Heritage Global Inc. - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
OR
o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number: 0-17973
C2
Global Technologies Inc.
(Exact
name of registrant as specified in its charter)
FLORIDA
(State
or other jurisdiction of
Incorporation
or Organization)
|
|
59-2291344
(I.R.S.
Employer Identification No.)
|
40
King St. West, Suite 3200, Toronto, ON M5H 3Y2
(Address
of Principal Executive Offices)
(416) 866-3000
(Registrant’s
Telephone Number)
N/A
(Registrant’s
Former Name)
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter time 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 R
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule
12b-2).
Large Accelerated Filer £ | Accelerated Filer £ | ||
Non-Accelerated Filer R | Smaller reporting company £ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
As
of
July 31, 2008, there were 22,745,410 shares of common stock, $0.01 par value,
outstanding.
TABLE
OF CONTENTS
Part I.
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Unaudited
Condensed Consolidated
Balance Sheets
as
of June
30, 2008 and December 31, 2007
|
3
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2008 and 2007
|
4
|
|
||
Unaudited
Condensed Consolidated Statement of Changes in Stockholders’ Equity
for
the period ended June 30, 2008
|
5
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2008 and 2007
|
6
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
34
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
34
|
|
|
|
Part II.
|
Other
Information
|
|
|
||
Item
1.
|
Legal
Proceedings
|
35
|
|
||
Item
1A.
|
Risk
Factors
|
35
|
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
35
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
35
|
|
||
Item
5.
|
Other
Information
|
35
|
|
||
Item
6.
|
Exhibits
|
36
|
2
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements.
C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
June
30,
|
December
31,
|
||||||
(In
thousands of dollars, except share and per share
amounts)
|
2008
|
2007
|
|||||
ASSETS
|
|
||||||
Current
assets:
|
|
|
|||||
Cash
and cash equivalents
|
$
|
797
|
$
|
67
|
|||
Deferred
income tax asset (Note 9)
|
70
|
1,000
|
|||||
Other
current assets
|
146
|
17
|
|||||
Total
current assets
|
1,013
|
1,084
|
|||||
Other
assets:
|
|||||||
Intangible
assets, net (Note 5)
|
10
|
20
|
|||||
Goodwill
(Note 5)
|
173
|
173
|
|||||
Investments
(Note 6)
|
646
|
519
|
|||||
Total
assets
|
$
|
1,842
|
$
|
1,796
|
|||
|
|||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable and accrued liabilities (Note 5)
|
$
|
636
|
$
|
402
|
|||
Notes
payable to a related party (Note 7)
|
—
|
2,335
|
|||||
Total
liabilities
|
636
|
2,737
|
|||||
|
|||||||
Commitments
and contingencies (Note 11)
|
|||||||
Stockholders’
equity (deficit):
|
|||||||
Preferred
stock, $10.00 par value, convertible, non-redeemable, authorized
10,000,000 shares, issued and outstanding 597 shares at June 30,
2008 and
607 shares at December 31, 2007; liquidation preference of $597 at
June
30, 2008 and $607 at December 31, 2007
|
6
|
6
|
|||||
Common
stock, $0.01 par value, authorized 300,000,000 shares, issued and
outstanding 22,745,410 shares at June 30, 2008 and 23,095,010 shares
at
December 31, 2007
|
227
|
231
|
|||||
Additional
paid-in capital
|
274,723
|
274,672
|
|||||
Accumulated
deficit
|
(273,750
|
)
|
(275,850
|
)
|
|||
|
|||||||
Total
stockholders’ equity (deficit)
|
1,206
|
(941
|
)
|
||||
|
|||||||
Total
liabilities and stockholders’ equity (deficit)
|
$
|
1,842
|
$
|
1,796
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
||||||||||||
(In
thousands of dollars, except per share amounts)
|
2008
|
|
2007
|
|
2008
|
2007
|
|||||||
Revenue:
|
|||||||||||||
Patent
licensing
|
$
|
1,900
|
$
|
—
|
$
|
8,125
|
$
|
—
|
|||||
|
|||||||||||||
Operating
costs and expenses:
|
|||||||||||||
Patent
licensing
|
1,308
|
—
|
4,492
|
—
|
|||||||||
Selling,
general and administrative
|
280
|
314
|
556
|
593
|
|||||||||
Depreciation
and amortization
|
5
|
5
|
10
|
10
|
|||||||||
|
|||||||||||||
Total
operating costs and expenses
|
1,593
|
319
|
5,058
|
603
|
|||||||||
|
|||||||||||||
Operating
income (loss)
|
307
|
(319
|
)
|
3,067
|
(603
|
)
|
|||||||
|
|||||||||||||
Other
income (expense):
|
|||||||||||||
Earnings
of equity accounted investments (Note 6)
|
8
|
—
|
7
|
—
|
|||||||||
Other
income (expense)
|
5
|
1
|
5
|
(292
|
)
|
||||||||
Interest
expense - third party
|
—
|
—
|
—
|
(12
|
)
|
||||||||
Interest
expense - related party (Note 7)
|
—
|
(47
|
)
|
(43
|
)
|
(83
|
)
|
||||||
|
|||||||||||||
Total
other income (expense)
|
13
|
(46
|
)
|
(31
|
)
|
(387
|
)
|
||||||
|
|||||||||||||
Income
(loss) from continuing operations before income
taxes
|
320
|
(365
|
)
|
3,036
|
(990
|
)
|
|||||||
Income
tax expense (Note 9)
|
9
|
—
|
930
|
—
|
|||||||||
Income
(loss) from continuing operations
|
311
|
(365
|
)
|
2,106
|
(990
|
)
|
|||||||
Loss
from discontinued operations (net of $0 tax)
|
(6
|
)
|
(18
|
)
|
(6
|
)
|
(20
|
)
|
|||||
Net
income (loss)
|
$
|
305
|
$
|
(383
|
)
|
$
|
2,100
|
$
|
(1,010
|
)
|
|||
|
|||||||||||||
Weighted
average common shares outstanding
|
23,045
|
23,095
|
23,070
|
23,094
|
|||||||||
Weighted
average preferred shares outstanding
|
1
|
1
|
1
|
1
|
|||||||||
Net
income (loss) per share - basic and diluted: (Note 2)
|
|||||||||||||
Income
(loss) from continuing operations
|
|||||||||||||
Common
shares
|
$
|
0.01
|
$
|
(0.01
|
)
|
$
|
0.09
|
$
|
(0.04
|
)
|
|||
Preferred
shares
|
$
|
0.54
|
$
|
N/A
|
$
|
3.65
|
$
|
N/A
|
|||||
Loss
from discontinued operations
|
|||||||||||||
Common
shares
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Preferred
shares
|
$
|
N/A
|
$
|
N/A
|
$
|
N/A
|
$
|
N/A
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the period ended June 30, 2008
(in
thousands of dollars, except share amounts)
(unaudited)
Preferred
stock
|
Common
stock
|
|||||||||||||||||||||
Shares
|
|
Amount
|
Shares
|
Amount
|
|
Additional
paid-in capital
|
Accumulated
Equity(Deficit)
|
Total
|
||||||||||||||
Balance
at December 31, 2006
|
611
|
$
|
6
|
23,084,850
|
$
|
231
|
$
|
274,499
|
$
|
(275,205
|
)
|
$
|
(469
|
)
|
||||||||
Conversion
of Class N preferred stock
|
(4
|
)
|
—
|
160
|
—
|
—
|
—
|
—
|
||||||||||||||
Conversion
of third party debt
|
—
|
—
|
10,000
|
—
|
7
|
—
|
7
|
|||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
166
|
—
|
166
|
|||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(645
|
)
|
(645
|
)
|
|||||||||||||
Balance
at December 31, 2007
|
607
|
$
|
6
|
23,095,010
|
$
|
231
|
$
|
274,672
|
$
|
(275,850
|
)
|
$
|
(941
|
)
|
||||||||
Conversion
of Class N preferred stock
|
(10
|
)
|
—
|
400
|
—
|
—
|
—
|
—
|
||||||||||||||
Cancellation
of common stock
|
—
|
—
|
(350,000
|
)
|
(4
|
)
|
4
|
—
|
—
|
|||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
47
|
—
|
47
|
|||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
—
|
2,100
|
2,100
|
|||||||||||||||
Balance
at June 30, 2008
|
597
|
$
|
6
|
22,745,410
|
$
|
227
|
$
|
274,723
|
$
|
(273,750
|
)
|
$
|
1,206
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Six
months ended
June
30,
|
||||||
2008
|
2007
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income (loss) from continuing operations
|
$
|
2,106
|
$
|
(990
|
)
|
||
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|||||||
Depreciation
and amortization
|
10
|
10
|
|||||
Equity
interests in significantly influenced companies
|
(7
|
)
|
—
|
||||
Amortization
of discount and debt issuance costs on convertible note
payable
|
—
|
8
|
|||||
Accrued
interest added to notes payable to a related party
|
—
|
83
|
|||||
Non-cash
cost of prepayment of third party debt
|
—
|
224
|
|||||
Stock-based
compensation expense
|
47
|
86
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
Decrease
(increase) in other assets
|
(129
|
)
|
4
|
||||
Decrease
in deferred income tax asset
|
930
|
—
|
|||||
Increase
(decrease) in accounts payable and accrued liabilities
|
234
|
(2
|
)
|
||||
Net
cash provided by (used in) operating activities by continuing
operations
|
3,191
|
(577
|
)
|
||||
Net
cash used in operating activities by discontinued
operations
|
(6
|
)
|
(20
|
)
|
|||
Net
cash provided by (used in) operating activities
|
3,185
|
(597
|
)
|
||||
Cash
flows from investing activities:
|
|||||||
Purchase
of portfolio investments
|
(125
|
)
|
—
|
||||
Cash
distributions from portfolio investments
|
5
|
—
|
|||||
Net
cash used in investing activities of continuing and discontinued
operations
|
(120
|
)
|
—
|
||||
Cash
flows from financing activities:
|
|||||||
Increase
in notes payable to a related party
|
—
|
2,059
|
|||||
Repayment
of notes payable to a related party
|
(2,335
|
)
|
—
|
||||
Repayment
of convertible note payable
|
—
|
(1,462
|
)
|
||||
Net
cash provided by (used in) financing activities
|
(2,335
|
)
|
597
|
||||
Increase
in cash and cash equivalents
|
730
|
—
|
|||||
Cash
and cash equivalents at beginning of period
|
67
|
3
|
|||||
Cash
and cash equivalents at end of period
|
$
|
797
|
$
|
3
|
Supplemental
cash flow information:
|
|||||||
Taxes
paid
|
—
|
6
|
|||||
Interest
paid
|
43
|
21
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data)
Note
1 - Description of Business and Principles of Consolidation
The
consolidated financial statements include the accounts of C2 Global Technologies
Inc. and its wholly-owned subsidiaries, including C2 Communications Technologies
Inc. and C2 Investments Inc. These entities, on a combined basis, are referred
to as “C2”, the “Company”, “we” or “our” in these unaudited condensed
consolidated financial statements. Our unaudited condensed consolidated
financial statements were prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) and include the
assets, liabilities, revenues, and expenses of all majority-owned subsidiaries
over which C2 exercises control. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
C2
owns
certain patents, including two foundational patents in voice over internet
protocol (“VoIP”) technology - U.S. Patent Nos. 6,243,373 (the “VoIP Patent”)
and 6,438,124 (together the “VoIP Patent Portfolio”), which it has licensed and
continues to seek to license. The VoIP Patent, including a corresponding foreign
patent and related international patent applications, was acquired from a third
party in 2003. At the time of acquisition, the vendor of the VoIP Patent was
granted a first priority security interest in the patent in order to secure
C2’s
obligations under the associated purchase agreement, as discussed in Note 8.
