, which accrues interest
at a simple rate of 8% per annum.
Note
11 - Subsequent Events
These
financial statements were approved by management and the board of directors
through the issuance date and management has evaluated subsequent events through
the issuance date.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Special
Note About Forward-Looking Statements
Certain
statements in Management’s Discussion and Analysis (“MD&A”), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words “believes,” “project,” “expects,” “anticipates,”
“estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,”
“will continue,” “will likely result,” and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from
the forward-looking statements. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Overview
of our Business
Conversion
Services International, Inc. provides professional services to the Global 2000,
as well as mid-market clientele relating to strategic consulting, business
intelligence/data warehousing and data management and, through strategic
partners, the sale of software. The Company’s services based clients are
primarily in the financial services, pharmaceutical, healthcare and
telecommunications industries, although it has clients in other industries as
well. The Company’s clients are primarily located in the northeastern United
States.
The
Company began operations in 1990. Its services were originally focused on
e-business solutions and data warehousing. In the late 1990s, the Company
strategically repositioned itself to capitalize on its data warehousing
expertise in the fast growing business intelligence/data warehousing space. The
Company became a public company via its merger with a wholly owned subsidiary of
LCS Group, Inc., effective January 30, 2004.
The
Company’s core strategy includes capitalizing on the already established
in-house business intelligence/data warehousing (“BI/DW”) technical expertise
and its strategic consulting division. This is expected to result in organic
growth through the addition of new customers.
The
Company derives a majority of its revenue from professional services
engagements. Its revenue depends on the Company’s ability to generate new
business, in addition to preserving present client engagements. The general
domestic economic conditions in the industries the Company serves, the pace of
technological change, and the business requirements and practices of its clients
and potential clients directly affect our ability to accomplish these goals.
When economic conditions decline, companies generally decrease their technology
budgets and reduce the amount of spending on the type of information technology
(IT) consulting provided by the Company. The Company’s revenue is also impacted
by the rate per hour it is able to charge for its services and by the size and
chargeability, or utilization rate, of its professional workforce. If the
Company is unable to maintain its billing rates or sustain appropriate
utilization rates for its professionals, its overall profitability may decline.
Several large clients have changed their business practices with respect to
consulting services. Such clients now require that we contract with their vendor
management organizations in order to continue to perform services. These
organizations charge fees generally based upon the hourly rates being charged to
the end client. Our revenues and gross margins are being negatively affected by
this practice.
The
Company will continue to focus on a variety of growth initiatives in order to
improve its market share and increase revenue. Moreover, as the Company
endeavors to achieve top line growth, through entry on new approved vendor
lists, penetrating new vertical markets, and expanding its time and material
business, the Company will concentrate its efforts on improving margins and
driving earnings to the bottom line.
The
Company’s most significant costs are personnel expenses, which consist of
consultant fees, benefits and payroll-related expenses.
Results
of Operations
The
following table sets forth selected financial data for the periods
indicated:
|
|
Selected Statement of Operations Data for the three
|
|
|
Selected Statement of Operations Data for the six
|
|
|
|
months ended June 30,
|
|
|
months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$ |
4,647,811 |
|
|
$ |
5,862,569 |
|
|
$ |
9,624,644 |
|
|
$ |
9,673,008 |
|
Gross
profit
|
|
|
1,353,189 |
|
|
|
1,453,049 |
|
|
|
2,479,418 |
|
|
|
1,724,915 |
|
Net
loss
|
|
|
(64,240 |
) |
|
|
(147,465 |
) |
|
|
(481,350 |
) |
|
|
(1,734,122 |
) |
Net
loss attributable to common stockholders
|
|
|
(204,240 |
) |
|
|
(287,465 |
) |
|
|
(761,350 |
) |
|
|
(2,014,122 |
) |
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Net
loss per common share attributable to common stockholders
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
Selected Statement of Financial Position Data as of
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Working
capital deficiency
|
|
$ |
(904,514 |
) |
|
$ |
(469,280 |
) |
Total
assets
|
|
|
3,220,123 |
|
|
|
4,517,356 |
|
Total
stockholders' deficit
|
|
|
(2,965,446 |
) |
|
|
(2,310,231 |
) |
Three and Six Months Ended June 30,
2010 and 2009
Revenue
The
Company’s revenue is primarily comprised of billings to clients for consulting
hours worked on client projects. Revenue of $4.6 million and $9.6 million for
the three and six months ended June 30, 2010, respectively, decreased by $1.2
million, or 20.7%, and $0.1 million, or 0.5%, as compared to revenue of $5.9
million and $9.7 million for the three and six months ended June 30, 2009,
respectively.
