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 March 31, 2008
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
o
Accelerated
filer
o
Non-accelerated
filer
o
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
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
May 8, 2008
|
|
|
Common
Stock, $0.001 par value per share
|
|
|
114,857,189
shares
|
|
CONVERSION
SERVICES INTERNATIONAL, INC.
FORM
10-Q
For
the three months ended March 31, 2008
INDEX
|
|
|
|
Page
|
|
Part I.
|
Financial
Information
|
1
|
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
|
|
|
|
|
|
|
|
a) Condensed
Consolidated Balance Sheets as of March 31, 2008 (unaudited) and
December
31, 2007 (unaudited)
|
1
|
|
|
|
|
|
|
|
|
b)
Condensed Consolidated Statements of Operations for the three months
ended
March 31, 2008 (unaudited) and 2007 (unaudited)
|
2
|
|
|
|
|
|
|
|
|
c)
Condensed Consolidated Statements of Cash Flows for the three months
ended
March 31, 2008 (unaudited) and 2007 (unaudited)
|
3
|
|
|
|
|
|
|
|
|
d)
Notes to Condensed Consolidated Financial Statements
(unaudited)
|
5
|
|
|
|
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
10
|
|
|
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
18
|
|
|
|
|
|
|
Part II.
|
Other
Information
|
19
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
19
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
19
|
|
|
Item
5.
|
Other
Information
|
19
|
|
|
Item
6.
|
Exhibits
|
20
|
|
|
|
|
|
|
Signature
|
|
|
21
|
PART
I. FINANCIAL INFORMATION
Item 1.
Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
526,522
|
|
$
|
1,506,866
|
|
|
Accounts
receivable, net
|
|
|
2,413,895
|
|
|
3,077,847
|
|
|
Accounts
receivable from related parties, net
|
|
|
421,377
|
|
|
315,503
|
|
|
Prepaid
expenses
|
|
|
165,382
|
|
|
199,635
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,527,176
|
|
|
5,099,851
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, at cost, net
|
|
|
172,212
|
|
|
182,868
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
6,135,125
|
|
|
6,135,125
|
|
|
Intangible
assets, net
|
|
|
741,219
|
|
|
778,470
|
|
|
Deferred
financing costs, net
|
|
|
20,000
|
|
|
-
|
|
|
Discount
on debt issued, net
|
|
|
368,413
|
|
|
447,361
|
|
|
Equity
investments
|
|
|
90,183
|
|
|
82,253
|
|
|
Other
assets
|
|
|
85,445
|
|
|
85,445
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
11,139,773
|
|
$
|
12,811,373
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
983,596
|
|
$
|
2,056,341
|
|
|
Current
portion of long-term debt
|
|
|
5,667
|
|
|
10,819
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,653,868
|
|
|
1,356,425
|
|
|
Deferred
revenue
|
|
|
173,204
|
|
|
59,350
|
|
|
Related
party note payable
|
|
|
106,352
|
|
|
107,833
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,922,687
|
|
|
3,590,768
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net of current portion
|
|
|
988,751
|
|
|
1,533,126
|
|
|
DEFERRED
TAXES
|
|
|
363,400
|
|
|
363,400
|
|
|
Total
Liabilities
|
|
|
4,274,838
|
|
|
5,487,294
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2008 and December 31, 2007, respectively;
|
|
|
823,332
|
|
|
728,333
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 200,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
115,977,079
and 111,289,844 issued and outstanding at March 31, 2008 and December
31,
2007, respectively
|
|
|
115,977
|
|
|
111,290
|
|
|
Series
B convertible preferred stock, 20,000 shares issued and outstanding
at
March 31, 2008 and December 31, 2007, respectively;
|
|
|
1,352,883
|
|
|
1,352,883
|
|
|
Additional
paid in capital
|
|
|
67,928,491
|
|
|
66,742,898
|
|
|
Treasury
stock, at cost, 1,145,382 shares in treasury as of March 31, 2008
and
December 31, 2007, respectively
|
|
|
(423,869
|
)
|
|
(423,869
|
)
|
|
Accumulated
deficit
|
|
|
(62,931,879
|
)
|
|
(61,187,456
|
)
|
|
Total
Stockholders' Equity
|
|
|
6,041,603
|
|
|
6,595,746
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
11,139,773
|
|
$
|
12,811,373
|
|
See
Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
3,959,588
|
|
$
|
4,823,590
|
|
|
Related
party services
|
|
|
591,869
|
|
|
569,131
|
|
|
Reimbursable
expenses
|
|
|
138,971
|
|
|
253,086
|
|
|
Other
|
|
|
15,033
|
|
|
2,131
|
|
|
|
|
|
4,705,461
|
|
|
5,647,938
|
|
|
COST
OF REVENUE:
|
|
|
|
|
|
|
|
|
Services
|
|
|
2,896,423
|
|
|
3,685,480
|
|
|
Related
party services
|
|
|
555,367
|
|
|
537,698
|
|
|
Consultant
expenses
|
|
|
221,703
|
|
|
250,519
|
|
|
|
|
|
3,673,493
|
|
|
4,473,697
|
|
|
GROSS
PROFIT
|
|
|
1,031,968
|
|
|
1,174,241
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
914,428
|
|
|
860,315
|
|
|
General
and administrative
|
|
|
1,074,749
|
|
|
1,300,703
|
|
|
Lease
impairment
|
|
|
-
|
|
|
210,765
|
|
|
Depreciation
and amortization
|
|
|
91,024
|
|
|
190,750
|
|
|
|
|
|
2,080,201
|
|
|
2,562,533
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,048,233
|
)
|
|
(1,388,292
|
)
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Equity
in earnings (loss) from investments
|
|
|
7,929
|
|
|
(2,513
|
)
|
|
Gain
on financial instruments
|
|
|
-
|
|
|
19,329
|
|
|
Loss
on early extinguishment of debt
|
|
|
(553,846
|
)
|
|
(288,060
|
)
|
|
Interest
income (expense), net
|
|
|
(150,273
|
)
|
|
(990,767
|
)
|
|
|
|
|
(696,190
|
)
|
|
(1,262,011
|
)
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(1,744,423
|
)
|
|
(2,650,303
|
)
|
|
INCOME
TAXES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,744,423
|
)
|
|
(2,650,303
|
)
|
|
Accretion
of issuance costs associated with convertible preferred
stock
|
|
|
(95,000
|
)
|
|
(147,038
|
)
|
|
Dividends
on convertible preferred stock
|
|
|
(59,705
|
)
|
|
(67,846
|
)
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(1,899,128
|
)
|
$
|
(2,865,187
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
Basic
and diluted loss per common share attributable to common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
110,213,822
|
|
|
56,600,982
|
|
See
Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,744,423
|
)
|
$
|
(2,650,303
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment and amortization of leasehold
improvements
|
|
|
28,773
|
|
|
32,376
|
|
|
Amortizaton
of intangible assets
|
|
|
37,251
|
|
|
144,027
|
|
|
Amortization
of debt discounts
|
|
|
78,948
|
|
|
101,873
|
|
|
Amortization
of relative fair value of warrants issued
|
|
|
20,625
|
|
|
662,500
|
|
|
Amortization
of deferred financing costs