The
C2 Patent was developed by the Company.
Licensing
of intellectual property constitutes the primary business of the Company. C2’s
target market consists of carriers, equipment manufacturers, service providers
and end users in the internet protocol (“IP”) telephone market who are using
C2’s patented VoIP technologies by deploying VoIP networks for phone-to-phone
communications. The Company has engaged, and intends to continue to engage,
in
licensing agreements with third parties domestically and internationally. At
present, no ongoing royalties are being paid to the Company. The Company has
begun to obtain licensing and royalty revenue from its target market by
enforcing its patents, with the assistance of outside counsel, in order to
realize value from its intellectual property.
During
the first half of 2008, the Company entered into settlement and license
agreements with three telecommunications carriers with respect to its
intellectual property. In February 2008 the Company entered into agreements
with
AT&T, Inc. (“AT&T”) and Verizon Communications, Inc. (“Verizon”), and in
May 2008 the Company entered into an agreement with Sprint Communications Co.
L.P. (“Sprint”). Under the terms of the settlement and license agreements, C2
granted each of AT&T, Verizon and Sprint a non-exclusive, perpetual,
worldwide, fully paid up, royalty free license under any of C2’s present patents
and patent applications, including the VoIP Patent, to make, use, sell or
otherwise dispose of any goods and services based on such patents.
In
the
third quarter of 2007, the Company began investing in Internet-based e-commerce
businesses, when it acquired minority positions in MyTrade.com, Inc. (sold
in
the fourth quarter of 2007), Buddy Media, Inc. and LIMOS.com LLC. In the fourth
quarter of 2007 it acquired a one-third interest in Knight’s Bridge Capital
Partners Internet Fund No. 1 GP LLC. In April 2008, the Company made an
additional investment of $124 in Buddy Media, Inc., and an additional investment
of $1 in the Internet Fund GP. These investments are discussed in more detail
in
Note 6.
Management
believes that the unaudited interim data includes all adjustments necessary
for
a fair presentation. The December 31, 2007 condensed consolidated balance
sheet, as included herein, is derived from the audited consolidated financial
statements, but does not include all disclosures required by GAAP. The June
30,
2008 unaudited condensed consolidated financial statements should be read in
conjunction with the Company’s annual report on Form 10-K for the year ended
December 31, 2007, filed with the Securities and Exchange Commission.
7
These
unaudited condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly,
do
not include any adjustments that might result from the outcome of this
uncertainty. The independent registered public accounting firm’s report on the
consolidated financial statements included in the Company’s annual report on
Form 10-K for the year ended December 31, 2007 contained an explanatory
paragraph regarding the uncertainty of the Company’s ability to continue as a
going concern.
The
results of operations for the six-month period ended June 30, 2008 are not
necessarily indicative of those to be expected for the entire year ending
December 31, 2008.
Note
2 - Summary of Significant Accounting Policies
Net
earnings (loss) per share
The
Company is required, in periods in which it has net income, to calculate basic
earnings per share (“EPS”) using the two-class method described in EITF Issue
No. 03-6, Participating
Securities and the Two-Class Method under SFAS Statement No.
128
(“EITF
03-6”). The two-class method is required because the Company’s Class N preferred
shares, each of which is convertible to 40 common shares, have the right to
receive dividends or dividend equivalents should the Company declare dividends
on its common stock. Under the two-class method, earnings for the period, net
of
any deductions for contractual preferred stock dividends and any earnings
actually distributed during the period, are allocated on a pro-rata basis to
the
common and preferred stockholders. The weighted-average number of common and
preferred shares outstanding during the period is then used to calculate basic
EPS for each class of shares.
At
June
30, 2008 and 2007, the net effect of including the Company’s potential common
shares is anti-dilutive, and therefore diluted EPS is not presented in these
condensed consolidated unaudited financial statements.
Potential
common shares are as follows:
June
30,
|
|||||||
2008
|
|
2007
|
|||||
Assumed
conversion of Class N preferred stock
|
23,880
|
24,440
|
|||||
Assumed
exercise of options and warrant to purchase shares of common
stock
|
2,014,499
|
2,106,159
|
|||||
2,038,379
|
2,130,599
|
Use
of estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant
estimates include revenue recognition, purchase accounting (including the
ultimate recoverability of intangibles and other long-lived assets), valuation
of goodwill and intangibles, valuation of deferred tax assets, liabilities,
stock-based compensation, and contingencies surrounding litigation. These
estimates have the potential to significantly impact our consolidated financial
statements, either because of the significance of the financial statement item
to which they relate, or because they require judgment and estimation due to
the
uncertainty involved in measuring, at a specific point in time, events that
are
continuous in nature.
Intangible
assets and goodwill
The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 141, Business
Combinations
(pending
its adoption of SFAS No. 141(R) which will become effective in the fiscal year
ending December 31, 2009) and SFAS No. 142, Goodwill
and Other Intangible Assets.
All
business combinations are accounted for using the purchase method. Goodwill
and
intangible assets with indefinite useful lives are not amortized, but are tested
for impairment at least annually. Intangible assets are recorded based on
estimates of fair value at the time of the acquisition.
8
The
Company assesses the fair value of its intangible assets and its goodwill based
upon the fair value of the Company as a whole, with the Company’s valuation
being based upon its market capitalization. Management believes this to be
the
most reasonable method at the current time, given the absence of a predictable
revenue stream and the Company’s corresponding inability to use an alternative
valuation method such as a discounted cash flow analysis. If the carrying amount
of the Company’s net assets exceeds the Company’s estimated fair value,
intangible asset and/or goodwill impairment may be present. The Company measures
the goodwill impairment loss based upon the fair value of the underlying assets
and liabilities, including any unrecognized intangible assets, and estimates
the
implied fair value of goodwill. An impairment loss is recognized to the extent
that the Company’s recorded goodwill exceeds its implied fair value.
Goodwill,
in addition to being tested for impairment annually, is tested for impairment
between annual tests if an event occurs or circumstances change such that it
is
more likely than not that the carrying amount of goodwill may be impaired.
No
impairment was present upon the performance of these tests at December 31,
2007
and 2006. We cannot predict the occurrence of future events that might adversely
affect the reported value of goodwill. Such events may include, but are not
limited to, strategic decisions made in response to economic and competitive
conditions, judgments on the validity of the Company’s VoIP Patent Portfolio, or
other factors not known to management at this time.
Investments
Investments
are accounted for under the methods appropriate to each type of investment.
Equity
securities that do not have readily determinable fair values, and equity
securities having underlying common stock that also do not have readily
determinable fair values, are accounted for under the cost method when the
Company’s ownership interests do not allow it to exercise significant influence
over the entities in which it has invested. When the Company’s ownership
interests do allow it to exercise significant influence over the entities in
which it has invested, the investments are accounted for under the equity
method.
The
Company monitors all of its investments for impairment by considering factors
such as the economic environment and market conditions, as well as the
operational performance of, and other specific factors relating to, the
businesses underlying the investments. The fair values of the securities are
estimated quarterly using the best available information as of the evaluation
date, including data such as the quoted market prices of comparable public
companies, market price of the common stock underlying the preferred stock,
recent financing rounds of the investee, and other investee-specific
information. The Company will record an other than temporary impairment in
the
carrying value of the investments should the Company conclude that such a
decline has occurred.
Impairments,
equity pick-ups, dividends and realized gains and losses on equity securities
are included in other income in the consolidated statements of operations.
See
Note 6 for further discussion of the Company’s investments.
Liabilities
The
Company is involved from time to time in various legal matters arising out
of
its operations in the normal course of business. On a case by case basis, the
Company evaluates the likelihood of possible outcomes for this litigation.
Based
on this evaluation, the Company determines whether a liability accrual is
appropriate. If the likelihood of a negative outcome is probable, and the amount
is estimable, the Company accounts for the liability in the current period.
A
change in the circumstances surrounding any current litigation could have a
material impact on the financial statements.
Stock-Based
Compensation
The
Company calculates stock-based compensation in accordance with SFAS No. 123,
Accounting
for Stock-Based Compensation,
as
revised December 2004 (“SFAS No. 123(R)”), which it was required to adopt in the
first quarter of 2006. SFAS No. 123(R) requires that all equity awards,
including options, be expensed at fair value, as of the grant date, over the
vesting period. Companies are required to use an option pricing model (e.g.
Black-Scholes or Binomial) to determine compensation expense. See Note 4 for
further discussion of the Company’s stock-based compensation.
9
Income
taxes
The
Company records deferred taxes in accordance with SFAS No. 109, Accounting
for Income Taxes (“SFAS
109”). This statement requires recognition of deferred tax assets and
liabilities for temporary differences between the tax bases of assets and
liabilities and the amounts at which they are carried in the financial
statements, based upon the enacted tax rates in effect for the year in which
the
differences are expected to reverse. The Company establishes a valuation
allowance when necessary to reduce deferred tax assets to the amount expected
to
be realized.
The
Company periodically assesses the value of its deferred tax asset, which has
been generated by a history of net operating and net capital losses and
determines the necessity for a valuation allowance. The Company evaluates which
portion, if any, will more likely than not be realized by offsetting future
taxable income, taking into consideration any limitations that may exist on
its
use of its net operating and net capital loss carryforwards.
In
July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109
("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements in accordance with SFAS 109, and prescribes
a recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted the provisions of FIN 48 effective
January 1, 2007. The adoption of FIN 48 had no material effect on the
financial position, operations or cash flow of the Company. See Note 9 for
further discussion of the Company’s income taxes.
