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, 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
August
12, 2008
|
Common
Stock, $0.001 par value per share
|
|
117,945,295 shares
|
CONVERSION
SERVICES INTERNATIONAL, INC.
FORM
10-Q
For
the three and six months ended June 30, 2008
INDEX
|
|
|
|
Page
|
Part I.
|
Financial
Information
|
1
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
|
|
|
|
|
|
|
a)
|
Condensed
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December
31, 2007 (unaudited)
|
1
|
|
|
|
|
|
|
|
b)
|
Condensed
Consolidated Statements of Operations for the three and six months
ended
June 30, 2008 (unaudited) and 2007 (unaudited)
|
2
|
|
|
|
|
|
|
|
c)
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June
30,
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
|
12
|
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
22
|
|
|
|
|
|
Part II.
|
Other
Information
|
23
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
23
|
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
Item
5.
|
|
Other
Information
|
24
|
|
Item
6.
|
|
Exhibits
|
24
|
|
|
|
|
|
Signature
|
|
|
|
25
|
PART
I. FINANCIAL INFORMATION
Item 1.
Financial Statements
CONVERSION
SERVICES INTERNATIONAL, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
364,258
|
|
$
|
1,506,866
|
|
Accounts
receivable, net
|
|
|
2,601,408
|
|
|
3,077,847
|
|
Accounts
receivable from related parties, net
|
|
|
339,309
|
|
|
315,503
|
|
Prepaid
expenses
|
|
|
173,384
|
|
|
199,635
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,478,359
|
|
|
5,099,851
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, at cost, net
|
|
|
126,402
|
|
|
182,868
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,754,738
|
|
|
6,135,125
|
|
Intangible
assets, net
|
|
|
726,801
|
|
|
778,470
|
|
Deferred
financing costs, net
|
|
|
18,333
|
|
|
-
|
|
Discount
on debt issued, net
|
|
|
289,465
|
|
|
447,361
|
|
Equity
investments
|
|
|
95,239
|
|
|
82,253
|
|
Other
assets
|
|
|
85,445
|
|
|
85,445
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,574,782
|
|
$
|
12,811,373
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,656,440
|
|
$
|
2,056,341
|
|
Current
portion of long-term debt
|
|
|
-
|
|
|
10,819
|
|
Short
term notes payable
|
|
|
1,004,714
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
1,687,651
|
|
|
1,356,425
|
|
Deferred
revenue
|
|
|
75,687
|
|
|
59,350
|
|
Related
party note payable
|
|
|
97,883
|
|
|
107,833
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,522,375
|
|
|
3,590,768
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net of current portion
|
|
|
-
|
|
|
1,533,126
|
|
DEFERRED
TAXES
|
|
|
363,400
|
|
|
363,400
|
|
Total
Liabilities
|
|
|
4,885,775
|
|
|
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
June 30, 2008 and December 31, 2007, respectively;
|
|
|
918,332
|
|
|
728,333
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 300,000,000 shares authorized;
118,542,571
and 111,289,844 issued and outstanding at June 30, 2008 and December
31,
2007, respectively
|
|
|
118,543
|
|
|
111,290
|
|
Series
B convertible preferred stock, 20,000 shares issued and outstanding
at
June 30, 2008 and December 31, 2007, respectively;
|
|
|
1,352,883
|
|
|
1,352,883
|
|
Additional
paid in capital
|
|
|
68,096,416
|
|
|
66,742,898
|
|
Treasury
stock, at cost, 1,145,382 shares in treasury as of June 30, 2008
and
December 31, 2007, respectively
|
|
|
(423,869
|
)
|
|
(423,869
|
)
|
Accumulated
deficit
|
|
|
(65,373,298
|
)
|
|
(61,187,456
|
)
|
Total
Stockholders' Equity
|
|
|
3,770,675
|
|
|
6,595,746
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
9,574,782
|
|
$
|
12,811,373
|
|
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 June 30,
|
|
For the six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
3,739,736
|
|
$
|
4,627,293
|
|
$
|
7,699,324
|
|
$
|
9,450,883
|
|
Related
party services
|
|
|
622,455
|
|
|
452,813
|
|
|
1,214,324
|
|
|
1,021,944
|
|
Reimbursable
expenses
|
|
|
173,278
|
|
|
311,514
|
|
|
312,249
|
|
|
564,600
|
|
Other
|
|
|
99,665
|
|
|
21,312
|
|
|
114,698
|
|
|
23,443
|
|
|
|
|
4,635,134
|
|
|
5,412,932
|
|
|
9,340,595
|
|
|
11,060,870
|
|
COST
OF REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
2,882,037
|
|
|
3,397,819
|
|
|
5,778,460
|
|
|
7,083,299
|
|
Related
party services
|
|
|
569,927
|
|
|
422,960
|
|
|
1,125,294
|
|
|
960,658
|
|
Consultant
expenses
|
|
|
178,124
|
|
|
290,833
|
|
|
399,827
|
|
|
541,352
|
|
|
|
|
3,630,088
|
|
|
4,111,612
|
|
|
7,303,581
|
|
|
8,585,309
|
|
GROSS
PROFIT
|
|
|
1,005,046
|
|
|
1,301,320
|
|
|
2,037,014
|
|
|
2,475,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
774,904
|
|
|
863,352
|
|
|
1,689,332
|
|
|
1,723,667
|
|
General
and administrative
|
|
|
1,033,679
|
|
|
1,064,194
|
|
|
2,108,428
|
|
|
2,364,897
|
|
Lease
impairment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
210,765
|
|
Goodwill
impairment
|
|
|
1,380,387
|
|
|
557,055
|
|
|
1,380,387
|
|
|
557,055
|
|
Depreciation
and amortization
|
|
|
70,645
|
|
|
185,345
|
|
|
161,669
|
|
|
376,095
|
|
|
|
|
3,259,615
|
|
|
2,669,946
|
|
|
5,339,816
|
|
|
5,232,479
|
|
LOSS
FROM OPERATIONS
|
|
|
(2,254,569
|
)
|
|
(1,368,626
|
)
|
|
(3,302,802
|
)
|
|
(2,756,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings (loss) from investments
|
|
|
5,057
|
|
|
(9,468
|
)
|
|
12,986
|
|
|
(11,981
|
)
|
Gain
on financial instruments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,329