|
|
|
-
|
|
|
14,347
|
|
|
Loss
on sale of equity investment
|
|
|
-
|
|
|
25,569
|
|
|
Stock
based compensation
|
|
|
190,185
|
|
|
76,098
|
|
|
Gain
on change in fair value of financial instruments
|
|
|
-
|
|
|
(19,329
|
)
|
|
Loss
on early extinguishment of debt
|
|
|
553,846
|
|
|
288,060
|
|
|
Increase
in allowance for doubtful accounts
|
|
|
21,681
|
|
|
80,633
|
|
|
(Income)
loss from equity investments
|
|
|
(7,929
|
)
|
|
2,513
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
638,733
|
|
|
658,319
|
|
|
Increase
in accounts receivable from related parties
|
|
|
(102,337
|
)
|
|
(28,377
|
)
|
|
Decrease
(Increase) in prepaid expenses
|
|
|
34,254
|
|
|
(32,727
|
)
|
|
Increase
in accounts payable and accrued expenses
|
|
|
275,838
|
|
|
362,091
|
|
|
Increase
in deferred revenue
|
|
|
113,854
|
|
|
280,467
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
139,299
|
|
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(18,117
|
)
|
|
-
|
|
|
Net
cash used in investing activities
|
|
|
(18,117
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
repayments under line of credit
|
|
|
(1,072,745
|
)
|
|
(3,684,701
|
)
|
|
Proceeds
from issuance of short-term note payable
|
|
|
-
|
|
|
4,250,000
|
|
|
Deferred
financing costs
|
|
|
(20,000
|
)
|
|
-
|
|
|
Principal
payments on short-term debt
|
|
|
-
|
|
|
(1,195,455
|
)
|
|
Issuance
of Company common stock and stock options
|
|
|
-
|
|
|
120,758
|
|
|
Principal
payments on capital lease obligations
|
|
|
(5,152
|
)
|
|
(15,578
|
)
|
|
Principal
payments on related party notes
|
|
|
(3,629
|
)
|
|
(32,888
|
)
|
|
Net
cash used in financing activities
|
|
|
(1,101,526
|
)
|
|
(557,864
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(980,344
|
)
|
|
(559,727
|
)
|
|
CASH,
beginning of period
|
|
|
1,506,866
|
|
|
668,006
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
526,522
|
|
$
|
108,279
|
|
See
Notes
to Condensed Consolidated Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
37,286
|
|
$
|
140,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common
stock purchase warrant issued in settlement of Laurus debt
|
|
|
-
|
|
|
500,000
|
|
|
Common
stock issued in conversion of long-term debt to equity
|
|
|
600,000
|
|
|
-
|
|
See
Notes
to Condensed Consolidated Financial Statements.
CONVERSION
SERVICES INTERNATIONAL, INC.
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, on
credit, 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 months
ended March 31, 2008 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 March 31, 2008, 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, 2007 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, DeLeeuw Associates, Inc. and CSI Sub Corp.
(DE). 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
Revenue
from consulting and professional services is recognized at the time the services
are performed on a project by project basis. 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 revenue on the
percentage of completion method of accounting based on the evaluation of actual
costs incurred to date compared to total estimated costs. Revenue recognized
in
excess of billings is recorded as cost in excess of billings. Billings in excess
of revenue recognized are recorded as deferred revenue until revenue recognition
criteria are met. Reimbursements, including those relating to travel and other
out-of-pocket expenses, are included in revenue, and an equivalent amount of
reimbursable expenses are included in cost of services.
Extinguishment
of debt
In
March
2007, the Company restructured its financing with both Laurus and three
affiliates of Laidlaw Ltd. (formerly known as Sands Brothers) (“Sands”). As a
result of these restructurings, the convertible notes which existed under the
prior Sands transaction were extinguished and replaced with a non-convertible
note and the Overadvance Side Letter with Laurus was also extinguished. A loss
of $288,060 on the Sands and Laurus transactions was recorded as an early
extinguishment of debt.
In
March
2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
converted debt due to them under an Unsecured Convertible Line of Credit Note
dated June 7, 2004 into Company Common Stock. A loss of $553,846 on this
transaction was recorded as an early extinguishment of debt.
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 March
31,
2008, receivables related to services performed for Bank of America comprised
approximately 21.6% of the Company’s accounts receivable balance. This is
comprised of receivables directly from Bank of America (3.4%) and receivables
from two vendor management companies that are issued invoices for the Company’s
work at Bank of America, Sapphire Technologies (11.3%) and ZeroChaos (6.9%).
Also, receivables from LEC, a related party, comprised 14.4% of the accounts
receivable balance.
The
Company maintains its cash with a high credit quality financial institution.
Each account is secured by the Federal Deposit Insurance Corporation up to
$100,000.
Income
taxes
The
Company accounts for income taxes, in accordance with SFAS No. 109,
“
Accounting
for Income Taxes
”
(“SFAS
109”) and related interpretations, 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.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the 2008 financial
statement presentation.
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 -
Recently
Issued Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141 (revised 2007),
Business
Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No.
141(R) also establishes disclosure requirements to enable the evaluation of
the
nature and financial effects of the business combination. SFAS No. 141(R)
is effective for fiscal years beginning after December 15,
2008.
In
February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, “
The
Fair Value Option for Financial Assets and Financial Liabilities
— Including an amendment of FASB Statement No. 115
”
(FAS
159).
FAS 159, which becomes effective for the company on January 1, 2008,
permits companies to choose to measure many financial instruments and certain
other items at fair value and report unrealized gains and losses in earnings.
Such accounting is optional and is generally to be applied instrument by
instrument. Election of this fair-value option did not have a material effect
on
its consolidated financial condition, results of operations, cash flows or
disclosures.