Fair
value of financial instruments
The
fair
value of financial instruments is the amount at which the instruments could
be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. The carrying value at June 30, 2008 and December
31,
2007 for the Company’s financial instruments, which include cash, accounts
payable and accrued liabilities, and related party debt, approximates fair
value.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under GAAP, expands the required disclosures regarding
fair
value measurements, and applies to other accounting pronouncements that either
require or permit fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and for interim periods within those
fiscal years, with early adoption encouraged. SFAS No. 157 is to be applied
prospectively, with a limited form of retrospective application for several
financial instruments. The Company elected to adopt SFAS No. 157 at January
1,
2007, in order to conform to the adoption of a similar Canadian accounting
pronouncement by its parent, Counsel Corporation (together with its
subsidiaries, “Counsel”). The Company’s adoption of SFAS No. 157 had no effect
on the Company’s financial position, results of operations or cash flows.
In
February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157
(“FSP
FAS 157-2”). FSP FAS 157-2 delays the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008. FSP FAS 157-2
states that a measurement is recurring if it happens at least annually and
defines nonfinancial assets and nonfinancial liabilities as all assets and
liabilities other than those meeting the definition of a financial asset or
financial liability in SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, Including
an
Amendment of FASB Statement No. 115
(“SFAS
No. 159”, discussed below). FSP FAS 157-2 is effective upon issuance. Entities
that applied the measurement and disclosure guidance in SFAS No. 157 in
preparing either interim or annual financial statements issued before the
effective date of the FSP are not eligible for the FSP’s deferral provisions.
Entities are encouraged to adopt SFAS No. 157 in its entirety, as long as they
have not yet issued financial statements during that year. An entity that
chooses to adopt SFAS No. 157 in its entirety must do so for all nonfinancial
assets and nonfinancial liabilities within its scope. As C2 had not employed
fair value accounting for any of its nonfinancial assets and nonfinancial
liabilities prior to its adoption of SFAS No. 157 at January 1, 2007, FSP FAS
157-2 had no effect on its financial position, operations or cash
flows.
10
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159. SFAS No. 159 provides the option
to
measure selected financial assets and liabilities at fair value, and requires
the fair values of those assets and liabilities to be shown on the face of
the
balance sheet. It also requires the provision of additional information
regarding the reasons for electing the fair value option and the effect of
the
election on current period earnings. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, with early adoption permitted if SFAS No. 157 is also
adopted. SFAS No. 159 is to be applied prospectively. The Company adopted SFAS
No. 159 at January 1, 2008. As noted above, the carrying values of the Company’s
cash, accounts payable and accrued liabilities, and related party debt
approximate fair value, and therefore the adoption of SFAS No. 159 had no effect
on the reported amounts of these assets and liabilites. In addition, the Company
has the option to elect fair value accounting for its investments in
internet-based E-commerce businesses. The Company has elected to continue to
account for these investments using the methods in place at December 31, 2007,
as described above under “Investments”. Therefore, the adoption of SFAS No. 159
had no impact on the Company’s financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations
(“SFAS
No. 141(R)”) and SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements
(“SFAS
No. 160”). SFAS No. 141(R) replaces SFAS No. 141 and SFAS No. 160 amends
Accounting Research Bulletin No. 51, Consolidated
Financial Statements.
Together, SFAS No. 141(R) and SFAS No. 160 substantially increase the use of
fair value and make significant changes to the way companies account
for
business combinations and noncontrolling interests. Some of the more significant
requirements are that they will require more assets acquired and liabilities
assumed to be measured at fair value as of the acquisition date, liabilities
related to contingent consideration to be remeasured at fair value in each
subsequent reporting period, acquisition-related costs to be expensed, and
noncontrolling interests in subsidiaries to be initially measured at fair value
and classified as a separate component of equity.
SFAS No.
141(R) and SFAS No. 160 are effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. They are to be applied
prospectively, with one exception relating to income taxes. The Company is
currently evaluating the impact that SFAS No. 141(R) and SFAS No. 160 will
have
on its financial statements when adopted.
In
March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133
(“SFAS
No. 161”). SFAS No. 161 does not change FASB Statement No. 133’s scope or
accounting, but does require expanded disclosures about an entity’s derivative
instruments and hedging activities. The required disclosures include: how and
why an entity is using a derivative instrument or hedging activity, how the
entity accounts for derivative instruments and hedged items under FASB Statement
No. 133, and how the entity’s financial position, financial performance and cash
flows are affected by derivative instruments. SFAS No. 161 also amends SFAS
No.
107, Disclosures
about Fair Value of Financial Instruments
(“SFAS
No. 107”) to clarify that derivative instruments are subject to SFAS No. 107’s
concentration-of-credit-risk disclosures. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008, with early adoption
permitted. The Company does not plan early adoption of SFAS No. 161 and is
currently evaluating the impact that SFAS No. 161 will have on its financial
statements when adopted.
In
April
2008, the FASB issued FASB
Staff Position No. FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets
(“FSP
FAS 142-3”). FSP FAS 142-3 amends the list of factors that an entity should
consider in developing renewal or extension assumptions used in determining
the
useful life of recognized intangible assets under SFAS No. 142, both those
acquired individually or as part of a group of other assets, and those acquired
in business combinations or asset acquisitions. The FSP also expands the
disclosure requirements of SFAS No. 142. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Although the guidance regarding
an
intangible asset’s useful life is to be applied prospectively only to intangible
assets acquired after FSP FAS 142-3’s effective date, the disclosure
requirements must be applied prospectively to all intangible assets recognized
as of the effective date. The Company is
currently evaluating the impact that FSP FAS 142-3 will have on its financial
statements when adopted.
11
In
May
2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(“SFAS
No. 162”). SFAS No. 162 is intended to improve financial reporting by providing
a consistent framework for determining the accounting principles to be used
in
the preparation of financial statements in conformity with GAAP. Currently,
GAAP
hierarchy is outlined in the American Institute of Certified Public Accountants
Statement on Auditing Standards No. 69, “The
Meaning of
Present
Fairly in Conformity With Generally Accepted Accounting Principles”, which is
directed to auditors rather than to the entities responsible for the preparation
of financial statements. SFAS No. 162 will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The
Meaning of
Present
Fairly in Conformity With Generally Accepted Accounting Principles”. The FASB
does not believe that SFAS No. 162 will result in a change to current practice,
but has provided transition provisions. The Company does not believe that the
adoption of SFAS No. 162 will have any effect on its financial
statements.
In
May
2008, the FASB issued FASB
Staff Position No. FSP APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)
(“FSP
APB 14-1”). FSP APB 14-1 addresses the accounting for convertible debt
securities that, upon conversion, may be settled by the issuer fully or
partially in cash. It does not change the accounting for traditional types
of
convertible debt securities that do not have a cash settlement feature, and
does
not apply if, under existing GAAP for derivatives, the embedded conversion
feature must be accounted for separately from the rest of the instrument. FSP
APB 14-1 is effective for fiscal years and interim periods beginning after
December 15, 2008. It should be applied retrospectively to all past periods
presented, even if the convertible debt security has matured, been converted
or
otherwise extinguished as of the FSP’s effective date. The Company is
currently evaluating the impact that FSP APB 14-1 will have on its financial
statements when adopted.
On
June
25, 2008, the FASB ratified Emerging Issues Task Force Issue 07-5, Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own
Stock
(“EITF
07-5”). The Task Force reached a consensus on how an entity should evaluate
whether an instrument (or an embedded feature) is indexed to its own stock,
how
the currency in which the instrument is denominated affects the determination
of
whether the instrument is indexed to a company’s own stock, and how an issuer
should account for market-based employee stock option valuation instruments.
EITF 07-5 is effective for fiscal years and interim periods beginning after
December 31, 2008, and must be applied to outstanding instruments as of the
beginning of the fiscal year of adoption, with a cumulative-effect adjustment
to
the opening balance of retained earnings. Early adoption is not permitted.
The
Company is currently evaluating the impact that EITF 07-5 will have on its
financial statements when adopted.
Note
3 - Liquidity and Capital Resources
At
June
30, 2008 the Company had stockholders’ equity of $1,206, as compared to a
stockholders’ deficit of $941 at December 31, 2007. Working capital at June 30,
2008 was $377, as compared to a working capital deficit of $1,653 at December
31, 2007. The primary reason for the improvement of the Company’s financial
position is the revenue from the settlement and license agreements that the
Company entered into in February and May 2008. The Company’s cash and cash
equivalents increased by $730, from $67 at December 31, 2007 to $797 at June
30,
2008.
In
the
first and second quarters of 2008, the Company realized revenues from continuing
operations for the first time since 2004. However, the Company must continue
to
realize value from its intellectual property through ongoing licensing and
royalty revenue, as discussed in Note 1, in order to continue as a going
concern. Absent an ongoing revenue stream, there is significant doubt about
the
Company’s ability to obtain additional financing to fund its operations without
the support of Counsel. Additionally, management believes that the Company
does
not, at this time, have the ability to obtain additional financing from third
parties in order to pursue expansion through acquisition.
At
June
30, 2008 the Company had no related party debt owing to its 91% common
stockholder, Counsel, as compared to $2,335 owing at December 31, 2007. Should
Counsel make further advances under the existing loan agreements, repayment
will
be due on the loans’ maturity date of December 31, 2008. Counsel has indicated
that it will fund the Company’s minimal cash requirements until at least
December 31, 2008.
12
Note
4 - Stock-Based Compensation
At
June
30, 2008, the Company had five stock-based compensation plans, which are
described more fully in Note 16 to the audited consolidated financial statements
contained in our most recently filed Annual Report on Form 10-K.
The
Company’s stock-based compensation expense for the three and six months ended
June 30, 2008, respectively, is $24 and $47, as compared to $44 and $86 for
the
same periods in 2007. The fair value compensation costs of unvested stock
options in the first six months of 2008 and 2007 were determined using
historical Black-Scholes input information at grant dates between 2004 and
2008.
These inputs included expected volatility between 79% and 81%, risk-free
interest rates between 1.80% and 5.07%, expected terms of 4.75 years, and an
expected dividend yield of zero.
As
of
June 30, 2008, the total unrecognized stock-based compensation expense related
to unvested stock options was $152, which is expected to be recognized over
a
weighted average period of approximately 14 months.