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
-
|
|
|
(553,846
|
)
|
|
(288,060
|
)
|
Interest
expense, net
|
|
|
(191,907
|
)
|
|
(2,596,435
|
)
|
|
(342,180
|
)
|
|
(3,587,202
|
)
|
|
|
|
(186,850
|
)
|
|
(2,605,903
|
)
|
|
(883,040
|
)
|
|
(3,867,914
|
)
|
LOSS
BEFORE INCOME TAXES
|
|
|
(2,441,419
|
)
|
|
(3,974,529
|
)
|
|
(4,185,842
|
)
|
|
(6,624,832
|
)
|
INCOME
TAXES
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NET
LOSS
|
|
|
(2,441,419
|
)
|
|
(3,974,529
|
)
|
|
(4,185,842
|
)
|
|
(6,624,832
|
)
|
Accretion
of issuance costs associated with convertible preferred
stock
|
|
|
(95,000
|
)
|
|
(147,038
|
)
|
|
(190,000
|
)
|
|
(294,076
|
)
|
Dividends
on convertible preferred stock
|
|
|
(53,996
|
)
|
|
(69,873
|
)
|
|
(113,701
|
)
|
|
(137,719
|
)
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(2,590,415
|
)
|
$
|
(4,191,440
|
)
|
$
|
(4,489,543
|
)
|
$
|
(7,056,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
Basic
and diluted loss per common share attributable to common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
114,884,970
|
|
|
58,567,995
|
|
|
112,549,396
|
|
|
57,589,922
|
|
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)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,185,842
|
)
|
$
|
(6,624,832
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
of property and equipment and amortization of leasehold
improvements
|
|
|
74,583
|
|
|
59,338
|
|
Amortizaton
of intangible assets
|
|
|
51,669
|
|
|
288,062
|
|
Amortization
of debt discounts
|
|
|
157,896
|
|
|
180,822
|
|
Amortization
of relative fair value of warrants issued
|
|
|
33,750
|
|
|
2,940,106
|
|
Amortization
of deferred financing costs
|
|
|
1,667
|
|
|
28,695
|
|
Loss
on sale of equity investment
|
|
|
-
|
|
|
25,569
|
|
Stock
based compensation
|
|
|
279,426
|
|
|
189,592
|
|
Gain
on change in fair value of financial instruments
|
|
|
-
|
|
|
(19,329
|
)
|
Goodwill
impairment
|
|
|
1,380,387
|
|
|
557,055
|
|
Lease
impairment
|
|
|
-
|
|
|
210,765
|
|
Loss
on early extinguishment of debt
|
|
|
553,846
|
|
|
288,060
|
|
Increase
in allowance for doubtful accounts
|
|
|
133,255
|
|
|
97,546
|
|
(Income)
loss from equity investments
|
|
|
(12,986
|
)
|
|
11,981
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
332,580
|
|
|
975,323
|
|
(Increase)
decrease in accounts receivable from related parties
|
|
|
(13,202
|
)
|
|
72,292
|
|
Decrease
(Increase) in prepaid expenses
|
|
|
26,252
|
|
|
(17,437
|
)
|
Decrease
in other assets
|
|
|
-
|
|
|
25,000
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
287,896
|
|
|
(97,387
|
)
|
Increase
in deferred revenue
|
|
|
16,337
|
|
|
29,248
|
|
Net
cash used in operating activities
|
|
|
(882,486
|
)
|
|
(779,531
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(18,117
|
)
|
|
(6,548
|
)
|
Sale
of equity investment in DeLeeuw Turkey
|
|
|
-
|
|
|
50,000
|
|
Net
cash (used in) provided by investing activities
|
|
|
(18,117
|
)
|
|
43,452
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
repayments under line of credit
|
|
|
(399,901
|
)
|
|
(3,764,107
|
)
|
Proceeds
from issuance of short-term note payable
|
|
|
-
|
|
|
650,000
|
|
Deferred
financing costs
|
|
|
(20,000
|
)
|
|
-
|
|
Principal
payments on short-term debt
|
|
|
-
|
|
|
(1,195,455
|
)
|
Issuance
of Company common stock
|
|
|
200,000
|
|
|
4,610,758
|
|
Principal
payments on capital lease obligations
|
|
|
(7,983
|
)
|
|
(22,316
|
)
|
Principal
payments on related party notes
|
|
|
(14,121
|
)
|
|
(15,204
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(242,005
|
)
|
|
263,676
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(1,142,608
|
)
|
|
(472,403
|
)
|
CASH,
beginning of period
|
|
|
1,506,866
|
|
|
668,006
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
364,258
|
|
$
|
195,603
|
|
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)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
122,679
|
|
$
|
276,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and
six
months ended June 30, 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 June 30, 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 June
30,
2008, receivables related to services performed for Bank of America comprised
approximately 30.6% of the Company’s accounts receivable balance. This is
comprised of receivables directly from Bank of America and receivables from
two
vendor management companies that are issued invoices for the Company’s work at
Bank of America, Sapphire Technologies and ZeroChaos. Also, receivables from
LEC, a related party, comprised 11.5% 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 –
Going
concern
The
Company has incurred net losses for the six months ended June 30, 2008 and
the
years ended December 31, 2007, 2006, 2005 and 2004, negative cash flows from
operating activities for the six months ended June 30, 2008 and the years ended
December 31, 2007, 2006, 2005 and 2004, and had an accumulated deficit of $65.4
million at June 30, 2008. 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, we cannot predict how long we will
continue to incur further losses or whether we will become profitable again,
or
if the Company’s business will improve. These factors raise substantial doubt as
to our 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, 2008, the Company had a cash balance of approximately $364,000,
compared to $1,506,866 at December 31, 2007, and a working capital deficiency
of
$1.0 million.