Revenue
for the Company is categorized by strategic consulting, business intelligence,
data warehousing and data management. The chart below reflects revenue by line
of business for the three and six months ended June 30, 2010 and
2009:
|
|
For the three months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
% of total revenues
|
|
|
$
|
|
|
% of total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Consulting
|
|
$ |
1,340,299 |
|
|
|
28.8 |
% |
|
$ |
2,092,210 |
|
|
|
35.7 |
% |
Business
Intelligence / Data Warehousing
|
|
|
2,616,114 |
|
|
|
56.3 |
% |
|
|
2,977,119 |
|
|
|
50.8 |
% |
Data
Management
|
|
|
474,390 |
|
|
|
10.2 |
% |
|
|
493,301 |
|
|
|
8.4 |
% |
Reimbursable
expenses
|
|
|
153,508 |
|
|
|
3.3 |
% |
|
|
298,379 |
|
|
|
5.0 |
% |
Other
|
|
|
63,500 |
|
|
|
1.4 |
% |
|
|
1,560 |
|
|
|
0.1 |
% |
|
|
$ |
4,647,811 |
|
|
|
100.0 |
% |
|
$ |
5,862,569 |
|
|
|
100.0 |
% |
|
|
For the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
% of total revenues
|
|
|
$
|
|
|
% of total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Consulting
|
|
$ |
2,818,406 |
|
|
|
29.3 |
% |
|
$ |
3,094,150 |
|
|
|
32.0 |
% |
Business
Intelligence / Data Warehousing
|
|
|
5,442,356 |
|
|
|
56.5 |
% |
|
|
5,079,272 |
|
|
|
52.5 |
% |
Data
Management
|
|
|
936,135 |
|
|
|
9.7 |
% |
|
|
1,036,069 |
|
|
|
10.7 |
% |
Reimbursable
expenses
|
|
|
345,247 |
|
|
|
3.6 |
% |
|
|
444,957 |
|
|
|
4.6 |
% |
Other
|
|
|
82,500 |
|
|
|
0.9 |
% |
|
|
18,560 |
|
|
|
0.2 |
% |
|
|
$ |
9,624,644 |
|
|
|
100.0 |
% |
|
$ |
9,673,008 |
|
|
|
100.0 |
% |
Strategic
consulting
The
strategic consulting line of business includes work related to planning and
assessing people, process and technology for clients, performing gap analysis,
making recommendations regarding technology and business process improvements to
assist clients to realize their business goals and maximize their investments in
both people and technology. The Company performs strategic consulting work
through its CSI DeLeeuw division.
Strategic
consulting revenue of $1.3 million, or 28.8% of total revenue, for the three
months ended June 30, 2010 decreased by $0.8 million, or 35.9%, as compared to
revenue of $2.1 million, or 35.7% of total revenue, for the three months ended
June 30, 2009. This decrease is primarily due to a $0.8 million decrease in
revenue related to a project at PNC Bank that began in April 2009 and completed
as of June 30, 2010. In the strategic consulting line of business, there was a
50.0% decrease in consultant headcount and a 17.1% decrease in the average bill
rate during the quarter, as compared to the prior year period.
Strategic
consulting revenue of $2.8 million, or 29.3% of total revenue, for the six
months ended June 30, 2010 decreased by $0.3 million, or 8.9%, as compared to
revenue of $3.1 million, or 32.0% of total revenue, for the six months ended
June 30, 2009. This decrease is primarily due to a $0.3 million decrease in
revenue related to Bank of America, a $0.3 million decrease in revenue related
to a completed project at NYISO, and a $0.1 million decrease for various other
client projects. These decreases in revenue were partially offset by $0.4
million of increased revenue in the current period related to projects at TD
Ameritrade and PNC Bank. In the strategic consulting line of business, there was
a 26.2% decrease in consultant headcount and a 13.8% decrease in the billable
hours year to date, partially offset by a 7.2% average bill rate increase as
compared to the prior year period.