The
tables below present information regarding all stock options outstanding at
June
30, 2008 and 2007:
|
Options
|
Weighted
Average
Exercise
Price
|
|||||
Outstanding
at December 31, 2007
|
975,749
|
$
|
9.88
|
||||
Granted
|
40,000
|
$
|
0.90
|
||||
Expired
|
(1,250
|
)
|
$
|
78.00
|
|||
Outstanding
at June 30, 2008
|
1,014,499
|
$
|
9.44
|
||||
Options
exercisable at June 30, 2008
|
571,999
|
$
|
16.10
|
|
Options
|
Weighted
Average
Exercise
Price
|
|||||
Outstanding
at December 31, 2006
|
1,096,326
|
$
|
19.52
|
||||
Granted
|
30,000
|
$
|
0.70
|
||||
Expired
|
(20,167
|
)
|
$
|
78.00
|
|||
Outstanding
at June 30, 2007
|
1,106,159
|
$
|
17.91
|
||||
Options
exercisable at June 30, 2007
|
495,346
|
$
|
38.40
|
No
options were forfeited or exercised during the six months ending June 30, 2008
or 2007.
The
aggregate intrinsic value of options outstanding at June 30, 2008 was $0, based
on the Company’s closing stock price of $0.47 as of the last business day of the
period ended June 30, 2008. Intrinsic value is the amount by which the fair
value of the underlying stock exceeds the exercise price of the options. At
June
30, 2008, all of the outstanding options had exercise prices greater than
$0.47.
The
tables below present information regarding unvested stock options outstanding
at
June 30, 2008 and 2007:
13
|
Options
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||
Unvested
at December 31, 2007
|
425,813
|
$
|
0.51
|
||||
Granted
|
40,000
|
$
|
0.56
|
||||
Vested
|
(23,313
|
)
|
$
|
0.42
|
|||
Forfeited
|
—
|
—
|
|||||
Unvested
at June 30, 2008
|
442,500
|
$
|
0.52
|
|
Options
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||
Unvested
at December 31, 2006
|
596,625
|
$
|
0.63
|
||||
Granted
|
30,000
|
$
|
0.46
|
||||
Vested
|
(15,812
|
)
|
$
|
0.40
|
|||
Forfeited
|
—
|
—
|
|||||
Unvested
at June 30, 2007
|
610,813
|
$
|
0.63
|
The
total
fair value of shares vesting during the six months ending June 30, 2008 was
$10,
as compared to $1 for the same period in 2007.
Note
5 - Composition of Certain Financial Statements Captions
Intangible
assets consisted of the following:
|
June
30, 2008
|
||||||||||||
|
Amortization
period
|
Cost
|
|
Accumulated
amortization
|
|
Net
|
|
||||||
Intangible
assets subject to amortization:
|
|||||||||||||
Patent
rights
|
60
months
|
$
|
100
|
$
|
(90
|
)
|
$
|
10
|
December
31, 2007
|
|||||||||||||
|
Amortization
period
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
|
||||||
Intangible
assets subject to amortization:
|
|||||||||||||
Patent
rights
|
60
months
|
$
|
100
|
$
|
(80
|
)
|
$
|
20
|
The
Company’s patent rights were acquired in December 2003 and are associated with
the VoIP Patent. Aggregate amortization expense of intangibles was $5 for each
of the three month periods ended June 30, 2008 and 2007, and $10 for each of
the
six month periods ended June 30, 2008 and 2007. The Company expects that the
patent rights will be fully amortized during 2008.
The
Company’s goodwill of $173 relates to an investment in a subsidiary company that
holds certain of the Company’s patent rights.
14
Accounts
payable and accrued liabilities consisted of the following:
June
30,
2008
|
December
31, 2007
|
||||||
Regulatory
and legal fees
|
$
|
52
|
$
|
69
|
|||
Accounting,
auditing and tax consulting
|
72
|
107
|
|||||
Patent
licensing costs
|
348
|
—
|
|||||
Sales
and other taxes
|
62
|
62
|
|||||
Remuneration
and benefits
|
54
|
114
|
|||||
Other
|
48
|
50
|
|||||
|
|||||||
Total
accounts payable and accrued liabilities
|
$
|
636
|
$
|
402
|
Note
6 - Investments
The
Company’s investments as at June 30, 2008 and December 31, 2007 consisted of the
following:
June
30,
|
December
31,
|
||||||
2008
|
2007
|
||||||
Buddy
Media, Inc.
|
$
|
224
|
$
|
100
|
|||
LIMOS.com
LLC
|
403
|
399
|
|||||
Knight’s
Bridge Capital Partners Internet Fund
No. 1 GP LLC
|
19
|
20
|
|||||
|
|||||||
Total
investments
|
$
|
646
|
$
|
519
|
Buddy
Media, Inc.
On
September 12, 2007, the Company acquired 303,030 shares of convertible Series
A
Preferred Stock of Buddy Media, Inc. (“Buddy Media”) for a total purchase price
of $100. Buddy Media is a leading developer of applications for emerging new
media platforms, including Facebook, MySpace and other social media sites.
The
Company’s investment was less than 5% of Buddy Media on an as-converted basis.
The Series A preferred shares vote on an as-converted basis with the common
stock, are convertible by a vote of the majority of the Series A preferred
stockholders or mandatorily convertible in connection with an initial public
offering, and are redeemable in certain circumstances, including a liquidation
or sale of Buddy Media. They are entitled to dividends in the event that common
stock holders also receive dividends. The material terms of the Company’s
Stockholders’ Agreement and Subscription Agreement are standard for early
investments in development stage companies and include drag along rights, right
of first offer, refusal rights, co-sale rights, limited anti-dilution
protection, dividend preference and liquidation preference. The Series A
preferred shares have standard piggyback registration rights with customary
expiration provisions and are subject to a contractual 180 day market
stand-off.
On
April
15, 2008, the Company acquired 140,636 shares of convertible Series B Preferred
Stock of Buddy Media for a total purchase price of $124. The Series B preferred
shares are senior to the Series A preferred shares described above, but
otherwise have terms and conditions substantially equivalent to those of the
Series A preferred shares. Following the purchase, the Company’s investment
remains less than 5% of Buddy Media on an as-converted basis.
The
Company’s ownership interest in Buddy Media does not allow it to exercise
significant influence over Buddy Media’s operations, and the Company intends to
hold the investment for an indefinite period of time. The investment is
therefore accounted for under the cost method. At each balance sheet date,
the
Company estimates the fair value of the securities using the best available
information as of the evaluation date. Because Buddy Media’s shares are not
traded on an open market, their valuation must be based primarily on
investee-specific information. The Company will record an other than temporary
impairment of the investment in the event the Company concludes that such
impairment has occurred. Based on the Company’s analysis, at June 30, 2008 there
has been no impairment in the fair value of its investment in Buddy
Media.
15
LIMOS.com
LLC
On
September 21, 2007, the Company acquired 400,000 units of AZ Limos LLC (name
subsequently changed to LIMOS.com LLC, “LIMOS.com”) for a total purchase price
of $400, representing a 16% ownership interest in LIMOS.com. In the first
quarter of 2008, the Company’s interest was reduced to 15.69% as a result of
investment in LIMOS.com by investors who are not related to the
Company.
LIMOS.com
was incorporated in July 2007 in order to acquire the assets and operations
of
Limos.com (“Limos”), a private company that provides qualified leads for
licensed limousine operators. The Company’s investment was part of a $2,500
capital raise by LIMOS.com.
LIMOS.com
acquired the assets and operations of Limos for a purchase price of $4,300,
$2,300 of which was provided by the $2,500 capital raise and $2,000 of which
was
provided by financing (the “Loan”) from a third party lender (the “Lender”). The
Loan bears an effective interest rate of 10.5% per annum and is secured by
all
the assets of LIMOS.com. All investors in LIMOS.com have pledged their ownership
interests as security for the Loan, and certain of the investors have guaranteed
$750 of the Loan. The Company’s majority stockholder, Counsel, has guaranteed
$250 of the Loan on the Company’s behalf.
Contemporaneously
with the Company’s investment in LIMOS.com and Counsel’s guaranty, Counsel and
the Lender entered into a Priorities Agreement. Under the terms of the Company’s
note payable to Counsel, which is discussed in more detail in Note 3, Note
7 and
Note 10 of these unaudited condensed consolidated financial statements, the
Company had pledged all of its assets to Counsel as security for the related
party note. The Priorities Agreement subordinates Counsel’s security interest in
the Company’s investment in LIMOS.com in favor of the Lender. As well, certain
third party investors have a 20% carried interest in LIMOS.com, which is payable
after all investors have received an annual 10% return on their capital from
earnings generated by LIMOS.com and after all investors have received the return
in full of their invested capital. Upon a liquidation event, following the
Company’s receipt of its invested capital and its contractual preferred return,
the Company’s right to participate in further distributions may be diluted, to a
minimum participation of approximately 11.3%, as the result of exercise of
options that have been granted to LIMOS.com employees. The exercise of these
options is dependent upon both their three-year vesting period and the
attainment of certain financial goals to be achieved by LIMOS.com.
At
the
date of the Company’s investment in LIMOS.com, its ownership interest did not
allow it to exercise significant influence over LIMOS.com’s operations, and the
investment was accounted for under the cost method. Subsequently, in November
2007, the Company’s parent, Counsel, increased its ownership of an affiliated
entity (the “Affiliate”) from 50% to 100%. The Affiliate has voting control of
50% of LIMOS.com, including the 15.69% owned by the Company. In addition, the
Affiliate earns a 2% management fee, based on the invested capital of LIMOS.com,
in return for managing the operations of LIMOS.com, and holds two of the four
seats on LIMOS.com’s Board of Directors. The Company’s Chief Executive Officer,
who is also Counsel’s Chief Executive Officer, is a director of the Affiliate.
As a result of Counsel’s acquisition of the Affiliate, the Company’s ability to
exercise significant influence over LIMOS.com is deemed to have increased,
and
therefore the Company currently accounts for its investment in LIMOS.com under
the equity method. Consequently, the Company recorded a loss of $1 from its
investment for the period September 21, 2007 to December 31, 2007, a loss of
$1
for the first quarter of 2008, and income of $5 for the second quarter of
2008.
On
July
8, 2008, the Affiliate, at the time having voting control of 50% of LIMOS.com,
invoked the “shotgun” provision of the LIMOS.com operating agreement. Under the
terms of this provision, the Affiliate has offered to purchase 49% of the
interest in LIMOS.com from the non-related group that holds the interest (the
“Investor Group”), or to sell to the Investor Group the 49% interest controlled
by the Affiliate. The transaction will be priced at approximately twice the
Investor Group’s original investment amount. The Investor Group must respond to
the Affiliate’s offer within 60 days.
16
At
the
date of these unaudited condensed consolidated financial statements, the
Company has not made any adjustments to the carrying value of its investment
in
LIMOS.com to account for the possible outcome of the above offer by the
Affiliate.