The
Company has experienced continued losses from 2004 through June 30, 2008. The
resulting liquidity issues 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. As a result, of the default,
Access has 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. Refer to footnote 4 of
the
Notes to Condensed Consolidated Financial Statements for further discussion
on
the Line of Credit.
On
June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line
of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock and the remaining $1,050,000 balance which
is
outstanding at June 30, 2008, matures on June 6, 2009. As of June 30, 2008,
the
Company does not have the ability to repay this note upon maturity. Refer to
footnote 5 of the Notes to Condensed Consolidated Financial Statements for
further discussion on the Short Term Note Payable.
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. As of June
30, 2008, the Company was not in compliance with the AMEX continued listing
standards since it did not maintain the minimum required $6,000,000 of
stockholders equity.
The
Company needs additional capital in order to survive. Additional capital 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 -
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
4 - 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. 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, and an interest rate of
prime (which was 5.00% as of June 30, 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 was not in compliance
with this covenant as of June 30, 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.
The
Company was in default of the Loan and Security Agreement as of June 30, 2008
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 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.
Note
5 – Short Term Notes Payable
On
June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line
of
Credit Note. The note accrues interest at an annual interest rate of 7% and
the
conversion price of the shares of common stock issuable under the note is equal
to $1.58 per share. In addition, such investors received a warrant to purchase
277,778 shares of our common stock at an exercise price of $1.58 per share.
This
warrant expires in June 2009.
During
December 2007, the Company and TAG Virgin Islands, Inc. executed an Offset
and
Purchase Agreement whereby certain investors represented by TAG Virgin Islands,
Inc. converted $350,000 of the debt due to them under the Unsecured Convertible
Line of Credit Note dated June 7, 2004 into Company common stock. The Company
issued 2,499,997 shares of common stock to the investors. The number of shares
acquired was based on the $0.14 per share closing price of the Company’s common
stock on the American Stock Exchange on the date of conversion. Additionally,
the Company issued warrants to purchase a total of 2,499,997 shares of Company
common stock at a purchase price of $0.154 per share, and are exercisable for
five years.
During
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 the debt due to them under the 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.
The
remaining $1,050,000 balance, which is outstanding as of June 30, 2008 and
due
to the investors under the June 7, 2004 Unsecured Convertible Line of Credit
Note, matures on June 6, 2009.
Note
6 - 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 six months ended June 30, 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
|
|
|
(224,665
|
)
|
|
0.87
|
|
Options
outstanding at June 30, 2008
|
|
|
5,664,163
|
|
$
|
0.74
|
|
The
following table summarizes information concerning outstanding and exercisable
Company common stock options at June 30, 2008:
Range of exercise
prices
|
|
Options
outstanding
|
|
Weighted
average
exercise price
|
|
Weighted average
remaining
contractual life
|
|
Options
exercisable
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.250
|
|
|
1,936,666
|
|
$
|
0.25
|
|
|
8.2
|
|
|
653,316
|
|
$
|
0.25
|
|
$0.30-0.70
|
|
|
1,705,000
|
|
|
0.43
|
|
|
8.0
|
|
|
1,236,665
|
|
|
0.45
|
|
$0.825-0.83
|
|
|
1,348,166
|
|
|
0.83
|
|
|
6.4
|
|
|
1,193,654
|
|
|
0.83
|
|
$2.475-3.45
|
|
|
674,331
|
|
|
2.77
|
|
|
5.8
|
|
|
674,331
|
|
|
2.77
|
|
|
|
|
5,664,163
|
|
|
|
|
|
|
|
|
3,757,966
|
|
|
|
|
In
accordance with SFAS 123(R), the Company recorded approximately $89,000 and
$279,000 and $111,000 and $187,000 of expense related to stock options which
vested during the three and six months ended June 30, 2008 and 2007,
respectively.
Note
7 - 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,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes (A)
|
|
$
|
(2,441,419
|
)
|
$
|
(3,974,529
|
)
|
$
|
(4,185,842
|
)
|
$
|
(6,624,832
|
)
|
Net
loss (B)
|
|
$
|
(2,441,419
|
)
|
$
|
(3,974,529
|
)
|
$
|
(4,185,842
|
)
|
$
|
(6,624,832
|
)
|
Net
loss attributable to common stockholders (C)
|
|
$
|
(2,590,415
|
)
|
$
|
(4,191,440
|
)
|
$
|
(4,489,543
|
)
|
$
|
(7,056,627
|
)
|
Weighted
average outstanding shares of common stock (D)
|
|
|
114,884,970
|
|
|
58,567,995
|
|
|
112,549,396
|
|
|
57,589,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
income taxes (A/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
Net
loss per common share (B/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
Net
loss per common share attributable to common stockholders
(C/D)
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
For
the
six months ended June 30, 2008 and 2007, 5,664,163 and 6,570,500 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 23,332,321 shares of common
stock which were issued between June 7, 2004 and June 30, 2007, and outstanding
as of June 30, 2008, were excluded from the calculation of diluted loss per
share for the six months ended June 30, 2007, and the effect of 64,542,241
warrants which were issued between June 7, 2004 and June 30, 2008, and were
outstanding as of June 30, 2008, were excluded from the calculation of diluted
loss per share for the six months ended June 30, 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 June 30, 2007 and
666,667 shares of common stock underlying the same note whose outstanding
balance had been reduced to $1,050,000 as of June 30, 2008, 7,800,000 shares
underlying the Series A and Series B convertible preferred stock, and options
to
purchase 1,279,623 and 36,596 shares of common stock outstanding to Laurus
as of
June 30, 2007 and 2008, respectively.