In
September 2006, the FASB issued FAS No. 157 (“FAS 157”),
“
Fair
Value Measurements
”,
which
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurements. FAS 157 does not require
any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. FAS 157 is effective for
fiscal years beginning after November 15, 2007. The adoption of this
standard has not had a material affect on the Company’s financial condition,
results of operations, cash flows or disclosures.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51
”
(“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than
the
parent, the amount of consolidated net income attributable to the parent and
to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. We are currently evaluating
the potential impact, if any, of the adoption of SFAS No. 160 on our
consolidated results of operations and financial condition.
Note
3 - Line of credit
The
Company’s line of credit with Laurus Master Fund, Ltd. expired on December 31,
2007 and, in exchange for a $25,000 fee and a reduction of the maximum amount
available under the line of credit to $3,000,000, the maturity date was extended
until March 31, 2008.
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 5.25% as of March 31, 2008) plus 2.75%.
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
is in compliance with this covenant as of March 31, 2008. Additionally, during
the first year of the three year term the Company must maintain an average
minimum monthly borrowing of $2,000,000 which increases the $2,250,000 in the
second year and to $2,500,000 in the third year. 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.
Note
4 - 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. 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 three months ended March 31, 2008 or during the years ended December
31, 2007, 2006 or 2005.
The
following summarizes the stock option transactions under the 2003 Plan during
2008:
|
|
|
Shares
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
5,888,828
|
|
$
|
0.75
|
|
|
Options
granted
|
|
|
-
|
|
|
-
|
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
Options
canceled
|
|
|
(147,998
|
)
|
|
0.75
|
|
|
Options
outstanding at March 31, 2008
|
|
|
5,740,830
|
|
$
|
0.75
|
|
The
following table summarizes information concerning outstanding and exercisable
Company common stock options at March 31, 2008:
|
Range
of exercise prices
|
|
Options
outstanding
|
|
Weighted
average exercise price
|
|
Weighted
average remaining contractual life
|
|
Options
exercisable
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.250
|
|
|
1,976,666
|
|
$
|
0.250
|
|
|
8.5
|
|
|
669,982
|
|
$
|
0.250
|
|
|
$0.30-0.70
|
|
|
1,705,000
|
|
|
0.430
|
|
|
8.2
|
|
|
1,103,333
|
|
|
0.460
|
|
|
$0.825-0.83
|
|
|
1,364,833
|
|
|
0.830
|
|
|
6.7
|
|
|
997,651
|
|
|
0.830
|
|
|
$2.475-3.45
|
|
|
694,331
|
|
|
2.780
|
|
|
6.1
|
|
|
694,331
|
|
|
2.780
|
|
|
|
|
|
5,740,830
|
|
|
|
|
|
|
|
|
3,465,297
|
|
|
|
|
In
accordance with SFAS 123(R), the Company recorded approximately $190,200 and
$76,000 of expense related to stock options which vested during the three months
ended March 31, 2008 and 2007, respectively.
Note
5 - 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 March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes (A)
|
|
$
|
(1,744,423
|
)
|
$
|
(2,650,303
|
)
|
|
Net
loss (B)
|
|
$
|
(1,744,423
|
)
|
$
|
(2,650,303
|
)
|
|
Net
loss attributable to common stockholders (C)
|
|
$
|
(1,899,128
|
)
|
$
|
(2,865,187
|
)
|
|
Weighted
average outstanding shares of common stock (D)
|
|
|
110,213,822
|
|
|
56,600,982
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
Before
income taxes (A/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
Net
loss per common share (B/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
Net
loss per common share attributable to common stockholders
(C/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
For
the
three months ended March 31, 2008 and 2007, 5,740,830 and 6,543,447 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 19,584,922 shares of common
stock which were issued between June 7, 2004 and March 31, 2007, and outstanding
as of March 31, 2008, were excluded from the calculation of diluted loss per
share for the three months ended March 31, 2007, and the effect of 62,042,241
warrants which were issued between June 7, 2004 and March 31, 2008, and were
outstanding as of March 31, 2008, were excluded from the calculation of diluted
loss per share for the three months ended March 31, 2008 because the effect
was
antidilutive. Also excluded from the calculation of loss per share because
their
effect was antidilutive were 1,269,841 shares of common stock underlying the
$2,000,000 convertible line of credit note to Taurus as of March 31, 2007 and
666,667 shares of common stock underlying the same note whose outstanding
balance had been reduced to $1,050,000 as of March 31, 2008, 7,800,000 shares
underlying the Series A and Series B convertible preferred stock, and options
to
purchase 1,500,000 and 36,596 shares of common stock outstanding to Laurus
as of
March 31, 2007 and 2008, respectively.
Note
6 – Common Stock and Warrants
In
March
2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
converted $600,000 of debt due to them under an Unsecured Convertible Line
of
Credit Note dated June 7, 2004 into Company common stock. The Company issued
4,615,385 shares of common stock to the investors. The number of shares acquired
was based on the $0.13 per share closing price of the Company’s common stock on
the American Stock Exchange on the date of conversion. Warrants to purchase
4,615,385 shares of Company common stock were provided to the investors as
an
inducement to convert. The warrants are exercisable at a price of $0.143 per
share, and are exercisable for five years.
Using
the
Black-Scholes option pricing model, the Company calculated the relative fair
value of the warrants to purchase 4,615,385 shares of Company common stock
to be
approximately $553,846. This relative fair value was recorded as a charge to
the
loss on extinguishment of debt and an addition to additional paid-in capital.
The assumptions used in the relative fair value calculation are as follows:
Company closing stock price on March 26, 2008 of $0.13 per share; exercise
price
of the warrants of $0.143 per share; five year term; volatility of 158.6%;
annual rate of dividends of 0%; and a risk free interest rate of 1.35%.
Note
7 - Major Customers
During
the three months ended March 31, 2008, the Company had sales relating to two
major customers, Bank of America and LEC, a related party, comprising 18.3%
and
12.6% of revenues, and totaling approximately $862,219 and $591,869,
respectively. Amounts due from services provided to these customers included
in
accounts receivable was approximately $1,019,888 at March 31, 2008. As of March
31, 2008, receivables related to services performed for Bank of America and
LEC
accounted for approximately 21.6% and 14.4% of the Company’s accounts receivable
balance, respectively.