Business
intelligence / Data warehousing
The
business intelligence line of business includes work performed with various
applications and technologies for gathering, storing, analyzing and providing
clients with access to data in order to allow enterprise users to make better
and quicker business decisions. The data warehousing line of business includes
work performed for client companies to provide a consolidated view of high
quality enterprise information. CSI provides services in the data warehouse and
data mart design, development and implementation, prepares proof of concepts,
implements data warehouse solutions and integrates enterprise information. Since
the business intelligence and data warehousing work overlap and the Company has
performed engagements which include both business intelligence and data
warehousing components, the Company tracks this work as a single line of
business and reports the results as a single line of business.
Business
intelligence/data warehousing (“BI/DW”) revenue of $2.6 million, or 56.3% of
total revenue, for the three months ended June 30, 2010 decreased by $0.4
million, or 12.1%, as compared to revenue of $3.0 million, or 50.8% of total
revenue, for the three months ended June 30, 2009. This decrease is primarily
due to a $1.6 million revenue decrease largely related to projects for Church
& Dwight, NDMA, Pfizer, SAC Capital, Flight Safety and various smaller
projects. These decreases were partially offset by $1.2 million of current
period revenue increases primarily related to projects at PNC, Lehman Brothers
and Moody’s Corporation. Overall, the BI/DW line of business had an 8.2%
decrease in consultant headcount, a 7.5% decrease in the average bill rate, a
7.3% decrease in billable hours, partially offset by a 1.6% increase in the
utilization rate as compared to the prior period.
BI/DW
revenue of $5.4 million, or 56.5% of total revenue, for the six months ended
June 30, 2010 increased by $0.4 million, or 7.1% of total revenue, as compared
to revenue of $5.1 million, or 52.5% of total revenue, for the six months ended
June 30, 2009. New 2010 projects in this line of business contributed $3.4
million to revenue during the six month period ended June 30, 2010, which is
partially offset by $2.4 million of non-recurring revenue related to completed
projects and $0.6 million of decreased revenue relating to continuing projects
for current clients as compared to the prior year. Average BI/DW headcount
increased 1.7%, billable hours increased by 4.1%, average bill rate decreased
5.5% and consultant utilization increased 1.7% overall for the six month period
ended June 30, 2010 as compared to the prior year.
Data management
The data
management line of business includes such activities as Enterprise Information
Architecture, Metadata Management, Data Quality/Cleansing/ Profiling. The
Company performs these activities through its exclusive subcontractor agreement
with its related party, LEC.
Data
management revenue of $0.5 million, or 10.2% of total revenue, for the three
months ended June 30, 2010 decreased by $18,911, or 3.8%, as compared to revenue
of $0.5 million, or 8.4% of total revenue, for the three months ended June 30,
2009. This decrease is due to a 9.6% decrease in the average bill rate and a
6.9% decrease in the utilization rate during the current period, partially
offset by a 6.3% increase in billable hours as compared to the prior
year.
Data
management revenue of $0.9 million, or 9.7% of total revenue, for the six months
ended June 30, 2010 decreased by $0.1 million, or 9.6%, as compared to revenue
of $1.0 million, or 10.7% of total revenue, for the six months ended June 30,
2009. This decrease is due to a 10.1% decrease in the average bill rate,
partially offset by a 0.8% increase in billable hours during the current year to
date period as compared to the prior year.
Cost
of revenue
Cost of
revenue includes payroll and benefit and other direct costs for the Company’s
consultants. Cost of revenue was $3.3 million, or 70.9% of revenue, and $7.1
million, or 74.2% of revenue, for the three and six months ended June 30, 2010,
respectively, representing a decrease of $1.1 million, or 25.3%, and $0.8
million, or 10.1%, as compared to $4.4 million, or 75.2% of revenue, and $7.9
million, or 82.2% of revenue, for the three and six months ended June 30, 2009,
respectively.