Knight’s
Bridge Capital Partners Internet Fund No. 1 GP LLC
The
Company acquired a one-third interest in Knight’s Bridge Capital Partners
Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”), effective December 7, 2007,
for a total purchase price of $20. The additional two-thirds interest in
Knight’s Bridge GP was acquired by parties affiliated with Counsel. Knight’s
Bridge GP was formed to acquire the general partner interests in 2007 Fund
1 LLP
(the “Fund”, subsequently renamed Knight’s Bridge Capital Partners Internet Fund
No. 1 LP). At June 30, 2008, the Fund held investments in several Internet-based
e-commerce businesses. As the general partner of the Fund, Knight’s Bridge GP
manages the Fund, in return for which it earns a 2% per annum management fee
with respect to the Fund’s invested capital. Knight’s Bridge GP also has a 20%
carried interest on any incremental realized gains from the Fund’s investments.
The
Company’s one-third ownership of Knight’s Bridge GP allows the Company to
exercise significant influence, and therefore the Company accounts for its
investment under the equity method. The Company recorded income of $7 as its
share of Knight’s Bridge GP’s carried interest when the Fund sold one of its
investments in December 2007. Following the Fund’s sale of this investment, the
Company received a cash distribution of $7 from Knight’s Bridge GP, which was
recorded as a reduction of the Company’s investment. During the first six months
of 2008, the Company invested an additional $1 in Knight’s Bridge GP, recorded
$3 as its share of Knight’s Bridge GP’s earnings, and received a cash
distribution of $5.
Note
7 - Debt
At
June
30, 2008 the Company had no outstanding debt other than the accounts payable
and
accrued liabilities detailed in Note 5. At December 31, 2007, the Company was
indebted to Counsel in the aggregate amount of $2,335, consisting of $2,151
principal and $184 accumulated interest. This debt was repaid in full in March
2008 following the Company’s receipt of proceeds from the settlement agreements
with AT&T and Verizon that are discussed in Note 1.
The
related party notes payable to Counsel, which currently have a zero balance,
are
scheduled to mature on December 31, 2008. Counsel has indicated that it will
fund the Company’s minimal cash requirements until at least December 31, 2008.
Should further advances be required under these notes, their repayment is
subject to acceleration in certain circumstances including certain events of
default.
For
further discussion of the related party notes and other transactions with
Counsel, see Note 3 and Note 10.
Convertible
note payable to a third party
On
October 14, 2004, the Company issued the Note with a detachable warrant to
a
third party lender, in the principal amount of $5,000, due October 14, 2007.
In
January 2007, the lender converted a portion of its note into 10,000 common
shares of the Company, and the Company prepaid the remaining Note in full by
paying 105% of the amount then due.
The
Company’s cost to prepay the Note was $293, calculated as follows:
Amount
paid to third party lender
|
$
|
1,388
|
||
Balance
of Note owing at January 10, 2007, net of $8.8 converted
to common shares
|
(1,315
|
)
|
||
Accrued
interest owing for period January 1 - 10, 2007
|
(4
|
)
|
||
Net
premium paid
|
69
|
|||
Premium
related to excess of $0.88 conversion price over $0.70 market
price: 10,000 shares x $0.18
|
(2
|
)
|
||
Write-off
of unamortized discount and financing costs
|
226
|
|||
Cost
to prepay Note
|
$
|
293
|
17
The
cost
of $293 was approximately equal to the total of the interest expense and
discount amortization that the Company would have incurred by holding the debt
to its contractual maturity of October 14, 2007.
Warrant
to purchase common stock
In
addition to the Note, the Company issued a common stock purchase warrant (the
“Warrant”) to the third party lender, entitling the lender to purchase up to one
million shares of common stock, subject to adjustment. The Warrant entitles
the
holder to purchase the stock through the earlier of (i) October 13,
2009 or (ii) the date on which the average closing price for any
consecutive ten trading dates shall equal or exceed 15 times the exercise price.
The exercise price is $1.00 per share as to the first 250,000 shares, $1.08
per
share for the next 250,000 shares and $1.20 per share for the remaining 500,000
shares. The exercise price is 125%, 135% and 150% of the average closing price
for the ten trading days immediately prior to the issue date of the Warrant,
respectively.
At
the
time it was issued in October 2004, the Warrant was classified as a liability
in
the consolidated financial statements, as it was linked to a registration
payment arrangement and thus met the conditions for this classification under
the GAAP in effect at that date. The details of the registration payment
arrangement were previously disclosed in the Company’s Report on Form 8-K, filed
with the SEC on October 20, 2004. In December 2006, the FASB issued FASB Staff
Position No. EITF 00-19-2, Accounting
for Registration Payment Arrangements
(“FSP
EITF 00-19-2”). According to FSP EITF 00-19-2, financial instrument(s) such as
the Warrant should be recorded in the financial statements using appropriate
GAAP without regard to the contingent obligation to transfer consideration
pursuant to a related registration payment arrangement, and any contingent
obligations under the registration payment arrangement should be separately
recognized and measured in accordance with GAAP relating to liabilities.
Adoption of FSP EITF 00-19-2 is permitted for interim or annual periods for
which financial statements or interim reports have not been issued.
Retrospective application is not permitted. The Company evaluated the
requirements of FSP EITF 00-19-2, determined that it is applicable to the
Warrant, and chose to adopt FSP EITF 00-19-2 effective October 1, 2006, the
beginning of the Company’s 2006 fourth quarter. The impact of adopting FSP EITF
00-19-2 on the Company’s financial position was as follows: long-term
liabilities were reduced by $203, the fair value of the Warrant at October
1,
2006, and stockholders’ equity was increased by $430, the fair value of the
Warrant when issued at October 14, 2004. The difference between these two
amounts, $227, was recorded as a charge to opening retained earnings. At the
date of adoption of FSP EITF 00-19-2, and at June 30, 2008 and December 31,
2007, the Company’s assessment was that payments relating to the registration
payment arrangement were not probable, and therefore the Company has not
recorded any liability in connection with such a payment.
Note
8 - Patent Participation Fee
In
the
fourth quarter of 2003, C2 acquired Patent No. 6,243,373 from a third party.
The
consideration paid was $100 plus a 35% participation fee payable to the third
party relating to the net proceeds from future licensing and/or enforcement
actions from the C2 VoIP Patent Portfolio. Net proceeds are defined as amounts
collected from third parties net of the direct costs associated with the
maintenance, licensing and enforcement of the VoIP Patent Portfolio. Prior
to
the first quarter of 2008, no payments were required, as the relevant costs
incurred exceeded licensing revenues. As a result of settlement and license
agreements entered into during the first half of 2008, the Company incurred
a
patent participation fee expense of $349 in the first quarter and $321 in the
second quarter.
Note
9 - Income Taxes
In
the
second quarter of 2008, the Company recognized a deferred income tax expense
of
$9, increasing the aggregate deferred tax expense recorded year-to-date to
$930.
The income tax expense in the current year relates to the utilization, against
year-to-date estimated 2008 taxable income, of substantially all of the
available tax losses previously recognized as a deferred tax asset as at
December 31, 2007. The remaining $70 net deferred income tax asset balance
at
June 30, 2008 reflects the tax benefit of available tax losses considered “more
likely than not” to be utilized during the remainder of 2008. The Company
recorded no income tax benefit from its losses in the six months ended June
30,
2007 due to uncertainty regarding the future realization of the related deferred
tax asset.
18
The
Company adopted the provisions of FIN 48 effective January 1, 2007. As a
result of the implementation of FIN 48, as of December 31, 2007, the Company
recorded a reduction in its deferred tax asset of approximately $13,167,
attributable to unrecognized tax benefits of $24,000 associated with prior
years’ tax losses, which are not expected to be available primarily due to
change of control usage restrictions, and a reduction in the rate of the tax
benefit associated with all of its tax attributes. Due to the Company’s historic
policy of applying a valuation allowance against its deferred tax assets, the
effect of the above was an offsetting reduction in the Company’s valuation
allowance. Accordingly, the above reduction had no net impact on the Company’s
financial position, operations or cash flow.
In
the
event that these tax benefits are recognized in the future, there should be
no
impact on the Company’s effective tax rate, unless recognition occurs at a time
when all of the Company’s historic tax loss carryforwards have been utilized
and/or the associated valuation allowance against the Company’s deferred tax
assets has been reversed. In such circumstances, the amount recognized at that
time should result in a reduction in the Company’s effective tax
rate.
The
Company’s policy is to recognize accrued interest and penalties related to
unrecognized tax benefits in income tax expense. Because the Company has tax
loss carryforwards in excess of the unrecognized tax benefits, the Company
did
not accrue for interest and penalties related to unrecognized tax benefits
either upon the adoption of FIN 48 or in the current period.
It
is
reasonably possible that the total amount of the Company’s unrecognized tax
benefits will significantly increase or decrease within the next 12 months.
These changes may be the result of future audits, the application of “change in
ownership” rules leading to further restrictions in tax losses arising from
changes in the capital structure of the Company and/or that of its parent
company Counsel, reductions in available tax loss carryforwards through future
merger, acquisition and/or disposition transactions, failure to continue a
significant level of business activity, or other circumstances not known to
management at this time. Any such additional limitations could require the
Company to pay income taxes on its future earnings and record an income tax
expense to the extent of such liability, despite the existence of tax loss
carryforwards. At this time, an estimate of the range of reasonably possible
outcomes cannot be made.
The
Company has a history of generating tax losses arising from 1991 to the present.
All loss taxation years remain open for audit pending their application against
income in a subsequent taxation year. In general, the statute of limitations
expires 3 years from the date that a Company files a tax return applying prior
year tax loss carryforwards against income in the later year. In 2006, the
Company applied historic tax loss carryforwards against debt forgiveness income.
The Company’s estimated remaining federal tax loss carryforwards at the end of
June 2008 were comprised of approximately $53,000 of unrestricted net operating
tax losses, $33,000 of restricted net operating tax losses subject to an annual
usage restriction of $2,500 per annum until 2008 and $1,700 per annum
thereafter, and $34,000 of unrestricted capital losses.
The
Company historically has been subject to state income tax in multiple
jurisdictions. While the Company had net operating loss carryforwards for state
income tax purposes in certain states where it previously conducted business,
its available state tax loss carryforwards may differ substantially by
jurisdiction and, in general, are subject to the same or similar restrictions
as
to expiry and usage described above. In addition, in certain states the
Company’s state tax loss carryforwards that were attributable to the business of
WXC Corp. ceased to be available to the Company following the sale of the shares
of this company in 2006. It is entirely possible that in the future the Company
may not have tax loss carryforwards available to shield income earned for state
tax purposes, and which is attributable to a particular state, from being
subject to tax in that particular state.
In
the
first quarter of 2006, as discussed in Note 2, the Company adopted SFAS No.