Note
8 - Common Stock and Warrants
As
of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.
Note
9 - Major Customers
During
the three and six months ended June 30, 2008, the Company had sales relating
to
two major customers, Bank of America and LEC, a related party, comprising 24.7%
and 21.5% and 13.4% and 13.0% of revenues, and totaling approximately $1,147,000
and $2,009,000 and $622,000 and $1,214,000, respectively. Amounts due from
services provided to these customers included in accounts receivable was
approximately $1,237,700 at June 30, 2008. As of June 30, 2008, receivables
related to services performed for Bank of America and LEC accounted for
approximately 30.6% and 11.5% of the Company’s accounts receivable balance,
respectively.
During
the three and six months ended June 30, 2007, the Company had sales relating
to
two major customers, Bank of America and ING, comprising 16.9% and 17.6% and
12.7% and 10.9% of revenues, respectively, and totaling approximately $912,000
and $1,950,000 and $688,000 and $1,207,000, respectively. Amounts due from
services provided to these customers included in accounts receivable was
approximately $773,905 at June 30, 2007. As of June 30, 2007, receivables
related to services provided to Bank of America and ING accounted for
approximately 23.1% and 1.9% of the Company’s accounts receivable balance,
respectively.
Note
10 - 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.
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. A hearing
with
respect to this claim is expected to occur in September 2008.
Lease
Commitments
Years Ending June 30
|
|
Office
|
|
Sublease
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
358,273
|
|
$
|
107,310
|
|
$
|
250,963
|
|
2010
|
|
|
364,876
|
|
|
125,195
|
|
|
239,681
|
|
2011
|
|
|
186,911
|
|
|
71,540
|
|
|
115,371
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
910,060
|
|
$
|
304,045
|
|
$
|
606,015
|
|
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
11 - Related Party Transactions
Refer
to
footnote 9 of the Notes to Condensed Consolidated Financial Statements for
the
related party transaction disclosure as a major customer.
As
of
June 30, 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
12 – Regulatory Agency Communications
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. As of June
30, 2008, the Company was not in compliance with the AMEX continued listing
standards since it did not maintain the minimum required $6,000,000 of
stockholders equity.
Note
13 – Subsequent Events
McKnight
Associates, Inc. was acquired by the Company in July 2005. William McKnight,
the
founder of McKnight Associates, joined the Company as Sr. Vice President -
Data
Management as of the date of the acquisition. He had a three year employment
contract with the Company that expired on July 21, 2008. Mr. McKnight’s
employment with the Company was terminated upon the expiration of his employment
contract. The Company recorded goodwill as a component of the allocation of
the
purchase price of McKnight Associates in 2005. As of June 30, 2008, the Company
has determined that the recorded goodwill, in the amount of $1,380,387, is
impaired and has recorded the impairment charge in the June 2008 quarter.
On
July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes are due on December 27, 2008 and are convertible into 2,500,000 shares
of
common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable
at a
price of $0.088 per share (subject to adjustment), and are exercisable for
a
period of five years.
Using
the
Black-Scholes option pricing model, the Company calculated the relative fair
value of the warrants to purchase 2,500,000 shares of Company common stock
to be
approximately $200,000. This relative fair value has been recorded as a
reduction of the $200,000 balance of the short term debt and an addition to
additional paid-in capital. The assumptions used in the relative fair value
calculation are as follows: Company stock price on July 28, 2008 of $0.08 per
share; exercise price of the warrants of $0.088 per share; five year term;
volatility of 203.9%; annual rate of dividends of 0%; and a risk free interest
rate of 3.44%.
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 1990's, 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 will 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 growth opportunities 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.
·
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
|
|
Selected Statement of Operations Data for the six
|
|
|
|
months ended June 30,
|
|
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
4,635,134
|
|
$
|
5,412,932
|
|
$
|
9,340,595
|
|
$
|
11,060,870
|
|
Gross
profit
|
|
|
1,005,046
|
|
|
1,301,320
|
|
|
2,037,014
|
|
|
2,475,561
|
|
Net
loss
|
|
|
(2,441,419
|
)
|
|
(3,974,529
|
)
|
|
(4,185,842
|
)
|
|
(6,624,832
|
)
|
Net
loss attributable to common stockholders
|
|
|
(2,590,415
|
)
|
|
(4,191,440
|
)
|
|
(4,489,543
|
)
|
|
(7,056,627
|
)
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
Net
loss per common share attributable to common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
|
|
Selected Statement of Financial Position Data as of
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
(1,044,016
|
)
|
$
|
1,509,083
|
|
Total
assets
|
|
|
9,574,782
|
|
|
12,811,373
|
|
Long-term
debt
|
|
|
-
|
|
|
1,533,126
|
|
Total
stockholders' equity
|
|
|
3,770,675
|
|
|
6,595,746
|
|
Three
and Six Months Ended June 30, 2008 and 2007
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 $9.3 million for
the three and six months ended June 30, 2008, respectively, decreased by $0.8
million, or 14.4%, and $1.7 million, or 15.6%, as compared to revenue of $5.4
million and $11.1 million for the three and six months ended June 30, 2007,
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, 2008
and
2007:
|
|
For the three months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
% of total revenues
|
|
$
|
|
% of total revenues