Cost of
services was $2.7 million, or 68.8% of services revenue for the three months
ended June 30, 2010, representing a decrease of $0.9 million, or 25.0%, as
compared to $3.6 million, or 71.6% of services revenue for the three months
ended June 30, 2009. Cost of services
decreased during the three months ended June 30, 2010 as compared to the prior
year due to a $1.1 million decrease in services revenue during the period,
accounting for a $0.8 million decrease in cost of services. The decrease in the
cost of services, as compared to the revenue decrease continues to reflect the
higher profit margin business that the Company has been pursuing. Additionally,
cost of services decreased by $0.1 million as compared to the prior year due to
charges recorded in the prior year for non-billable consultants and stock
compensation expense that were not recorded in the current period. The Company had an
average of 74 consultants in the current period and 98 in the prior year period,
resulting in an 24.5% decrease in consultant headcount.
Cost of services was $5.9 million, or
71.8% of services revenue for the six months ended June 30, 2010, representing a
decrease of $0.6 million, or 8.5%, as compared to $6.5 million, or 79.3% of
services revenue for the six months ended June 30, 2009. Cost of services
decreased during the six months ended June 30, 2010 as compared to the prior
year period primarily due to $0.6 million of cost recorded in the prior period
relating to revenue that had been deferred until payment was received from the
client.
Cost of
related party services was $0.4 million, or 88.2% of related party services
revenue, for the three months ended June 30, 2010, representing a decrease of
$25,925, or 5.8%, as compared to $0.4 million, or 90.0% of related party
services revenue, for the three months ended June 30, 2009. Cost of related party
services decreased for the three month period primarily due to a decrease in
related party consulting revenue and reduced payroll expense and reduced cost of
non-billable consultants during the three months ended June 30, 2010 as compared
to the prior year.
Cost of
related party services was $0.8 million, or 90.7% of related party services
revenue, for the six months ended June 30, 2010, representing a decrease of $0.1
million, or 9.9%, as compared to $0.9 million, or 91.0% of related party
services revenue, for the six months ended June 30, 2009. Cost of related party
services decreased for the six month period primarily due to a decrease in
related party consulting revenue and reduced charges relating to non-billable
consultants during the six months ended June 30, 2010 as compared to the prior
year.
Gross
profit
Gross
profit was $1.4 million, or 29.1% of revenue, and $2.5 million, or 25.8% of
revenue, for the three and six months ended June 30, 2010, respectively,
representing a decrease of $0.1 million, or 6.9% for the three months and an
increase of $0.8 million, or 43.7% for the six months, as compared to $1.5
million, or 24.8% of revenue, and $1.7 million, or 17.8% of revenue, for the
three and six months ended June 30, 2009, respectively.
Gross
profit from services was $1.2 million, or 31.2% of services revenue for the
three months ended June 30, 2010, representing a decrease of $0.2 million, or
14.4%, from the prior year’s gross profit from services of $1.4 million, or
28.4% of services revenue. The increase in the gross profit from services as a
percentage of services revenue has been outlined previously in the revenue and
cost of revenue discussions.
Gross profit from services was $2.3
million, or 28.2% of services revenue for the six months ended June 30, 2010,
representing an increase of $0.6 million, or 37.5%, from the prior year’s gross
profit from services of $1.7 million, or 20.7% of services revenue. The decrease
in the gross profit from services as a percentage of services revenue has been
outlined previously in the revenue and cost of revenue discussions.
Gross
profit from related party services was $56,128, or 11.8% of related party
services revenue for the three months ended June 30, 2010, representing an
increase of $7,014, or 14.3% from the prior year’s gross profit of $49,114, or
10.0% of related party services revenue for the three months ended June 30,
2009. The increase in the gross profit from related party services as a
percentage of related party services revenue has been outlined previously in the
revenue and cost of revenue discussions.
Gross
profit from related party services was $86,875, or 9.3% of related party
services revenue for the six months ended June 30, 2010, representing a decrease
of $6,142, or 6.6% from the prior year’s gross profit of $93,017, or 9.0% of
related party services revenue for the six months ended June 30, 2009. The
increase in the gross profit from related party services as a percentage of
related party services revenue has been outlined previously in the revenue and
cost of revenue discussions.
Selling
and marketing
Selling
and marketing expenses include payroll, employee benefits and other
headcount-related costs associated with sales and marketing personnel and
advertising, promotions, tradeshows, seminars and other programs. Selling and
marketing expenses were $0.6 million, or 13.6% of revenue, and $1.3 million, or
13.7% of revenue, for the three and six months ended June 30, 2010,
respectively, representing a decrease of $0.2 million, or 16.4%, and $0.3
million, or 15.5%, for the three and six month period, respectively, as compared
to $0.8 million, or 12.9% of revenue, and $1.6 million, or 16.1% of revenue, for
the three and six months ended June 30, 2009, respectively.