123(R). Effective December 31, 2006,
as
provided in FASB Staff Position (FSP) No. FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards
(“FSP
123(R)-3”), the Company elected to apply “the short cut method”, as outlined in
FSP 123(R)-3, as the methodology for recognizing any related windfall tax
benefits as a credit to additional paid-in capital. The adoption of SFAS No.
123(R) and “the short cut method” had no immediate impact from an income tax
perspective, since SFAS No. 123(R) specifically prohibits the recognition of
any
windfall tax benefits that have not been realized in cash or in the form of
a
reduction of income taxes payable. The Company, to date, has not realized
such benefits either in cash or in the form a of a reduction in income taxes
payable due to the continued availability of net operating tax loss
carryforwards. The adoption of the “short cut method” will therefore only have
application in the event of the Company incurring an income tax liability at
a
future date.
19
Note
10
- Related Party Transactions
During
the first quarter of 2008, the Company repaid the $2,335 owing to Counsel at
December 31, 2007, as well as $43 in interest accrued during the quarter. No
interest expense was incurred for the second quarter of 2008. Should Counsel
make additional advances under the terms of the existing loan agreements between
the Company and Counsel, these advances will accrue interest at 10%, compounded
quarterly, and will be due on December 31, 2008. Additionally, any outstanding
loan balance will be subject to an accelerated maturity in certain
circumstances. For further discussion of the loan transactions with Counsel,
see
Note 3 and Note 7.
The
Chief
Executive Officer (“CEO”) of C2 is an employee of Counsel. As CEO of C2, he is
entitled to an annual salary of $138, plus a discretionary bonus of 100% of
the
base salary. No bonus was paid for the year ended December 31,
2007.
In
December 2004, C2 entered into a management services agreement (the “Agreement”)
with Counsel. Under the terms of the Agreement, C2 agreed to make payment to
Counsel for the past and future services to be provided by certain Counsel
personnel to C2 for each of 2004 and 2005. In March 2006 C2 entered into a
similar agreement with Counsel for services to be provided in 2006. The basis
for such services charged was an allocation, based on time incurred, of the
cost
of the base compensation paid by Counsel to those employees providing services
to C2. For the years ended December 31, 2004, 2005 and 2006, the cost of such
services was $280, $450 and $225, respectively. The fees for 2004, 2005 and
2006
were forgiven on December 30, 2006 as part of Counsel’s forgiveness of its
outstanding debt from C2. In May 2007, the Company and Counsel entered into
a
similar agreement for services provided during 2007, and the cost for 2007
was
$225. In the first quarter of 2008, the Company and Counsel reached an agreement
that Counsel will continue to provide these services in 2008 on the same cost
basis. For the first half of 2008, the costs were estimated to be
$180.
Note
11 - Commitments and Contingencies
Legal
Proceedings
In
April
2004, certain shareholders of C2 filed derivative and securities lawsuits in
the
Superior Court of the State of California against Counsel, C2 and several
affiliated companies, as well as four present and former officers and directors
of C2. Counsel and C2 believe that the claims are and were without merit, and
have defended the actions accordingly.
Effective
June 18, 2008, in order to settle the litigation, and without any admission
of
liability by either C2 or the other defendants, the parties agreed to the
following terms: (i) Counsel and/or certain of its affiliates, other than C2,
would pay a total of $520 to the named plaintiffs; (ii) Counsel and/or a
subsidiary other than C2 would give the plaintiffs approximately 370,000 common
shares of C2, being five common shares of C2 for every share of C2 owned by
the
plaintiffs when the litigation commenced; (iii) plaintiffs who were also
dissenting shareholders in an appraisal action filed by C2 in Florida in June
2004 would withdraw their dissent and C2 would return the shares that they
tendered; (iv) Counsel and/or an affiliate would transfer 350,000 common shares
to C2 for cancellation to settle the derivative claims of the litigation. The
terms of the settlement of the derivative claims were endorsed by the California
court on May 23, 2008.
As
a
result of the transfer of common shares to the plaintiffs and the cancellation
of the shares transferred to C2, Counsel’s percentage ownership in C2 decreased
from approximately 92.5% to approximately 90.8%.
At
our
Adjourned Meeting of Stockholders held on December 30, 2003, our stockholders,
among other things, approved an amendment to our Articles of Incorporation,
deleting Article VI thereof (regarding liquidations, reorganizations, mergers
and the like). Stockholders who were entitled to vote at the meeting and advised
us in writing, prior to the vote on the amendment, that they dissented and
intended to demand payment for their shares if the amendment was effectuated,
were entitled to exercise their appraisal rights and obtain payment in cash
for
their shares under Sections 607.1301 - 607.1333 of the Florida Business
Corporation Act (the “Florida Act”), provided their shares were not voted in
favor of the amendment. In January 2004, we sent appraisal notices in compliance
with Florida corporate statutes to all stockholders who had advised us of their
intention to exercise their appraisal rights. The appraisal notices included
our
estimate of fair value of our shares, at $4.00 per share on a post-split basis.
These stockholders had until February 29, 2004 to return their completed
appraisal notices along with certificates for the shares for which they were
exercising their appraisal rights. Approximately 33 stockholders holding
approximately 74,000 shares of our stock returned completed appraisal notices
by
February 29, 2004. A stockholder of 20 shares notified us of his acceptance
of
our offer of $4.00 per share, while the stockholders of the remaining shares
did
not accept our offer. Subject to the qualification that, in accordance with
the
Florida Act, we may not make any payment to a stockholder seeking appraisal
rights if, at the time of payment, our total assets are less than our total
liabilities, stockholders who accepted our offer to purchase their shares at
the
estimated fair value will be paid for their shares within 90 days of our receipt
of a duly executed appraisal notice. If we should be required to make any
payments to dissenting stockholders, Counsel will fund any such amounts through
advances to C2. Stockholders who did not accept our offer were required to
indicate their own estimate of fair value, and if we do not agree with such
estimates, the parties are required to go to court for an appraisal proceeding
on an individual basis, in order to establish fair value. Because we did not
agree with the estimates submitted by most of the dissenting stockholders,
we
have sought a judicial determination of the fair value of the common stock
held
by the dissenting stockholders. On June 24, 2004, we filed suit against the
dissenting stockholders seeking a declaratory judgment, appraisal and other
relief in the Circuit Court for the 17th
Judicial
District in Broward County, Florida. On February 4, 2005, the declaratory
judgment action was stayed pending the resolution of the direct and derivative
lawsuits filed in California. This decision was made by the judge in the Florida
declaratory judgment action due to the similar nature of certain allegations
brought by the defendants in the declaratory judgment matter and the California
lawsuits described above. On March 7, 2005, the dissenting shareholders appealed
the decision of the District Court judge to the Fourth District Court of Appeals
for the State of Florida, which denied the appeal on June 21, 2005. As a result
of the settlement of the derivative and securities lawsuits in California,
described above, the stay of the Florida declaratory judgment action is expected
to be lifted shortly. When the declaratory judgment action resumes with respect
to the remaining dissenting stockholders, who exercised their appraisal rights
with respect to approximately 27,500 shares, there is no assurance that this
matter will be resolved in our favor and an unfavorable outcome of this matter
could have a material adverse impact on our business, results of operations,
financial position or liquidity.
20
In
connection with the Company’s efforts to enforce its patent rights, C2
Communications Technologies Inc., a wholly-owned subsidiary of the Company,
filed a patent infringement lawsuit against AT&T, Inc., Verizon
Communications, Inc., Qwest Communications International, Inc., Bellsouth
Corporation, Sprint Nextel Corporation, Global Crossing Limited, and Level
3
Communications, Inc. The complaint was filed in the Marshall Division of the
United States District Court for the Eastern District of Texas on June 15,
2006.
The complaint alleges that these companies’ VoIP services and systems infringe
the Company’s U.S. Patent No. 6,243,373, entitled “Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”.
The
complaint seeks an injunction, monetary damages and costs. There is no assurance
that the Company will be successful in this litigation. A trial date of
September 2, 2008 has been set for the lawsuit. In June 2007, the complaint
against Bellsouth Corporation was dismissed without prejudice. In February
2008,
the Company settled the complaints against AT&T and Verizon by entering into
settlement and license agreements, and in May 2008 the Company settled the
complaint against Sprint Nextel Corporation by entering into a similar
agreement, as discussed in Note 1.
The
Company is involved in various other legal matters arising out of its operations
in the normal course of business, none of which are expected, individually
or in
the aggregate, to have a material adverse effect on the Company.
21
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
(All
dollar amounts are presented in thousands of U.S. dollars, unless otherwise
indicated, except per share amounts)
The
following discussion and analysis should be read in conjunction with the
information contained in the unaudited condensed consolidated financial
statements of the Company and the related notes thereto, appearing elsewhere
herein, and in conjunction with the Management’s Discussion and Analysis of
Financial Condition and Results of Operations set forth in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007, filed with the
Securities and Exchange Commission (“SEC”).
Forward
Looking Information
This
Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act of 1934, as amended,
that
are based on management’s exercise of business judgment as well as assumptions
made by, and information currently available to, management. When used in this
document, the words “may”, "will”,
“anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar
import, are intended to identify any forward-looking statements. You should
not
place undue reliance on these forward-looking statements. These statements
reflect our current view of future events and are subject to certain risks
and
uncertainties, as noted in the Company’s Annual Report on Form 10-K, filed with
the SEC, and as noted below. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, our actual
results could differ materially from those anticipated in these forward-looking
statements. We undertake no obligation, and do not intend, to update, revise
or
otherwise publicly release any revisions to these forward-looking statements
to
reflect events or circumstances after the date hereof, or to reflect the
occurrence of any unanticipated events. Although we believe that our
expectations are based on reasonable assumptions, we can give no assurance
that
our expectations will materialize.
Overview
and Recent Developments
C2
Global
Technologies Inc. (“C2” or the “Company”) was incorporated in the State of
Florida in 1983 under the name “MedCross, Inc.” which was changed to “I-Link
Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, and to “C2
Global Technologies Inc.” in 2005. The most recent name change reflects a change
in the strategic direction of the Company following the disposition of its
Telecommunications business in the third quarter of 2005. In the second quarter
of 2006, the Company opened an office in Texas.
C2
owns
certain patents, detailed below under “Company History” and “Intellectual
Property”, including two foundational patents in voice over internet protocol
(“VoIP”) technology - U.S. Patent Nos. 6,243,373 and 6,438,124 (together the
“VoIP Patent Portfolio”), which it seeks to license. Subsequent to the
disposition of its Telecommunications business, licensing of intellectual
property constitutes the primary business of the Company. C2’s target market
consists of carriers, equipment manufacturers, service providers and end users
in the internet protocol (“IP”) telephone market who are using C2’s patented
VoIP technologies by deploying VoIP networks for phone-to-phone communications.