During
the three months ended March 31, 2007, the Company had sales relating to two
major customers, Bank of America and LEC, a related party, comprising 18.4%
and
10.1% of revenues, and totaling approximately $1,041,600 and $569,131,
respectively. Amounts due from services provided to these customers included
in
accounts receivable was approximately $1,081,828 at March 31, 2007. As of March
31, 2007, receivables related to services provided to Bank of America and LEC
accounted for approximately 20.4% and 10.2% of the Company’s accounts receivable
balance, respectively.
Note
8 - Commitments and Contingencies
Legal
Proceedings
In
March
2007, CSI commenced an action in the Superior Court of New Jersey, Morris County
Chancery Division, for breach of contract, unfair competition, misappropriation
of trade secrets and related claims against two former CSI employees and their
start-up business. In the spring of 2007, the court granted CSI’s request
for a temporary restraining order based upon violation of a restrictive
covenant. The lawsuit is presently in the discovery phase, and CSI intends
to litigate its claims aggressively in order to preserve its business from
unfair competition and its confidential information from misappropriation.
The
defendants to the lawsuit have filed in response a counterclaim against CSI
alleging tortious interference with economic advantage, abuse of process and
breach of contract. Although CSI is unable to predict the outcome of this
litigation matter, management has been advised that based upon the discovery
exchanged to date, the likelihood of a materially adverse outcome on the
counterclaim against the Company is remote.
Lease
Commitments
|
Years
Ending March 31
|
|
Office
|
|
Sublease
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
362,404
|
|
$
|
107,310
|
|
$
|
255,094
|
|
|
2010
|
|
|
360,404
|
|
|
116,252
|
|
|
244,152
|
|
|
2011
|
|
|
280,366
|
|
|
107,310
|
|
|
173,056
|
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
1,003,174
|
|
$
|
330,872
|
|
$
|
672,302
|
|
Effective
February 2007, the Company subleased a portion of its East Hanover, New Jersey
corporate office space for the remainder of the lease term. 7,154 square feet
of
the Company’s 16,604 square feet of rented office space were subleased from
February 15, 2007 to December 31, 2010. The sublease provides for three months
of free rent to the sublessee, monthly rent equal to $5,962 per month from
May
15, 2007 to December 31, 2007, $8,942 per month from January 1, 2008 to December
31, 2009, and $11,923 per month from January 1, 2010 to December 31, 2010.
Additionally, the Company will receive a fixed rental for electric of $10,731
per annum payable in equal monthly installments throughout the term of the
lease.
The
Company has recorded a lease impairment resulting from this sublease in the
amount of $210,765 during the three months ended March 31, 2007. This impairment
charge reflects the unreimbursed costs relating to the subleased space which
will be incurred by the Company during the remaining term of the lease. These
costs include the differential between the Company’s rental rate for the
subleased space and the amount being paid by the sublessee, and unreimbursed
common area fees and real estate taxes.
Note
9 - Related Party Transactions
Refer
to
footnote 7 of the Notes to Condensed Consolidated Financial Statements for
the
related party transaction disclosure as a major customer.
As
of
March 31, 2008, Scott Newman, our President and Chief Executive Officer, had
no
outstanding loan balance to the Company. The balance outstanding with respect
to
the loan from Glenn Peipert, our Executive Vice President and Chief Operating
Officer, to the Company was approximately $0.1 million, which accrues interest
at a simple rate of 8% per annum.
Note
10 - Subsequent Events
On
April
28, 2008, Milbank Roy & Co., LLC (“Milbank”) submitted a Demand for
Arbitration and Statement of Claim with the American Arbitration Association.
Through an agreement with Milbank, Milbank had a limited exclusive right to
obtain certain bridge financing and equity financing on behalf of the Company
during 2007 from certain potential investors that were identified on certain
schedules. Milbank alleges that it is owed a fee of $105,000 relating to the
Company’s completion of a revolving line of credit transaction with Access
Capital, Inc. in March 2008. Management believes that this revolving line of
credit transaction is not included in the scope of the engagement for which
Milbank was hired and it intends to vigorously defend this claim. As of the
date
of this filing, there have been no developments with respect to this
claim.
On
May 5,
2008, we received a letter from the American Stock Exchange (“AMEX”) stating
that the Company has resolved the continued listing deficiencies referenced
in
the AMEX letter dated June 29, 2006. As is the case with all listed issuers,
the
Company’s continued listing eligibility will continue to be assessed on an
ongoing basis. Additionally, the AMEX has notified the Company that it has
become subject to the provisions of Section 1009(h) of the AMEX Company Guide.
Under Section 1009(h) of the AMEX Company Guide, if within 12 months, AMEX
again
determines that the Company is below continued listing standards, the AMEX
staff
will examine the relationship between the two incidents of falling below
continued listing standards and re-evaluate the Company's method of financial
recovery from the first incident before taking appropriate action.
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. In addition, this foundation
will
be leveraged as the Company pursues targeted strategic
acquisitions.
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.
In
addition to the conditions described above for growing the Company’s current
business, the Company expects to continue to grow through acquisitions.
One of the Company’s objectives is to make acquisitions of companies offering
services complementary to the Company’s lines of business. This is expected to
accelerate the Company’s business plan at lower costs than it would generate
internally and also improve its competitive positioning and expand the Company’s
offerings in a larger geographic area. The service industry is very fragmented,
with a handful of large international firms having data warehousing and/or
business intelligence divisions, and hundreds of regional boutiques throughout
the United States. These smaller firms do not have the financial
wherewithal to scale their businesses or compete with the larger players.
The Company has completed acquisitions of the following companies since
2004:
·
In March 2004, the Company acquired DeLeeuw Associates, a management consulting
firm in the information technology sector with core competency in delivering
Change Management Consulting, including both Six Sigma and Lean domain expertise
to enhance service delivery, with proven process methodologies resulting in
time
to market improvements within the financial services and banking industries.
Historically, the DeLeeuw Associates business was involved in the operational
integration of mergers and acquisitions, and would prescribe the systems
integration work necessary. DeLeeuw Associates has now begun to sell the
expanded suite of services offered by the Company, from operational integration
to systems integration.
·
In May 2004, the Company acquired 49% of all issued and outstanding shares
of
common stock of Leading Edge Communications Corporation (“LEC”). LEC provides
enterprise software and services solutions for technology infrastructure
management.