Selling
and marketing expense for the three months ended June 30, 2010 decreased by $0.2
million as compared to the prior year due primarily to a $0.1 million reduction
in payroll and stock compensation expense and a $0.1 million reduction in
various accounts including professional fees, immigration fees and trade show
expense.
Selling
and marketing expense for the six months ended June 30, 2010 decreased by $0.3
million as compared to the prior year due primarily to a $0.2 million reduction
in payroll and stock compensation expense and a $0.1 million reduction in
various accounts including professional fees, immigration fees and trade show
expense.
General
and administrative
General
and administrative costs include payroll, employee benefits and other
headcount-related costs associated with the finance, legal, facilities, certain
human resources and other administrative headcount, and legal and other
professional and administrative fees. General and administrative costs were $0.7
million, or 14.4% of revenue, and $1.4 million, or 14.6% of revenue, for the
three and six months ended June 30, 2010, increasing by $0.1
million, or 9.5%, and $0.1 million, or 11.8%, as compared to $0.6 million, or
10.4% of revenue, and $1.3 million, or 13.0% of revenue, for the three and six
months ended June 30, 2009, respectively.
The $0.1
million increase in general and administrative expense for the three months
ended June 30, 2010 as compared to the prior year is primarily due to a $0.1
million increase in various expenses including payroll, legal, accounting and
professional fees, partially offset by a reduction in bad debt expense during
the current period.
The $0.1
million increase in general and administrative expense for the six months ended
June 30, 2010 as compared to the prior year is primarily due to a $0.1 million
increase in payroll and bad debt expense during the six month
period.
Depreciation
and amortization
Depreciation
expense is recorded on the Company’s property and equipment which is generally
depreciated over a period between three to seven years. Amortization of
leasehold improvements is taken over the shorter of the estimated useful life of
the asset or the remaining term of the lease. The Company amortizes deferred
financing costs utilizing the effective interest method over the term of the
related debt instrument. Depreciation and amortization expenses were $23,099 and
$47,481, for the three and six months ended June 30, 2010, respectively,
representing a $6,180 and $8,923 decline from $29,279 and $56,404
for the three and six months ended June 30, 2009, respectively.
Other
income (expense)
During
the six months ended June 30, 2009, the Company recorded an impairment with
respect to its investment in its related party, LEC, and recorded a charge of
$103,298.
Interest
expense, which includes amortization of the discount on debt of $27,623 and
$69,070 during the three and six months ended June 30, 2009, respectively, and
zero in 2010, was $0.1 million and $0.2 million for the three and six months
ended June 30, 2010, respectively, and $0.2 million and $0.5 million for the
three and six months ended June 30, 2009, respectively. Interest expense of $0.1
million for the three months ended June 30, 2010 decreased by $0.1 million, or
53.9%, as compared to $0.2 million in the prior year period. The interest
expense related to the Access Capital line of credit decreased by $52,875 as
compared to the prior year due to reduced line of credit balances and a lower
interest rate being paid on the outstanding balances. Additionally, the interest
expense related to outstanding debt declined by approximately $20,875 since the
related notes were repaid in 2009 and debt discount amortization declined by
approximately $28,000 due to becoming fully amortized in 2009. Interest expense
of $0.2 million for the six months ended June 30, 2010 decreased by $0.3
million, or 60.2%, as compared to $0.5 million in the prior year period. This
decrease is due to decreased interest due on the line of credit and notes
payable of $0.1 million and $0.2 million of decreased warrant and debt discount
amortization.
Liquidity
and Capital Resources
The
Company has incurred a $481,350 net loss for the six months ended June 30, 2010
and, while the Company reported a profit of $31,956 for the fiscal year ended
December 31, 2009, it incurred significant losses for the years ended December
31, 2004 through 2008. Additionally, although the Company had positive cash flow
from operating activities during the year ended December 31, 2009 and the six
months ended June 30, 2010, it incurred negative cash flows from operating
activities for the years ended December 31, 2004 through 2009, and had an
accumulated deficit of $72.1 million at June 30, 2010. The Company has relied
upon cash from its financing activities to fund its ongoing operations as it has
not been able to generate sufficient cash from its operating activities in the
past, and there is no assurance that it will be able to do so in the future. Due
to this history of losses and operating cash consumption, the
Company cannot predict how long it will continue to incur further
losses or whether it will become profitable again, or if the Company’s
business will improve. These factors raise substantial doubt as to its
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As of
June 30, 2010, the Company had a cash balance of approximately $7,792, compared
to $96,957 at December 31, 2009, and a working capital deficiency of $0.9
million.