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Consulting
|
|
$
|
1,433,632
|
|
|
30.9
|
%
|
$
|
2,364,910
|
|
|
43.7
|
%
|
Business
Intelligence / Data Warehousing
|
|
|
2,306,103
|
|
|
49.8
|
%
|
|
2,262,383
|
|
|
41.8
|
%
|
Data
Management
|
|
|
622,455
|
|
|
13.4
|
%
|
|
452,813
|
|
|
8.4
|
%
|
Reimbursable
expenses
|
|
|
173,279
|
|
|
3.7
|
%
|
|
311,514
|
|
|
5.8
|
%
|
Other
|
|
|
99,665
|
|
|
2.2
|
%
|
|
21,312
|
|
|
0.3
|
%
|
|
|
$
|
4,635,134
|
|
|
100.0
|
%
|
$
|
5,412,932
|
|
|
100.0
|
%
|
|
|
For the six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
% of total revenues
|
|
$
|
|
% of total revenues
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Consulting
|
|
$
|
2,563,347
|
|
|
27.4
|
%
|
$
|
4,721,762
|
|
|
42.7
|
%
|
Business
Intelligence / Data Warehousing
|
|
|
5,135,976
|
|
|
55.0
|
%
|
|
4,729,122
|
|
|
42.8
|
%
|
Data
Management
|
|
|
1,214,324
|
|
|
13.0
|
%
|
|
1,021,943
|
|
|
9.2
|
%
|
Reimbursable
expenses
|
|
|
312,250
|
|
|
3.3
|
%
|
|
564,600
|
|
|
5.1
|
%
|
Other
|
|
|
114,698
|
|
|
1.3
|
%
|
|
23,443
|
|
|
0.2
|
%
|
|
|
$
|
9,340,595
|
|
|
100.0
|
%
|
$
|
11,060,870
|
|
|
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 $1.4 million, or 30.9% of total revenue, for the three
months ended June 30, 2008 decreased by $1.0 million, or 39.4%, as compared
to
revenue of $2.4 million, or 43.7% of total revenue, for the three months ended
June 30, 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 due to the completion of projects and a reduction in the number
of
consultants on billing, and a $0.2 million decline in revenue from JP Morgan
Chase due to the completion of this project.
These
declines were partially offset by $0.2 million of increased revenue at Bank
of
America due to an increase in consultant headcount at this client as compared
to
the prior year.
In
the
strategic consulting line of business, there was a 36.7% decline in consultant
headcount, resulting in a 29.8% reduction in billable hours as compared to
the
prior year period.
Strategic
consulting revenue of $2.6 million, or 27.4% of total revenue, for the six
months ended June 30, 2008 decreased by $2.1 million, or 45.7%, as compared
to
revenue of $4.7 million, or 42.7% of total revenue, for the six months ended
June 30, 2007. This decrease is primarily due to a $1.2 million reduction in
revenue due to the completion of the ING project during 2007,
a
continued decline in the Integrated Strategies revenue of $0.6 million as
compared to the prior year due to the completion of projects and a reduction
in
the number of consultants on billing, and a $0.4 million decline in revenue
from
JP Morgan Chase due to the completion of this project.
These
declines were partially offset by $0.1 million of increased revenue from Bank
of
America due to an increase in consultant headcount at this client.
In
the
strategic consulting line of business, there was a 29.2% decline in consultant
headcount, and a 39.7% 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 $2.3 million, or 49.8% of
total revenue, for the three months ended June 30, 2008 was unchanged as
compared to revenue of $2.3 million, or 41.8% of total revenue, for the three
months ended June 30, 2007. Overall, the BI/DW line of business had a 3.7%
decrease in consultant headcount, however, there was an offsetting 5.2% increase
in the utilization rate and a 4.0% increase in billable hours in the current
year compared to the prior period.
Business
intelligence/data warehousing (“BI/DW”) revenue of $5.1 million, or 55.0% of
total revenue, for the six months ended June 30, 2008 increased by $0.4 million,
or 8.6%, as compared to revenue of $4.7 million, or 42.8% of total revenue,
for
the six months ended June 30, 2007. New 2008 projects in this line of business
contributed $2.3 million to revenue during the six month period ended June
30,
2008, which is partially offset by $1.9 million of non-recurring prior year
revenue related to completed projects. Average BI/DW headcount increased 3.7%,
billable hours increased 8.8% and consultant utilization increased 4.1% overall
for the six month period ended June 30, 2008 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 $0.6 million, or 13.4% of total revenue, for the three
months ended June 30, 2008 increased by $0.1 million, or 37.5%, as compared
to
revenue of $0.5 million, or 8.4% of total revenue, for the three months ended
June 30, 2007. This increase is due to a 2 person increase in consultant
headcount relating to a new project obtained in 2008.
Data
management revenue of $1.2 million, or 13.0% of total revenue, for the six
months ended June 30, 2008 increased by $0.2 million, or 18.8%, as compared
to
revenue of $1.0 million, or 9.2% of total revenue, for the six months ended
June
30, 2007. This increase is due to a 2 person increase in consultant headcount
relating to a new project obtained in 2008.
Cost
of revenue
Cost
of
revenue includes payroll and benefit and other direct costs for the Company’s
consultants. Cost of revenue was $3.6 million, or 78.3% of revenue, and $7.3
million, or 78.2% of revenue, for the three and six months ended June 30, 2008,
respectively, representing a decrease of $0.5 million, or 11.7%, and $1.3
million, or 14.9%, as compared to $4.1 million, or 76.0% of revenue, and $8.6
million, or 77.6% of revenue, for the three and six months ended June 30, 2007,
respectively.
Cost
of
services was $2.9 million, or 77.1% of services revenue for the three months
ended June 30, 2008, representing a decrease of $0.5 million, or 15.2%, as
compared to $3.4 million, or 73.4% of services revenue for the three months
ended June 30, 2007.
Cost
of
services declined during the three months ended June 30, 2008 as compared to
the
prior year due to a $0.9 million decline in revenue during the period,
accounting for a $0.6 million reduction in cost of services. This decline was
partially offset by a $0.1 million increase in cost due to nine full time
employee consultants that were not billable for a large portion of the current
period.