The Company has engaged, and intends to continue to engage, in licensing
agreements with third parties domestically and internationally. At present,
no
ongoing royalties are being paid to the Company.
The
Company plans to obtain licensing and royalty revenue from the target market
for
its patents. In this regard, in the third quarter of 2005, the Company retained
legal counsel with expertise in the enforcement of intellectual property rights,
and on June 15, 2006, C2 Communications Technologies Inc., a wholly-owned
subsidiary of the Company, filed a patent infringement lawsuit against AT&T,
Inc. (“AT&T”), Verizon Communications, Inc. (“Verizon”), Qwest
Communications International, Inc., Bellsouth Corporation, Sprint Nextel
Corporation (“Sprint”), Global Crossing Limited, and Level 3 Communications,
Inc. The complaint was filed in the Marshall Division of the United States
District Court for the Eastern District of Texas, and alleges that these
companies’ VoIP services and systems infringe C2’s U.S. Patent No. 6,243,373,
entitled “Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”
(the
“VoIP Patent”). The complaint seeks an injunction, monetary damages, and costs.
A trial date of September 2, 2008 has been set for the lawsuit.
22
In
June
2007, the complaint against Bellsouth Corporation was dismissed without
prejudice. In February 2008, the Company entered into settlement and license
agreements with AT&T and Verizon, and in May 2008 the Company entered into a
settlement and license agreement with Sprint. Under the terms of the settlement
and license agreements, C2 granted each of AT&T, Verizon and Sprint a
non-exclusive, perpetual, worldwide, fully paid up, royalty free license under
any of C2’s present patents and patent applications, including the VoIP Patent,
to make, use, sell or otherwise dispose of any goods and services based on
such
patents.
On
June
13 2008, the United States federal court (the “Court”) issued a claim
construction (“Markman”) ruling in the patent litigation described above. The
Court rejected the claim constructions of the defendants on each of the nine
disputed claim terms, while construing six of them in the manner originally
proposed by the Company. For the other three claim terms, the Court adopted
a
construction that had not been proposed by either side.
In
the
third quarter of 2007, the Company began investing in Internet-based e-commerce
businesses, when it acquired minority positions in MyTrade.com, Inc., Buddy
Media, Inc. (“Buddy Media”) and LIMOS.com LLC. Its investment in MyTrade.com,
Inc. was sold in the fourth quarter of 2007. In
the
fourth quarter of 2007 the Company acquired a one-third interest in Knight’s
Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”). The
additional two-thirds interest in Knight’s Bridge GP was acquired by parties
affiliated with the Company’s majority stockholder, Counsel Corporation
(together with its subsidiaries, “Counsel”). Knight’s Bridge GP was formed to
acquire the general partner interests in 2007 Fund 1 LLP (the “Fund”,
subsequently renamed Knight’s Bridge Capital Partners Internet Fund No. 1 LP).
The Fund holds investments in several Internet-based e-commerce businesses.
As
the general partner of the Fund, Knight’s Bridge GP manages the Fund, in return
for which it earns a 2% per annum management fee with respect to the Fund’s
invested capital. Knight’s Bridge GP also has a 20% carried interest on any
incremental realized gains from the Fund’s investments. In the second quarter of
2008, the Company increased its investment in Buddy Media. Following the
purchase, the Company’s investment in Buddy Media remains less than 5% on an
as-converted basis.
In
April
2004, certain shareholders of C2 filed derivative and securities lawsuits in
the
Superior Court of the State of California against Counsel, C2 and several
affiliated companies, as well as four present and former officers and directors
of C2. Counsel and C2 believe that the claims are and were without merit, and
have defended the actions accordingly. Effective June 18, 2008, in order to
settle the litigation, and without any admission of liability by either C2
or
the other defendants, the parties agreed to the following terms: (i) Counsel
and/or certain of its affiliates, other than C2, would pay a total of $520
to
the named plaintiffs; (ii) Counsel and/or a subsidiary other than C2 would
give
the plaintiffs approximately 370,000 common shares of C2, being five common
shares of C2 for every share of C2 owned by the plaintiffs when the litigation
commenced; (iii) plaintiffs who were also dissenting shareholders in an
appraisal action filed by C2 in Florida in June 2004 would withdraw their
dissent and C2 would return the shares that they tendered; (iv) Counsel and/or
an affiliate would transfer 350,000 common shares to C2 for cancellation to
settle the derivative claims of the litigation. The terms of the settlement
of
the derivative claims were endorsed by the California court on May 23, 2008.
As
a result of the transfer of common shares to the plaintiffs and the cancellation
of the shares transferred to C2, Counsel’s percentage ownership in C2 decreased
from approximately 92.5% to approximately 90.8%.
Company
History
In
1994,
we began operating as an Internet service provider and quickly identified that
the emerging IP environment was a promising basis for enhanced service delivery.
We soon turned to designing and building an IP telecommunications platform
consisting of proprietary software and hardware, and leased telecommunications
lines. The goal was to create a platform with the quality and reliability
necessary for voice transmission.
In
1997,
we began offering enhanced services over a mixed IP-and-circuit-switched network
platform. These services offered a blend of traditional and enhanced
communication services and combined the inherent cost advantages of an IP-based
network with the reliability of the existing Public Switched Telephone Network
(“PSTN”).
In
August 1997, we acquired MiBridge, Inc. (“MiBridge”), a communications
technology company engaged in the design, development, integration and marketing
of a range of software telecommunications products that support multimedia
communications over the PSTN, local area networks (“LANs”) and IP networks. The
acquisition of MiBridge permitted us to accelerate the development and
deployment of IP technology across our network platform.
23
In
1998,
we first deployed our real-time IP communications network platform. With this
new platform, all core operating functions such as switching, routing and media
control became software-driven. This new platform represented the first
nationwide, commercially viable VoIP platform of its kind. Following the launch
of our software-defined VoIP platform in 1998, we continued to refine and
enhance the platform to make it even more efficient and capable for our partners
and customers.
Commencing
in 2001, the Company entered the Telecommunications business. The assets of
the
Company’s Telecommunications segment were owned through a wholly-owned
subsidiary, Acceris Communications Corp. (name changed to WXC Corp. (“WXCC”) in
October 2005). This business was sold effective September 30, 2005.
In
2002,
the U.S. Patent and Trademark Office issued U.S. Patent No. 6,438,124 (the
“C2
Patent”) for the Company’s Voice Internet Transmission System. Filed in 1996,
the C2 Patent reflects foundational thinking, application, and practice in
the
VoIP services market. The C2 Patent encompasses the technology that allows
two
parties to converse phone-to-phone, regardless of the distance, by transmitting
voice/sound via the Internet. No special telephone or computer is required
at
either end of the call. The apparatus that makes this technically possible
is a
system of Internet access nodes, or Voice Engines, which provide digitized,
compressed, and encrypted duplex or simplex Internet voice/sound. The end result
is a high-quality calling experience whereby the Internet serves only as the
transport medium and as such, can lead to reduced toll charges. Shortly after
the issuance of our core C2 Patent, we disposed of our domestic U.S. VoIP
network in a transaction with Buyers United, Inc., which closed on May 1,
2003. The sale included the physical assets required to operate our nationwide
network using our patented VoIP technology (constituting the core business
of
the I-Link Communications Inc. (“ILC”) business) and included a fully paid
non-exclusive perpetual license to our proprietary software-based network
convergence solution for voice and data. The sale of the ILC business removed
essentially all operations that did not pertain to our proprietary
software-based convergence solution for voice and data. As part of the sale,
we
retained all of our intellectual property rights and patents.
In
2003,
we added to our VoIP patent holdings when we acquired the VoIP Patent, which
included a corresponding foreign patent and related international patent
applications. The vendor of the VoIP Patent was granted a first priority
security interest in the patent in order to secure C2’s obligations under the
associated purchase agreement. The VoIP Patent, together with the existing
C2
Patent and related international patents and patent applications, form our
international VoIP Patent Portfolio that covers the basic process and technology
that enable VoIP communication as it is used in the market today.
Telecommunications companies that enable their customers to originate a phone
call on a traditional handset, transmit any part of that call via IP, and then
terminate the call over the traditional telephone network, are utilizing C2’s
patented technology. The comprehensive nature of the VoIP Patent is summarized
in the patent’s abstract, which, in pertinent part, describes the technology as
follows: “A
method and apparatus are provided for communicating audio information over
a
computer network. A standard telephone connected to the PSTN may be used to
communicate with any other PSTN-connected telephone, where a computer network,
such as the Internet, is the transmission facility instead of conventional
telephone transmission facilities.”
As part
of the consideration for the acquisition of the VoIP Patent, the vendor is
entitled to receive 35% of the net proceeds from our VoIP Patent
Portfolio.
Revenue
and contributions from operations related to our intellectual property, up
to
December 31, 2004, were based on the sales and deployment of our VoIP solutions,
which we ceased directly marketing in 2005, rather than on the receipt of
licensing fees and royalties. Revenue in the first half of 2008 was the result
of entering into the settlement and license agreements with AT&T, Verizon
and Sprint, as described above. We expect to generate ongoing licensing and
royalty revenue in this business as we gain recognition of the underlying value
in our VoIP Patent Portfolio through the enforcement of our intellectual
property rights, as discussed above under “Overview and Recent
Developments”.
As
discussed above under “Overview and Recent Developments”, in the third quarter
of 2007, the Company began investing in Internet-based e-commerce businesses
through its acquisitions of minority positions in MyTrade.com, Inc. (sold in
the
fourth quarter of 2007), Buddy Media, Inc. and LIMOS.com LLC, and it continued
its investment activities in the fourth quarter of 2007 with the acquisition
of
a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP
LLC. At June 30, 2008 the Company’s investment in these businesses totaled $646.
The Company’s objective is to realize long-term capital appreciation as the
value of these businesses is developed and recognized.
24
Intellectual
Property
In
2005
and 2006, the Company was awarded patents for the VoIP Patent from the People’s
Republic of China, Hong Kong, and Canada. In the fourth quarter of 2006, the
European Patent Office advised that it intended to grant C2 a European patent
that is equivalent to the VoIP Patent. The decision to grant the European patent
was subsequently published on March 21, 2007 and in June 2007 the Company
applied for the validation of the patent in fifteen European countries. In
the
fourth quarter of 2006, the Company was awarded a patent in Canada for the
C2
Patent.
25
Below
is
a summary of the Company’s patents:
Type
|
Title
|
Number
|
Status
|
VoIP
Architecture
|
Computer
Network/Internet Telephone
System
(“VoIP Patent”)
|
U.S.