The
liquidity issues that have resulted from the Company’s history of losses have
been addressed in the past through the sale of Company common stock, preferred
stock and by entering into various debt instruments.
The
Company executed a revolving line of credit agreement in March 2008 with Access
Capital, Inc. (“Access Capital” or “Access”). As of June 30, 2008, the Company
was in default of the Loan and Security Agreement and remains in default as of
June 30, 2010. As a result of the default, Access had increased the interest
rate payable on borrowings under the line of credit to 18% per annum, has
notified the Company’s clients of their security interest in the amounts due to
the Company, and has provided instruction that payments are to be made directly
to Access Capital. Effective January 1, 2010, although the Company remains in
default with respect to the Access Capital Loan and Security Agreement, Access
Capital agreed to reduce the interest rate on borrowings under the line of
credit from 18%, to 12% per annum. Refer to footnote 4 of the Notes to Condensed
Consolidated Financial Statements for further discussion on the Line of
Credit.
In
February 2006, the Company issued Series A Preferred Stock, in the amount of
$1,900,000, which is redeemable for cash or common stock at the Company’s option
on February 1, 2011. The Company does not currently have the funds to repay this
debt upon maturity.
Additional
capital or financing will be needed to fund current working capital
requirements, ongoing debt service and to repay the obligations that are
maturing over the upcoming 12 month period. Our primary sources of liquidity are
cash flows from operations, borrowings under our revolving credit facility, and
various short and long term financings. We plan to continue to strive to
increase revenues and to control operating expenses in order to reduce, or
eliminate, the operating losses. Additionally, we will continue to seek equity
and/or debt financing in order to enable us to continue to meet our financial
obligations until we achieve profitability. There can be no assurance that any
such funding will be available to us on favorable terms, or at all. Failure to
obtain sufficient financing would have substantial negative ramifications to the
Company.
The
Company’s working capital deficit was $0.9 million as of June 30, 2010 which
represented a $0.4 million increase in the working capital deficit when compared
to the working capital deficit of $0.5 million as of December 31, 2009. The
primary reason for the decline in working capital is a $1.2 million reduction in
accounts receivable, partially offset by a $0.4 million decrease in the
outstanding line of credit balance and a $0.4 million decrease in accounts
payable and accrued expenses as compared to the prior period.
Cash
provided by operating activities during the six months ended June 30, 2010 was
approximately $0.4 million compared to cash used in operating activities of $1.4
million for the six months ended June 30, 2009. The increase in cash provided by
operations was the result of a $0.9 million increase in cash provided by
operations from changes in operating assets and liabilities. This increase is
primarily due to $2.2 million of cash provided by accounts receivable as
compared to the prior year, which is partially offset by a $0.6 million of cash
used by accounts payable and accrued liabilities and a $0.7 million reduction in
deferred revenue as compared to the prior year. Additionally, cash used in
operations resulting from the Company’s net loss adjusted for non-cash
charges/credits recorded in income, such as depreciation, amortization, stock
based compensation and bad debt expense, improved by $0.9 million as compared to
the prior year period.
Cash used
in investing activities was zero in the current period compared to $10,173
during the six months ended June 30, 2009. The Company purchased computer
equipment during the prior year period.
Cash used
in financing activities was $0.5 million during the six months ended June 30,
2010 and cash provided by financing activities was $1.1 million during the six
months ended June 30, 2009. The cash (used in) financing activities during the
current period was due to repayments under the Company’s revolving line of
credit agreement with Access Capital. The cash provided by
financing activities during the prior period was primarily the result of the
Company’s borrowings under its line of credit arrangement.