The
Company had an average of 83 consultants in the current period and 102 in the
prior year period, resulting in a 18.6% decline in consultant headcount. This
decline in headcount is consistent with the 19.2% decrease in services revenue
during the current period as compared to the prior year period.
Cost
of
services was $5.8 million, or 75.1% of services revenue for the six months
ended
June 30, 2008, representing a decrease of $1.3 million, or 18.4%, as compared
to
$7.1 million, or 74.9% of services revenue for the six months ended June 30,
2007. Cost of services declined during the six months ended June 30, 2008 as
compared to the prior year period primarily due to a $1.8 million decline in
revenue during the period, accounting for a $1.3 million reduction in cost
of
services. Additionally, stock compensation expense declined by $0.1 million,
which was offset by the $0.1 million increased cost related to the non-billable
consultants during the June 2008 quarter.
Cost
of
related party services was $0.6 million, or 91.6% of related party services
revenue, for the three months ended June 30, 2008, representing an increase
of
$0.2 million, or 34.7%, as compared to $0.4 million, or 93.4% of related party
services revenue, for the three months ended June 30, 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 June 30,
2008
as compared to the prior year.
Cost
of
related party services was $1.1 million, or 92.7% of related party services
revenue, for the six months ended June 30, 2008, representing an increase of
$0.1 million, or 17.1%, as compared to $1.0 million, or 94.0% of related party
services revenue, for the six months ended June 30, 2007. Cost of related party
services increased for the six month period due to an increase in related party
consulting revenue during the six months ended June 30, 2008 as compared to
the
prior year.
Gross
profit
Gross
profit was $1.0 million, or 21.7% of revenue, and $2.0 million, or 21.8% of
revenue, for the three and six months ended June 30, 2008, respectively,
representing a decrease of $0.3 million, or 22.8%, and $0.4 million, or 17.7%,
as compared to $1.3 million, or 24.0% of revenue, and $2.5 million, or 22.4%
of
revenue, for the three and six months ended June 30, 2007,
respectively.
Gross
profit from services was $0.9 million, or 22.9% of services revenue for the
three months ended June 30, 2008, representing a decrease of $0.4 million,
or
30.2%, from the prior years gross profit from services of $1.3 million, or
26.6%
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 services was $1.9 million, or 24.9% of services revenue for the
six
months ended June 30, 2008, representing a decrease of $0.5 million, or 18.9%,
from the prior years gross profit from services of $2.4 million, or 25.1% 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 $52,528, or 8.4% of related party
services revenue for the three months ended June 30, 2008, representing an
increase of $22,675, or 76.0% from the prior year’s gross profit of $29,853, or
6.6% of related party services revenue for the three months ended June 30,
2007.
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 $89,030, or 7.3% of related party
services revenue for the six months ended June 30, 2008, representing an
increase of $27,744, or 45.3% from the prior year’s gross profit of $61,286, or
6.0% of related party services revenue for the six months ended June 30, 2007.
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 $0.8 million, or 16.7% of revenue, and $1.7 million,
or
18.1% of revenue, for the three and six months ended June 30, 2008,
respectively, decreasing by $0.1 million and zero, as compared to $0.9 million,
or 15.9% of revenue, and $1.7 million, or 15.6% of revenue, for the three and
six months ended June 30, 2007, respectively.
Selling
and marketing expense for the three months ended June 30, 2008 decreased by
$0.1
million as compared to the prior year, but increased as a percentage of total
revenue by 0.8% points. The decrease in expense is primarily due to a $0.1
million decrease in payroll related expense resulting from a 2007 headcount
reduction. The increase in the current year expense as a percentage of total
revenue is primarily due to the reduction in revenue in the current period
as
compared to the prior year.
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
$1.0
million, or 22.3% of revenue, and $2.1 million, or 22.6% of revenue, for the
three and six months ended June 30, 2008,
decreasing
by $0.1 million and $0.3 million, as compared to $1.1 million, or 19.7% of
revenue, and $2.4 million, or 21.4% of revenue, for the three and six months
ended June 30, 2007, respectively.
The
$0.1
million decrease in general and administrative expense for the three months
ended June 30, 2008 as compared to the prior year is primarily due to a $0.2
million reduction in payroll and stock option expense due to a reduction in
headcount and reductions in the salaries of several executives during the third
quarter of 2007, partially offset by a $0.1 million increase in legal and
accounting and bank fees during the current period.
The
$0.3
million decrease in general and administrative expense for the six months ended
June 30, 2008 as compared to the prior year is primarily due to a $0.2 million
reduction in payroll and stock option expense due to a reduction in headcount
and reductions in the salaries of several executives during the third quarter
of
2007 and a $0.2 million reduction in expense for items including taxes, rent
and
stock exchange listing fees, partially offset by a $0.1 million increase in
bad
debt expense during the current period.
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 six months ended June 30, 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.
Goodwill
impairment
Statement
of Financial Accounting Standards No. 142 (“SFAS No. 142”), “
Goodwill
and Other Intangible Assets
”,
instructs the Company to test intangible assets for impairment annually, or
more
frequently if events or changes in circumstances indicate that the asset might
be impaired. During the three month period ended June 30, 2008, it was
determined that William McKnight’s employment contract would not be extended
past its July 21, 2008 expiration date. As a result of this trigger event,
the
Company performed an interim impairment analysis with respect to the recorded
goodwill relating to the McKnight Associates acquisition in the approximate
amount of $1.4 million and determined it to be fully impaired. A $1.4 million
goodwill impairment charge was recorded during this period.
During
the three month period ended June 30, 2007, the Company learned that several
Integrated Strategies (“ISI”) consultants were ending their projects.