·
In June 2004, the Company acquired substantially all of the assets and assumed
substantially all of the liabilities of Evoke Software Corporation, which
designed, developed, marketed and supported software programs for data analysis,
data profiling and database migration applications and provides related support
and consulting services. In July 2005, the Company divested substantially all
of
the assets of Evoke Software Corporation. The market for software has changed,
and the Company determined that data profiling should no longer be a standalone
product and needed to be part of a suite of tools. This is evidenced by the
subsequent acquisition of the Evoke software product by Similarity Systems
in
July 2005 and then Informatica in January 2006.
·
In July 2005, the Company acquired McKnight Associates, Inc. Since inception,
McKnight Associates has focused on successfully designing, developing and
implementing data warehousing and business intelligence solutions for its
clients in numerous industries. Mr. William McKnight, the founder of McKnight
Associates who joined the Company as Senior Vice President - Data Warehousing,
is a well-known industry leader, frequently speaks at national trade shows
and
contributes to major data management trade publications.
·
In July 2005, the Company acquired Integrated Strategies, Inc. (“ISI”). ISI is a
professional services firm with a solutions-oriented approach to complex
business and technical challenges. Similar to our wholly owned subsidiary,
DeLeeuw Associates, which is best known for its large-scale merger integration
management and business process change programs for the financial services
markets, ISI also counts industry leaders in this sector among its customers.
Because of this shared focus, the operations of ISI were merged into DeLeeuw
Associates.
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
|
|
|
|
|
months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
4,705,461
|
|
$
|
5,647,938
|
|
|
Gross
profit
|
|
|
1,031,968
|
|
|
1,174,241
|
|
|
Net
loss
|
|
|
(1,744,423
|
)
|
|
(2,650,303
|
)
|
|
Net
loss attributable to common stockholders
|
|
|
(1,899,128
|
)
|
|
(2,865,187
|
)
|
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
Net
loss per common share attributable to common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
|
|
|
Selected Statement of Financial Position Data as of
|
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
604,489
|
|
$
|
1,509,083
|
|
|
Total
assets
|
|
|
11,139,773
|
|
|
12,811,373
|
|
|
Long-term
debt
|
|
|
988,751
|
|
|
1,533,126
|
|
|
Total
stockholders' equity
|
|
|
6,041,603
|
|
|
6,595,746
|
|
Three
Months Ended March 31, 2008 and 2007
Revenue
The
Company’s revenue are primarily comprised of billings to clients for consulting
hours worked on client projects. Revenue of $4.7 million for the three months
ended March 31, 2008 decreased by $0.9 million, or 16.7%, as compared to revenue
of $5.6 million for the three months ended March 31, 2007.
Revenue
for the Company are categorized by strategic consulting, business intelligence,
data warehousing and data management. The chart below reflects revenue by line
of business for the three months ended March 31, 2008 and 2007:
|
|
|
For
the three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
%
of total revenues
|
|
$
|
|
%
of total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Consulting
|
|
$
|
1,129,715
|
|
|
24.0
|
%
|
$
|
2,356,852
|
|
|
41.7
|
%
|
|
Business
Intelligence / Data Warehousing
|
|
|
2,829,873
|
|
|
60.1
|
%
|
|
2,466,738
|
|
|
43.7
|
%
|
|
Data
Management
|
|
|
591,869
|
|
|
12.6
|
%
|
|
569,131
|
|
|
10.1
|
%
|
|
Reimbursable
expenses
|
|
|
138,971
|
|
|
3.0
|
%
|
|
253,086
|
|
|
4.5
|
%
|
|
Other
|
|
|
15,033
|
|
|
0.3
|
%
|
|
2,131
|
|
|
0.0
|
%
|
|
|
|
$
|
4,705,461
|
|
|
100.0
|
%
|
$
|
5,647,938
|
|
|
100.0
|
%
|
Strategic
consulting
The
strategic consulting line of business includes work related to planning and
assessing both 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 DeLeeuw Associates subsidiary (which includes the Integrated
Strategies division).
Strategic
consulting revenue of $1.1 million, or 24.0% of total revenue, for the three
months ended March 31, 2008 decreased by $1.3 million, or 52.1%, as compared
to
revenue of $2.4 million, or 41.7% of total revenue, for the three months ended
March 31, 2007. This decrease is primarily due to a $0.7 million reduction
in
revenue due to the completion of the ING project during 2007, a continued
decline in the Integrated Strategies revenue of $0.3 million as compared to
the
prior year, and a $0.2 million decline in revenue from Bank of America due
to a
reduction in consultant headcount at this client during the first quarter of
2007. While this client has been rehiring our consultants, revenue has not
yet
returned to prior year levels. In the strategic consulting line of business,
there was a 25% decline in consultant headcount, resulting in a 48.9% reduction
in billable hours 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 $2.8 million, or 60.1% of
total revenue, for the three months ended March 31, 2008 increased by $0.3
million, or 14.7%, as compared to revenue of $2.5 million, or 43.7% of total
revenue, for the three months ended March 31, 2007. The increase in BI/DW
revenue for the three months ended March 31, 2008 is primarily due to $1.6
million of current quarter revenue relating to new projects, partially offset
by
$1.3 million of prior period revenue relating to projects that were completed
in
the prior year. Overall, the BI/DW line of business had an 11.2% increase in
consultant headcount, resulting in a 12.9% increase in billable hours as
compared to the prior year period.
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 revenues were $0.6 million for both the three months ended March
31,
2008 and 2007.
Cost
of revenue
Cost
of
revenue includes payroll and benefit and other direct costs for the Company’s
consultants. Cost of revenue was $3.7 million, or 78.1% of revenue, for the
three months ended March 31, 2008, representing a decrease of $0.8 million,
or
17.9%, as compared to $4.5 million, or 79.2% of revenue for the three months
ended March 31, 2007.
Cost
of
services was $2.9 million, or 73.1% of services revenue for the three months
ended March 31, 2008, representing a decrease of $0.8 million, or 21.4%, as
compared to $3.7 million, or 76.4% of services revenue for the three months
ended March 31, 2007.
Cost
of
services
declined
during the three months ended March 31, 2008 as compared to the prior year
due
to an overall 8.0% decline in the number of consultants on billing. The Company
had an average of 103 consultants in the current period and 112 in the prior
year period. This decline in headcount is consistent with the decrease in
services revenue during the current period as compared to the prior year period.
The 3.3% decline in cost of services as a percentage of services revenue is
primarily due to a $0.1 million decrease in stock compensation and health
insurance expense.