The
Company executed a replacement revolving line of credit agreement in March 2008
with Access Capital, Inc. The Access Capital line of credit provides for
borrowing up to a maximum of $3,500,000, based upon collateral availability, a
90% advance rate against eligible accounts receivable, has a three year term,
and an interest rate of prime (which was 3.25% as of June 30, 2010) plus 2.75%
prior to a default, but 18% upon default. The Company must comply with a minimum
working capital covenant which requires the Company to maintain minimum monthly
working capital of $400,000. The Company was not in compliance with this
requirement as of June 30, 2008 and remains in default as of June 30, 2010.
Additionally, during the third year of the three year term the Company must
maintain an average minimum monthly borrowing of $2,500,000. The Company must
also pay an annual facility fee equal to 1% of the maximum available under the
facility and a $1,750 per month collateral management fee. Further debt incurred
by the Company may need to be subordinated to Access Capital, Inc. Although the
Company remained in default with respect to the Access Capital Loan and Security
Agreement, in January 2010 Access Capital agreed to reduce the interest rate to
be charged on revolving line of credit borrowings from 18% to 12% per
annum.
There are
currently no material commitments for capital expenditures.
As of
June 30, 2010 and December 31, 2009, the Company had accounts receivable due
from LEC of approximately $0.3 million and $0.2 million,
respectively. There are no known collection problems with respect to
LEC.
For the
three and six months ended June 30, 2010 and 2009, we invoiced LEC $0.5 million
and $0.9 million and $0.5 million and $1.0 million, respectively, for the
services of consultants subcontracted to LEC by us. The majority of its billing
is derived from Fortune 100 clients.
The
following is a summary of the debt instruments outstanding as of June 30,
2010:
Lender
|
|
Type of facility
|
|
Outstanding as of June
30, 2010 (not including
interest) (all numbers
approximate)
|
|
|
Remaining
Availability (if
applicable)
|
|
Access
Capital, Inc.
|
|
Line of Credit
|
|
$ |
2,058,000 |
|
|
$ |
385,000 |
|
TAG
Virgin Islands, Inc. Investors
|
|
Convertible Promissory Notes
|
|
$ |
500,000 |
|
|
$ |
- |
|
Glenn
Peipert
|
|
Promissory Note
|
|
$ |
95,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
$ |
2,653,000 |
|
|
$ |
385,000 |
|
Additionally,
the Company has two series of preferred stock outstanding as
follows:
Holder
|
|
Type of Instrument
|
|
Principal amount
outstanding as of
June 30, 2010
|
|
|
|
|
|
|
|
Taurus
Advisory Group, LLC Investors
|
|
Series A Convertible Preferred Stock
|
|
$ |
1,900,000 |
|
Matthew
J. Szulik
|
|
Series B Convertible Preferred Stock
|
|
$ |
2,000,000 |
|
TOTAL
|
|
|
|
$ |
3,900,000 |
|
New
Accounting Standards
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements ("ASU 2009-13"). ASU 2009-13, amends existing revenue
recognition accounting pronouncements that are currently within the scope of
Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"). The consensus to ASU 2009-13 provides
accounting principles and application guidance on whether multiple deliverables
exist, how the arrangement should be separated, and the consideration allocated.
This guidance eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management's estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. EITF 00-21 previously required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under EITF 00-21, if the
fair value of all of the elements in the arrangement was not determinable, then
revenue was deferred until all of the items were delivered or fair value was
determined. This new approach is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 and allows for retroactive application. The Company is
currently evaluating the potential impact of this standard on its financial
position and results of operations.
In April
2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue
Recognition ("ASU 2010-17"). ASU 2010-17, updates guidance on the criteria that
should be met for determining whether the milestone method of revenue
recognition is appropriate with the scope of Codification Subtopic 605
(previously included within EITF 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"). The consensus to ASU 2010-17 provides
guidance on defining a milestone and determining when it may be appropriate to
apply the milestone method of revenue recognition in which arrangements include
payment provisions whereby a portion or all of the consideration is contingent
upon milestone events such as successful completion of phases or a specific
result. This new approach is effective prospectively for milestones achieved in
fiscal years beginning on or after June 15, 2010 and allows for retroactive
application. The Company is currently evaluating the potential impact of this
standard on its financial position and results of operations as there are not
currently any milestones that will be achieved.