Additionally, the continued margin pressure exerted by the vendor management
organization structure utilized by ISI’s largest customer continues to
unfavorably impact the economics of this division. Statement of Financial
Accounting Standards No. 142 (“SFAS No. 142”), “
Goodwill
and Other Intangible Assets
”,
instructs the Company to test intangible assets for impairment annually, or
more
frequently if events or changes in circumstances indicate that the asset might
be impaired. Due to the change in this business, the Company performed an
interim impairment analysis during the three months ended June 30, 2007 and
recorded a goodwill impairment of $0.6 million during this 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. 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 and $0.2 million, for the three and six months ended June 30, 2008,
respectively, representing a $0.1 million and $0.2 million decline
from
$0.2
million and $0.4 million for the three and six months ended June 30, 2007,
respectively. The McKnight customer relationship intangible, the Scosys acquired
contract intangible, and the DeLeeuw approved vendor status intangible were
all
fully amortized in 2007.
Other
income (expense)
During
the six months ended June 30, 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. During the six months ended June 30, 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 six months ended June 30, 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 financial instruments.
Interest
expense, which includes amortization of the discount on debt of $0.1 million
and
$0.2 million during the three and six months ended June 30, 2008, respectively
and $0.1 million and $0.2 million during the three and six months ended June
30,
2007, respectively, was $0.2 million and $0.3 million for the three and six
months ended June 30, 2008, respectively, and $2.6 million and $3.6 million
for
the three and six months ended June 30, 2007, respectively. The decrease in
interest expense in the current period, as compared to the prior year, was
primarily due to the conversion of short and long-term notes due to TAG Virgin
Islands, Inc. to equity and a reduction in charges related to the relative
fair
value of warrants issued and charges incurred to account for beneficial
conversion features on notes that were issued in the prior year.
Liquidity
and Capital Resources
The
Company has incurred net losses for the six months ended June 30, 2008 and
the
years ended December 31, 2007, 2006, 2005 and 2004, negative cash flows from
operating activities for the six months ended June 30, 2008 and the years ended
December 31, 2007, 2006, 2005 and 2004, and had an accumulated deficit of $65.4
million at June 30, 2008. 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, we cannot predict how long we will
continue to incur further losses or whether we will become profitable again,
or
if the Company’s business will improve. These factors raise substantial doubt as
to our 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, 2008, the Company had a cash balance of approximately $0.4 million,
compared to $1.5 million at December 31, 2007, and a working capital deficiency
of $1.0 million.
The
Company has experienced continued losses from 2004 through June 30, 2008. The
resulting liquidity issues have been addressed through the sale of both Company
common stock and preferred stock and by entering into various debt instruments
between August 2004 and June 2008.
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. As a result, of the default,
Access has 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. Refer to footnote 4 of
the
Notes to Condensed Consolidated Financial Statements for further discussion
on
the Line of Credit.
On
June
7, 2004, the Company issued a five-year $2,000,000 Unsecured Convertible Line
of
Credit Note. $950,000 of the original principal balance has previously been
converted to Company common stock and the remaining $1,050,000 balance matures
on June 6, 2009. As of June 30, 2008, the Company does not have the ability
to
repay this note upon maturity. Refer to footnote 5 of the Notes to Condensed
Consolidated Financial Statements for further discussion on the Short Term
Note
Payable.
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. As of June
30, 2008, the Company was not in compliance with the AMEX continued listing
standards since it did not maintain the minimum required $6,000,000 of
stockholders equity.
The
Company needs additional capital in order to survive. Additional capital 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 has experienced continued losses from 2004 through June 30, 2008. The
resulting liquidity issue has been addressed by entering into various debt
and
equity instruments between August 2004 and June 2008 and, as of June 30, 2008
had approximately $4.5 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 deficit is $1.0 million as of June 30, 2008 compared
to working capital of $1.5 million as of December 31, 2007, representing a
$2.5
million decrease. Working capital declined due to a reclassification of $1.0
million of long-term debt to current liabilities in the current period. This
debt matures in June 2009 and, as a result, became a current liability in the
June 2008 quarter. Additionally contributing to the decline in working capital
was a $0.7 million reduction in cash due to the losses incurred during the
six
month period, a $0.5 million reduction in accounts receivable due to a decline
in revenues, and a $0.3 million increase in accounts payable and accrued
expenses primarily due to the timing of payments.
Cash
used
in operating activities during the six months ended June 30, 2008 was
approximately $0.9 million compared to $0.8 million for the six months ended
June 30, 2007. The Company recorded a $4.2 million loss for the six months
ended
June 30, 2008, however, this loss included $2.7 million of non-cash charges
for
items including depreciation, amortization, stock based compensation, goodwill
impairment and early extinguishment of debt, resulting in cash used of $1.5
million. Additionally, changes in operating assets and liabilities reflect
$0.6
million of cash provided by operations primarily due to the following; accounts
receivable declined by $0.3 million due to reduced revenues, and accounts
payable and accrued expenses increased by $0.3 million.
Cash
used
in investing activities was $18,117 during the six months ended June 30, 2008
compared to cash provided by investing activities of $43,452 during the six
months ended June 30, 2007. The Company purchased $18,117 of computer equipment
during the current period. During the period ended June 30, 2007, the Company
received $50,000 related to the sale of its equity investment in DeLeeuw Turkey
and purchased computer equipment for $6,548.
Cash
used
in financing activities was $0.2 million during the six months ended June 30,
2008 and cash provided by financing activities during the six months ended
June
30, 2007 was $0.3 million. The cash used in financing activities during the
current period was primarily the result of the Company’s $0.4 million net
repayment of balances outstanding under its line of credit arrangement,
partially offset by a $0.2 million issuance of common stock pursuant to a stock
purchase agreement. The $0.3 million of cash provided by financing activities
during the prior period was the result of the sale of $4.6 million of Company
common stock and $0.7 million of proceeds from the issuance of short term notes,
partially offset by $5.0 million in principal payments on outstanding
debt.