Cost
of
related party services was $0.6 million, or 93.8% of related party services
revenue, for the three months ended March 31, 2008, representing an increase
of
$18,000, or 3.3%, as compared to $0.5 million, or 94.5% of related party
services revenue, for the three months ended March 31, 2007. Cost of related
party services increased for the three month period due to an increase in
related party consulting revenue during the three months ended March 31, 2008
as
compared to the prior year.
Gross
profit
Gross
profit was $1.0 million, or 21.9% of revenue for the three months ended March
31, 2008, representing a decrease of $0.2 million, or 12.1%, as compared to
$1.2
million, or 20.8% of revenue for the three months ended March 31,
2007.
Gross
profit from services was $1.1 million, or 26.9% of services revenue for the
three months ended March 31, 2008, which is unchanged from the prior years
gross
profit from services of $1.1 million, or 23.6% 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 related party services was $37,000, or 6.2% of related party
services revenue for the three months ended March 31, 2008, remaining consistent
with the prior year’s gross profit of $31,000, or 5.5% of related party services
revenue for the three months ended March 31, 2007.
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 $0.9 million, or 19.4% of revenue for the three months
ended March 31, 2008, compared to $0.9 million, or 15.2% of revenue for the
three months ended March 31, 2007.
Selling
and marketing expense for the three months ended March 31, 2008 increased by
$54,000 as compared to the prior year, and increased as a percentage of total
revenue by 4.2% points. The increase in expense is primarily due to a $0.1
million increase in stock option expense in the current period as compared
to
the prior year. The increase in the current year as a percentage of total
revenue is primarily due to the reduction in revenue in the current period
while
the sales and marketing expense remained constant.
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
$1.1
million, or 22.8% of revenue for the three months ended March 31, 2008, compared
to $1.3 million, or 23.0% of revenue for the three months ended March 31,
2007.
The
$0.2
million decrease in general and administrative expense for the three months
ended March 31, 2008 as compared to the prior year is primarily due to a $0.1
million reduction in payroll expense due to a reduction in headcount and
reductions in the salaries of several executives during the third quarter of
2007 and a reduction of $0.2 million related to various expenses including
rent,
bad debt expense, accounting and legal fees, stock exchange listing fees, and
business taxes. These expense reductions were partially offset by a $0.1 million
increase in stock option expense in the current period as compared to the prior
year.
Lease
impairment
Effective
February 2007, the Company subleased a portion of its East Hanover, New Jersey
corporate office space for the remainder of the lease term. 7,154 square feet
of
the Company’s 16,604 square feet of rented office space were subleased from
February 15, 2007 to December 31, 2010. The sublease provides for three months
of free rent to the sublessee, monthly rent equal to $5,962 per month from
May
15, 2007 to December 31, 2007, $8,942 per month from January 1, 2008 to December
31, 2009, and $11,923 per month from January 1, 2010 to December 31, 2010.
Additionally, the Company will receive a fixed rental for electric of $10,731
per annum payable in equal monthly installments throughout the term of the
lease.
During
the three months ended March 31, 2007, the Company recorded a lease impairment
resulting from this sublease in the amount of $210,765. This impairment charge
reflects the unreimbursed costs relating to the subleased space which will
be
incurred by the Company during the remaining term of the lease. These costs
include the differential between the Company’s rental rate for the subleased
space and the amount being paid by the sublessee, and unreimbursed common area
fees and real estate taxes.
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. Acquired software is amortized on a straight-line
basis
over an estimated useful life of three years. Acquired contracts are amortized
over a period of time that approximates the estimated life of the contracts,
based upon the estimated annual cash flows obtained from those contracts,
generally five to six years. Depreciation and amortization expenses were $0.1
million for the three months ended March 31, 2008 representing a $0.1 million
decline from $0.2 million for the three months ended March 31,
2007.
Other
income (expense)
In
March
2007, the Company restructured its debt with Laurus and Sands. Gains or losses
on these extinguishments were recorded as a gain (loss) on early extinguishment
of debt. As a result, a $0.3 million combined loss was recorded on the
extinguishment of the Laurus overadvance and the Sands settlement. In March
2008, the Company restructured its debt with TAG Virgin Islands, Inc. and issued
Company common stock in repayment of $0.6 million of the Unsecured Convertible
Note dated June 7, 2004. A $0.6 million loss on the extinguishment of this
debt
was recorded in March 2008.
During
the three months ended March 31, 2007, the Company recognized a gain on the
revaluation of its freestanding derivative financial instruments relating to
its
warrants of approximately $19,000. There was no gain or loss recorded in 2008
with respect to financial instruments.
Interest
expense, which includes amortization of the discount on debt of $0.1 million
and
$0.1 million during the three months ended March 31, 2008 and 2007,
respectively, was $0.2 million and $1.0 million for the three months ended
March
31, 2008 and 2007, respectively. The decrease in interest expense in the current
period, as compared to the prior year, was primarily due to a $0.7 million
reduction in interest expense on short and long-term notes due to TAG Virgin
Islands, Inc. that were converted to equity and a $0.1 million reduction in
interest expense related to the Company’s line of credit due to reduced balances
outstanding under the line in the current period.
Liquidity
and Capital Resources
As
of
March 31, 2008, the Company had a cash balance of approximately $0.5 million
and
working capital of $0.6 million.
The
Company has experienced continued losses from 2004 through March 31, 2008.
The
Company has addressed the resulting liquidity issue by entering into various
debt and equity instruments between August 2004 and March 2008 and, as of March
31, 2008 had approximately $4.3 million of liabilities and debt outstanding
in
addition to an aggregate of $3.9 million of Series A and Series B Convertible
Preferred Stock which was issued in 2006.
The
Company’s working capital is $0.6 million as of March 31, 2008 compared to $1.5
million as of December 31, 2007, representing a $0.9 million decrease. The
primary reason for the decrease in working capital is a $0.6 million reduction
in accounts receivable due to a decline in revenues, a $0.3 million increase
in
accounts payable and accrued expenses primarily due to the timing of payments
and a $0.1 million increase in deferred revenue partially offset by $0.1 million
of various smaller increases in working capital.
Cash
provided by (used in) operating activities during the three months ended March
31, 2008 was approximately $0.1 million compared to ($1,863) for the three
months ended March 31, 2007. The improvement in cash provided by (used in)
operations was primarily the result of the Company’s effort to reduce operating
and interest expense. The Company recorded a $1.7 million loss for the three
months ended March 31, 2008, however, this loss included $0.9 million of
non-cash charges for items including depreciation, amortization, stock based
compensation and early extinguishment of debt. Additionally, changes in
operating assets and liabilities reflect $0.9 million of cash provided by
operations primarily due to the following; accounts receivable declined by
$0.5
million, accounts payable and accrued expenses increased by $0.3 million, and
deferred revenue increased by $0.1 million due to a prepayment received for
a
project being performed by the Company.