Application of
Critical Accounting Policies
Revenue
recognition
Our
revenue recognition policy is significant because revenues are a key component
of our results from operations. In addition, revenue recognition determines the
timing of certain expenses, such as incentive compensation. We follow very
specific and detailed guidelines in measuring revenue; however, certain
judgments and estimates affect the application of the revenue policy. Revenue
results are difficult to predict and any shortfall in revenue or delay in
recognizing revenue could cause operating results to vary significantly from
quarter to quarter and could result in future operating losses or reduced net
income.
Revenues
are principally derived from consulting and professional services and are
recognized as earned when the services are rendered, evidence of an arrangement
exists, the fee is fixed or determinable and collection is probable. For
projects charged on a time and materials basis, revenue is recognized based on
the number of hours worked by consultants at an agreed-upon rate per hour. For
large services projects where costs to complete the contract could reasonably be
estimated, the Company undertakes projects on a fixed-fee basis and recognizes
revenues on the percentage of completion method of accounting based on the
evaluation of actual costs incurred to date compared to total estimated costs.
Revenues recognized in excess of billings are recorded as costs in excess of
billings. Billings in excess of revenues recognized are recorded as deferred
revenues until revenue recognition criteria are met. Reimbursements, including
those relating to travel and other out-of-pocket expenses, are included in
revenues, and an equivalent amount of reimbursable expenses are included in cost
of services.
The
Company recognizes revenue in accordance with generally accepted accounting
principles. As a result, in the event that collectability from a client is not
reasonably assured, revenue is recognized on the cash basis.
Deferred
Income Taxes
Determining
the consolidated provision for income tax expense, income tax liabilities and
deferred tax assets and liabilities involves judgment. We record a
valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. We have considered
future taxable income and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. A valuation allowance is
maintained by the Company due to the impact of the current years net operating
loss (NOL). In the event that we determine that we would not be able to realize
all or part of our net deferred tax assets, an adjustment to the deferred tax
assets would be charged to net income in the period such determination is made.
Likewise, if we later determine that it is more likely than not that the net
deferred tax assets would be realized, the previously provided valuation
allowance would be reversed. Our current valuation allowance relates
predominately to benefits derived from the utilization of our
NOL’s.
Item 4T. Controls and
Procedures
Evaluation
of disclosure controls and procedures.
As of the
end of the period covered by this Quarterly Report, the Company’s Chief
Executive Officer and Chief Financial Officer (“the Certifying Officers”),
conducted evaluations of the Company’s disclosure controls and procedures. As
defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), the term “disclosure controls and
procedures” means controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission’s
rules and forms. Disclosure controls and procedures include without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including the Certifying Officers, to allow timely decisions regarding required
disclosures. Based on this evaluation, the Certifying Officers have concluded
that the Company’s disclosure controls and procedures were not effective to
ensure that material information is recorded, processed, summarized and reported
by management of the Company on a timely basis in order to comply with the
Company’s disclosure obligations under the Exchange Act and the rules and
regulations promulgated thereunder.
The Chief
Executive Officer’s and Chief Financial Officer’s conclusion regarding the
Company’s disclosure controls and procedures is based solely on management’s
conclusion that the Company’s internal control over financial reporting as
identified in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009 continues to be ineffective as of June 30, 2010. In connection
with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009,
our management assessed the effectiveness of the Company’s internal control over
financial reporting was not effective based on management’s identification of a
lack of segregation of duties due to the small number of employees dealing with
general administrative and financial matters and general controls over
information security and user access. Also, the Company’s Chief Financial
Officer is the only person with an appropriate level of accounting knowledge,
experience and training in the selection, application and implementation of
generally accepted accounting principles as it relates to complex transactions
and financial reporting requirements.
Changes
in internal control over financial reporting.
No
significant changes were made in our internal control over financial reporting
during the Company’s second quarter of 2010 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
From time
to time, the Company is either a defendant or the plaintiff in various claims
and lawsuits. Although there can be no assurances, management believes that the
disposition of such matters will not have a material adverse impact on the
results or operations or financial position of the Company.
Item 6.
Exhibits
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of
the Securities Exchange Act of 1934
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
the Securities Exchange Act of 1934
32.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of
the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of
the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Conversion
Services International, Inc.
|
|
|
|
Date:
August 10, 2010
|
By:
|
/s/ Lori
Cohen
|
|
|
Lori
Cohen
President
and Chief Executive
Officer
|