The
Company executed a replacement 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, and an interest rate of
prime (which was 5.00% as of June 30, 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 was not in compliance
with this covenant as of June 30, 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.
There
are
currently no material commitments for capital expenditures.
As
of
June 30, 2008 and December 31, 2007, the Company had accounts receivable due
from LEC of approximately $0.3 million and $0.3 million, respectively. There
are
no known collection problems with respect to LEC.
For
the
three and six months ended June 30, 2008, we invoiced LEC $0.6 million and
$1.2
million, respectively, for the services of consultants subcontracted to LEC
by
us. For the three and six months ended June 30, 2007, we invoiced LEC $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,
2008:
Lender
|
|
Type of facility
|
|
Outstanding as of June
30, 2008 (not including
interest) (all numbers
approximate)
|
|
Remaining
Availability (a)
|
|
Access Capital, Inc.
|
|
|
Line of Credit
|
|
$
|
1,656,000
|
|
$
|
679,000
|
|
Taurus
Advisory Group, LLC / TAG Virgin Islands, Inc. Investors
|
|
|
Convertible Promissory Note
|
|
$
|
1,050,000
|
|
$
|
-
|
|
Glenn
Peipert
|
|
|
Promissory Note
|
|
$
|
98,000
|
|
$
|
-
|
|
Larry
and Adam Hock
|
|
|
Settlement agreement
|
|
$
|
33,000
|
|
$
|
-
|
|
TOTAL
|
|
|
|
|
$
|
2,837,000
|
|
$
|
679,000
|
|
|
(a)
|
The
remaining availability under the line of credit is based on the collateral
availability at June 30, 2008 compared to the outstanding loan
balance.
|
Additionally,
the Company has two series of preferred stock outstanding as follows:
Holder
|
|
Type of Instrument
|
|
Principal amount
outstanding as of
June 30, 2008
|
|
|
|
|
|
|
|
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
|
|
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 an interim impairment
analysis with respect to the McKnight Associates goodwill as of June 30, 2008.
The last annual goodwill impairment analysis was performed 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 June 30, 2008 due to the following:
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 second 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. A hearing
with respect to this claim is expected to occur in September 2008.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
As
of
June 30, 2008, the Company and TAG Virgin Islands, Inc. executed a Stock
Purchase Agreement whereby an investor represented by TAG Virgin Islands, Inc.
purchased 2,500,000 shares of Company common stock at a purchase price of $0.08
per share, for a total investment of $200,000. The Company also issued a warrant
to purchase 2,500,000 shares of Company common stock to the investor. The
warrant is exercisable at a price of $0.09 per share, and is exercisable for
five years.
On
July
28, 2008, the Company issued 10% Convertible Unsecured Notes (the “Notes”) to
certain investors represented by TAG Virgin Islands, Inc. for $200,000. These
notes are due on December 27, 2008 and are convertible into 2,500,000 shares
of
common stock at the option of the holders. The investors were also granted
warrants to purchase 2,500,000 shares of Company common stock, exercisable
at a
price of $0.088 per share (subject to adjustment), and are exercisable for
a
period of five years.
Item
4. Submission of Matters to a Vote of Security Holders.
|
(a)
|
The
annual meeting of the stockholders was held on June 13,
2008.
|
|
(b)
|
All
of the Company's director nominees, Scott Newman, Glenn Peipert,
Lawrence
K. Reisman, Frederick Lester and Thomas Pear were elected. There
was no
solicitation in opposition to the Company's nominees.
|
|
(c)
|
Matters
voted on at the meeting and the number of votes
cast:
|
|
1.
|
To
elect five Directors to the Board of Directors to serve until the
2009
Annual Meeting of Stockholders or until their successors have been
duly
elected or appointed and qualified
:
|
Voted
For
|
|
For
All Except
|
|
Withhold
Authority
|
|
81,689,933
|
|
|
0
|
|
|
3,099,507
|
|
|
2.
|
To
ratify the appointment by the Audit Committee of the Board of Directors
of
Friedman
LLP, to serve as the Company’s independent auditors for the fiscal year
ending December 31, 2008
:
|
Voted
For
|
|
Voted
Against
|
|
Abstentions
|
|
84,753,231
|
|
|
31,421
|
|
|
4,787
|
|
|
3.
|
To
amend
the Company’s Certificate of Incorporation to increase the amount of the
Company’s authorized common stock, from two hundred million (200,000,000)
to three hundred million
(300,000,000):
|
Voted
For
|
|
Voted
Against
|
|
Abstentions
|
|
81,444,091
|
|
|
3,344,751
|
|
|
598
|
|
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. As of June
30, 2008, the Company was not in compliance with the AMEX continued listing
standards since it did not maintain the minimum required $6,000,000 of
stockholders equity.
4.1
|
Form
of Common Stock Purchase Warrant issued to investors, dated March
26,
2008.
|
4.2
|
Form
of Common Stock Purchase Warrant issued to investor, dated June
30,
2008.
|
4.3
|
Form
of Common Stock Purchase Warrant issued to investors, dated July
28,
2008.
|
4.4
|
Form
of 10% Convertible Unsecured Note issued to investors, dated July
28,
2008.
|
10.1
|
Note
Conversion Agreement by and between the Registrant and investors
represented by TAG Virgin Islands, Inc. dated as of March 26,
2008.
|
10.2
Stock Purchase Agreement dated June 30, 2008 by and between Registrant and
Matthew J. Szulik.
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 12, 2008
|
By:
|
/s/ Scott
Newman
|
|
Scott
Newman
President,
Chief Executive Officer and
Chairman
|
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