Cash
used
in investing activities was $18,000 in the current period compared to zero
during the three months ended March 31, 2007. The Company purchased computer
equipment during the current period, but had no investing expenditures during
the comparable prior year period.
Cash
used
in financing activities was $1.1 million during the three months ended March
31,
2008 and $0.6 million during the three months ended March 31, 2007. The cash
used in financing activities during the current period was primarily the result
of the Company’s effort to reduce the balance outstanding under its line of
credit arrangement. The cash used in financing activities during the prior
period was the result of the settlement of $4.9 million of debt, partially
offset by $4.25 million of financing received during that quarter.
The
Company’s line of credit with Laurus Master Fund, Ltd. expired on December 31,
2007 and, in exchange for a $25,000 fee and a reduction of the maximum amount
available under the line of credit to $3,000,000, the maturity date was extended
until March 31, 2008.
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 5.25% as of March 31, 2008) plus 2.75%.
The Company must comply with a minimum working capital covenant which requires
the Company to maintain minimum monthly working capital of $400,000.
Additionally, during the first year of the three year term the Company must
maintain an average minimum monthly borrowing of $2,000,000 which increases
the
$2,250,000 in the second year and to $2,500,000 in the third year. 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.
On
June
29, 2006, we received a letter from the American Stock Exchange (the “AMEX”)
indicating that we are below certain of the AMEX’s continued listing standards
as set forth in Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX
Company Guide. We were afforded the opportunity to submit a plan of compliance
to the AMEX by July 31, 2006 that demonstrates our ability to regain compliance
with Section 1003 of the AMEX Company Guide within 18 months. We submitted
our
plan to the AMEX on July 31, 2006, and the AMEX accepted our plan on September
26, 2006. We were granted an extension until December 28, 2007 to regain
compliance with the continued listing standards. We are subject to periodic
review by the AMEX Staff during the extension period. Failure to make progress
consistent with the plan or to regain compliance with the continued listing
standards by the end of the extension period could result in the Company being
delisted from the AMEX.
On
January 29, 2007, the Company announced that it received notice from the Staff
of the AMEX indicating that the Company no longer complied with the Exchange's
continued listing standards due to the Company's inability to maintain
compliance with certain AMEX continued listing requirements, as set forth in
Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX Company Guide
and
its plan of compliance submitted in July 2006, and that its securities are
subject to be delisted from the Exchange.
In
April
2007, the Company announced that it had been notified by the Hearings Department
of the AMEX that the Company’s hearing had been cancelled. The Hearings
Department indicated that the AMEX Listing Qualifications Staff recommended
cancellation of the Company’s hearing after a review of the Company’s submission
dated April 11, 2007, and other publicly available information.
On
May 5,
2008, we received a letter from the American Stock Exchange (“AMEX”) stating
that the Company has resolved the continued listing deficiencies referenced
in
the AMEX letter dated June 29, 2006. As is the case with all listed issuers,
the
Company’s continued listing eligibility will continue to be assessed on an
ongoing basis. Additionally, the AMEX has notified the Company that it has
become subject to the provisions of Section 1009(h) of the AMEX Company Guide.
Under Section 1009(h) of the AMEX Company Guide, if within 12 months, AMEX
again
determines that the Company is below continued listing standards, the AMEX
staff
will examine the relationship between the two incidents of falling below
continued listing standards and re-evaluate the Company's method of financial
recovery from the first incident before taking appropriate action.
There
are
currently no material commitments for capital expenditures.
As
of
March 31, 2008 and December 31, 2007, the Company had accounts receivable due
from LEC of approximately $0.4 million and $0.3 million, respectively. There
are
no known collection problems with respect to LEC.
For
the
three months ended March 31, 2008 and 2007, we invoiced LEC $0.6 million and
$0.6 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 March 31,
2008:
|
Lender
|
|
Type of facility
|
|
Outstanding as of March
31, 2008 (not including
interest) (all numbers
approximate)
|
|
Remaining
Availability (if
applicable)
|
|
|
Access
Capital, Inc.
|
|
|
Line
of Credit
|
|
$
|
983,596
|
|
$
|
743,000
|
|
|
Taurus
Advisory Group, LLC / TAG Virgin Islands, Inc. Investors
|
|
|
Convertible
Promissory Note
|
|
$
|
1,050,000
|
|
$
|
-
|
|
|
Glenn
Peipert
|
|
|
Promissory
Note
|
|
$
|
106,000
|
|
$
|
-
|
|
|
Larry
and Adam Hock
|
|
|
Settlement
agreement
|
|
$
|
67,000
|
|
$
|
-
|
|
|
TOTAL
|
|
|
|
|
$
|
2,206,596
|
|
$
|
743,000
|
|
Additionally,
the Company has two series of preferred stock outstanding as follows:
|
Holder
|
|
Type of Instrument
|
|
Principal amount
outstanding as of
March 31, 2007
|
|
|
|
|
|
|
|
|
|
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
|
|
The
Company believes existing cash plus funds provided by operations and borrowing
capacity under the line of credit should be sufficient to fund operations
through March 31, 2009. Additional financing may be required to fund targeted
acquisition candidates. 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 continue to execute on our expense reduction program which began in 2006
in
order to reduce, or eliminate, the operating losses. Additionally, we will
continue to seek equity financing in order to enable us to continue to meet
our
financial obligations until we achieve profitability. Any decision or ability
to
obtain financing through debt or equity investment will depend on various
factors, including, among others, financial and market conditions, strategic
acquisition and investment opportunities, and developments in the Company’s
markets. The sale of additional equity securities or future conversion of any
convertible debt would result in additional dilution to the Company’s
stockholders. There can be no assurance that any such funding will be available
to us on favorable terms, or at all. Failure to obtain sufficient equity
financing would have substantial negative ramifications to the
Company.
Recently
Issued Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141 (revised 2007), “
Business
Combinations
”
(“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No.
141(R) also establishes disclosure requirements to enable the evaluation of
the
nature and financial effects of the business combination. SFAS No. 141(R)
is effective for fiscal years beginning after December 15,
2008.
In
February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, “
The
Fair Value Option for Financial Assets and Financial Liabilities
— Including an amendment of FASB Statement No. 115
”
(FAS
159).
FAS 159, which becomes effective for the company on January 1, 2008,
permits companies to choose to measure many financial instruments and certain
other items at fair value and report unrealized gains and losses in earnings.
Such accounting is optional and is generally to be applied instrument by
instrument. Election of this fair-value option did not have a material effect
on
its consolidated financial condition, results of operations, cash flows or
disclosures.
In
September 2006, the FASB issued FAS No. 157 (“FAS 157”),
“
Fair
Value Measurements
”,
which
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurements. FAS 157 does not require
any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. FAS 157 is effective for
fiscal years beginning after November 15, 2007. The adoption of this
standard has not had a material affect on the Company’s financial condition,
results of operations, cash flows or disclosures.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51
”
(“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than
the
parent, the amount of consolidated net income attributable to the parent and
to
the noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. We are currently evaluating
the potential impact, if any, of the adoption of SFAS No. 160 on our
consolidated results of operations and financial condition.
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.
Revenue
from consulting and professional services is recognized at the time the services
are performed on a project by project basis. 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 revenue on the
percentage of completion method of accounting based on the evaluation of actual
costs incurred to date compared to total estimated costs. Revenue recognized
in
excess of billings is recorded as cost in excess of billings. Billings in excess
of revenue recognized are recorded as deferred revenue until revenue recognition
criteria are met. Reimbursements, including those relating to travel and other
out-of-pocket expenses, are included in revenue, and an equivalent amount of
reimbursable expenses are included in cost of services.
Impairment
of Goodwill, Intangible Assets and Other Long-Lived
Assets
We
evaluate our identifiable goodwill, intangible assets, and other long-lived
assets for impairment on an annual basis and whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. Future impairment evaluations could result in impairment charges, which
would result in an expense in the period of impairment and a reduction in the
carrying value of these assets. The Company performed its annual impairment
analysis as of December 31, 2007.
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.
Our
Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)
Internal
control over financial reporting is promulgated under the Exchange Act as a
process designed by, or under the supervision of, our CEO and CFO and effected
by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:
•
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
•
Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and directors;
and
•
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or disposition of our assets that could have a material
effect on the financial statements.
Readers
are cautioned that internal control over financial reporting, no matter how
well
designed, has inherent limitations and may not prevent or detect misstatements.
Therefore, even effective internal control over financial reporting can only
provide reasonable assurance with respect to the financial statement preparation
and presentation.
Our
management, under the supervision and with the participation of our CEO and
CFO,
has evaluated the effectiveness of our disclosure controls and procedures as
defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period
covered by this Report based upon the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on such evaluation, our management has made an
assessment that our internal control over financial reporting is not effective
as of March 31, 2008.
We
did
not maintain effective financial reporting processes due to lack of
documentation of certain review and approval functions. We have implemented
policies and procedures whereby all review and approval functions are to be
appropriately documented.
There
is
a lack of segregation of duties at the Company due to the small number of
employees dealing with general administrative and financial matters and general
controls over information technology security and user access. This constitutes
a weakness in financial reporting. Furthermore, 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. Management will continue to evaluate
the
segregation of duties issues considering the cost involved to remediate
them.
Changes
in internal control over financial reporting.
No
significant changes were made in our internal control over financial reporting
during the Company’s first quarter of 2008 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
In
March
2007, CSI commenced an action in the Superior Court of New Jersey, Morris County
Chancery Division, for breach of contract, unfair competition, misappropriation
of trade secrets and related claims against two former CSI employees and their
start-up business. In the spring of 2007, the court granted CSI’s request
for a temporary restraining order based upon violation of a restrictive
covenant. The lawsuit is presently in the discovery phase, and CSI intends
to litigate its claims aggressively in order to preserve its business from
unfair competition and its confidential information from misappropriation.
The
defendants to the lawsuit have filed in response a counterclaim against CSI
alleging tortious interference with economic advantage, abuse of process and
breach of contract. Although CSI is unable to predict the outcome of this
litigation matter, management has been advised that based upon the discovery
exchanged to date, the likelihood of a materially adverse outcome on the
counterclaim against the Company is remote.
On
April
28, 2008, Milbank Roy & Co., LLC (“Milbank”) submitted a Demand for
Arbitration and Statement of Claim with the American Arbitration Association.
Through an agreement with Milbank, Milbank had a limited exclusive right to
obtain certain bridge financing and equity financing on behalf of the Company
during 2007 from certain potential investors that were identified on certain
schedules. Milbank alleges that it is owed a fee of $105,000 relating to the
Company’s completion of a revolving line of credit transaction with Access
Capital, Inc. in March 2008. Management believes that this revolving line of
credit transaction is not included in the scope of the engagement for which
Milbank was hired and it intends to vigorously defend the Company. As of the
date of this filing, there have been no developments with respect to this
claim.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
In
March
2008, the Company and TAG Virgin Islands, Inc. executed a Note Conversion
Agreement whereby certain investors represented by TAG Virgin Islands, Inc.
converted $600,000 of debt due to them under an Unsecured Convertible Line
of
Credit Note dated June 7, 2004 into Company common stock. The Company issued
4,615,385 shares of common stock to the investors. The number of shares acquired
was based on the $0.13 per share closing price of the Company’s common stock on
the American Stock Exchange on the date of conversion. Warrants to purchase
4,615,385 shares of Company common stock were provided to the investors as
an
inducement to convert. The warrants are exercisable at a price of $0.143 per
share, and are exercisable for five years.
Item
5. Other Information.
On
May 5,
2008, we received a letter from the American Stock Exchange (“AMEX”) stating
that the Company has resolved the continued listing deficiencies referenced
in
the AMEX letter dated June 29, 2006. As is the case with all listed issuers,
the
Company’s continued listing eligibility will continue to be assessed on an
ongoing basis. Additionally, the AMEX has notified the Company that it has
become subject to the provisions of Section 1009(h) of the AMEX Company Guide.
Under Section 1009(h) of the AMEX Company Guide, if within 12 months, AMEX
again
determines that the Company is below continued listing standards, the AMEX
staff
will examine the relationship between the two incidents of falling below
continued listing standards and re-evaluate the Company's method of financial
recovery from the first incident before taking appropriate
action.
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:
May 9, 2008
|
By:
|
/s/ Scott
Newman
|
|
|
|
Scott
Newman
President,
Chief Executive Officer and
Chairman
|
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