No. 6,243,373
|
Issued:
June 5, 2001
Expires:
November 1, 2015
|
Australia
No. 716096
|
Issued:
June 1, 2000
Expires:
October 29, 2016
|
||
People’s
Republic of
China
No. ZL96199457.6
|
Issued:
December 14, 2005
Expires:
October 29, 2016
|
||
Canada
No. 2,238,867
|
Issued:
October 18, 2005
Expires:
October 29, 2016
|
||
Hong
Kong
No.
HK1018372
|
Issued:
August 11, 2006
Expires:
October 29, 2016
|
||
Europe
No. 0873637
|
Granted
March 21, 2007
|
||
Internet
Transmission
System(“C2
Patent”)
|
U.S.
No. 6,438,124
|
Issued:
August 20, 2002
Expires:
July 22, 2018
|
|
People’s
Republic of
China
No. ZL97192954.8
|
Issued:
May 21, 2004
Expires:
February 5, 2017
|
||
Canada
No. 2,245,815
|
Issued:
October 10, 2006
Expires:
February 5, 2017
|
||
Private
IP Communication
Network
Architecture
|
U.S.
No. 7,215,663
|
Issued:
May 8, 2007
Expires:
June 12, 2017
|
|
Conferencing
|
Delay
Synchronization in
Compressed
Audio System
|
U.S.
No. 5,754,534
|
Issued:
May 19, 1998
Expires:
May 6, 2016
|
Volume
Control Arrangement
for
Compressed Information
Signal
Delays
|
U.S.
No. 5,898,675
|
Issued:
April 27, 1999
Expires:
April 29, 2016
|
In
addition to the C2 and VoIP Patents, which cover the foundation of any VoIP
system, our patent portfolio includes:
Private
IP Communication Network Architecture (U.S. Patent No. 7,215,663 granted May
8,
2007)
- This
invention relates generally to multimedia communications networks. The patent’s
Internet Linked Network Architecture delivers telecommunication type services
across a network utilizing digital technology. The unique breadth and
flexibility of telecommunication services offered by the Internet Linked Network
Architecture flow directly from the network over which they are delivered and
the underlying design principles and architectural decisions employed during
its
creation.
C2
also
owns intellectual property that solves teleconferencing problems:
Delay
Synchronization in Compressed Audio Systems (U.S. Patent No. 5,754,534 granted
May 19, 1998)
- This
invention eliminates popping and clicking when switching between parties in
a
communications conferencing system employing signal compression techniques
to
reduce bandwidth requirements.
26
Volume
Control Arrangement for Compressed Information Signals (U.S. Patent No.
5,898,675 granted April 27, 1999)
- This
invention allows for modifying amplitude, frequency or phase characteristics
of
an audio or video signal in a compressed signal system without altering the
encoder or decoder employed by each conferee in a conferencing setting, so
that
individuals on the conference call can each adjust their own gain levels without
signal degradation.
Industry
The
communications services industry continues to evolve, both domestically and
internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have driven this change
include:
· |
entry
of new competitors and investment of substantial capital in existing
and
new services, resulting in significant price
competition
|
· |
technological
advances resulting in a proliferation of new services and products
and
rapid increases in network capacity
|
· |
The
Telecommunications Act of 1996, as amended;
and
|
· |
growing
deregulation of communications services markets in the United States
and
in other countries around the world
|
Historically,
the communications services industry transmitted voice and data over separate
networks using different technologies. Traditional carriers have typically
built
telephone networks based on circuit switching technology, which establishes
and
maintains a dedicated path for each telephone call until the call is
terminated.
VoIP
is a
technology that can replace the traditional telephone network. This type of
data
network is more efficient than a dedicated circuit network because the data
network is not restricted by the one-call, one-line limitation of a traditional
telephone network. This improved efficiency creates cost savings that can be
either passed on to the consumer in the form of lower rates or retained by
the
VoIP provider. In addition, VoIP technology enables the provision of enhanced
services such as unified messaging.
Competition
We
are
seeking to have telecommunications service providers (“TSPs”), equipment
suppliers (“ESs”) and end users license our patents. In this regard, our
competition is existing technology, outside the scope of our patents, which
allows TSPs and ESs to deliver communication services to their
customers.
VoIP
has
become a widespread and accepted telecommunications technology, with a variety
of applications in the telecommunications and other industries. While we and
many others believe that we will see continued proliferation of this technology
in the coming years, and while we believe that this proliferation will occur
within the context of our patents, there is no certainty that this will occur,
and that it will occur in a manner that requires organizations to license our
patents.
Government
Regulation
Recent
legislation in the United States, including the Sarbanes-Oxley Act of 2002,
has
increased regulatory and compliance costs as well as the scope and cost of
work
provided to us by our independent registered public accountants and legal
advisors. The Company became subject to Section 404 reporting as of December
31,
2007. As implementation guidelines continue to evolve, we expect to continue
to
incur costs, which may or may not be material, in order to comply with
legislative requirements or rules, pronouncements and guidelines by regulatory
bodies.
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our unaudited condensed consolidated financial statements, which
have
been prepared in accordance with generally accepted accounting principles
(“GAAP”) in the United States. This requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates required for the preparation of the
unaudited condensed consolidated financial statements included in Item 1 of
this
Report were those related to intangible assets, goodwill, investments, deferred
tax assets, liabilities, and contingencies surrounding litigation. These
estimates are considered significant because of the significance of the
financial statement item to which they relate, or because they require judgment
and estimation due to the uncertainty involved in measuring, at a specific
point
in time, events that are continuous in nature. Management bases its estimates
and judgments on historical experience and various other factors that are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. On an on-going basis,
management evaluates its estimates and judgments, including those related to
intangible assets, contingencies, collectibility of receivables and litigation.
Actual results could differ from these estimates.
27
The
critical accounting policies used in the preparation of our consolidated
financial statements are discussed in our Annual Report on Form 10-K for the
year ended December 31, 2007. To aid in the understanding of our financial
reporting, a summary of these policies is provided in Note 2 of the unaudited
condensed consolidated financial statements included in Item 1 of this
Report.
28
Management’s
Discussion of Financial Condition
Liquidity
and Capital Resources
At
June
30, 2008 the Company had stockholders’ equity of $1,206, as compared to a
stockholders’ deficit of $941 at December 31, 2007. Working capital at June 30,
2008 was $377, as compared to a working capital deficit of $1,653 at December
31, 2007. The primary reason for the improvement of the Company’s financial
position is the revenue from the settlement and license agreements that the
Company entered into in February and May 2008. The Company’s cash and cash
equivalents increased by $730, from $67 at December 31, 2007 to $797 at June
30,
2008.
In
the
first and second quarters of 2008, the Company realized revenues from continuing
operations for the first time since 2004. However, the Company must continue
to
realize value from its intellectual property through ongoing licensing and
royalty revenue, as discussed in Note 1 of the unaudited condensed consolidated
financial statements, in order to continue as a going concern. Absent an ongoing
revenue stream, there is significant doubt about the Company’s ability to obtain
additional financing to fund its operations without the support of Counsel.
Additionally, management believes that the Company does not, at this time,
have
the ability to obtain additional financing from third parties in order to pursue
expansion through acquisition.
At
June
30, 2008 the Company had no related party debt owing to its 91% common
stockholder, Counsel, as compared to $2,335 owing at December 31, 2007. Should
Counsel make further advances under the existing loan agreements, repayment
will
be due on the loans’ maturity date of December 31, 2008. Counsel has indicated
that it will fund the Company’s minimal cash requirements until at least
December 31, 2008.
Working
Capital
Cash
and
cash equivalents were $797 at June 30, 2008 as compared to $67 at
December 31, 2007, an increase of $730.
Our
working capital at June 30, 2008 was $377 as compared to a working capital
deficit of $1,653 at December 31, 2007. In addition to the increase in cash
and
cash equivalents, and the repayment of the $2,335 debt owed to Counsel, the
Company’s other current assets increased by $129 due to the Company’s prepayment
of D&O insurance coverage up to May 2009. The increase in current assets was
offset by a decrease of $930 in the Company’s deferred tax asset. Additionally,
accounts payable and accrued liabilities increased by $234, from $402 at
December 31, 2007 to $636 at June 30, 2008. The Company’s ability to maintain
positive working capital and achieve long-term viability is dependent upon
success in the pursuit of licensing arrangements and/or the ability to raise
additional funds to meet its business objectives. At this time, Counsel has
indicated that it will fund the Company’s minimal cash requirements until at
least December 31, 2008.
Cash
flows from operating activities
Cash
provided by operating activities of continuing operations during the six months
ended June 30, 2008 was $3,191, as compared to cash used of $577 during the
same
period in 2007. For the first six months of 2008 the Company had net income
from
continuing operations of $2,106, as compared to a net loss of $990 for the
first
six months of 2007, an increase of $3,096. The difference was primarily due
to
the fact that in February and May 2008 the Company entered into settlement
and
license agreements related to its patent licensing litigation and realized
net
patent licensing proceeds of $3,633.
The
most
significant change in non-cash items during the six months ended June 30, 2008,
as compared to the same period in 2007, was the reduction in debt-related costs,
from $315 to $0. In 2007, the Company’s non-cash cost of prepaying debt to its
third-party lender was $224, and it also recorded interest and debt amortization
costs of $8. There were no similar costs in 2008. As well, in 2007 the Company
capitalized $83 in interest on its debt owing to Counsel; as the debt was repaid
in 2008 there were no similar items in 2008. The use of cash related to other
assets was $129 in the first six months of 2008 as compared to cash provided
of
$4 in the first six months of 2007; this was largely due to the Company’s 2008
prepayment of directors and officers liability insurance. Accounts payable
increased by $234 primarily due to costs associated with the Company’s patent
licensing revenue.
29
Cash
flows from investing activities
During
the second quarter of 2008, the Company increased its holdings in its existing
portfolio investments by investing $124 in Buddy Media, Inc. and $1 in Knight’s
Bridge Capital Partners Internet Fund No. 1 GP LLC. It also received a cash
distribution of $5 from the latter investment. No net cash was provided by
or
used in investing activities during the six months ended June 30, 2007.
Cash
flows from financing activities
Financing
activities used net cash of $2,335 during the six months ended June 30, 2008,
as
compared to providing $597 for the same period in 2007. The sole financing
activity in 2008 was the repayment of the debt owing to Counsel at December
31,
2007. During the first six months of 2007, Counsel advanced $2,059. These
advances were largely used to fund the repayment in full of the $1,462 third
party Note that was outstanding at December 31, 2006.
30
Management’s
Discussion of Results of Operations
Three-Month
Period Ended June 30, 2008 Compared to Three-Month Period Ended June 30,
2007
Patent
licensing revenue is derived from licensing our intellectual property. Our
VoIP
Patent Portfolio is an international patent portfolio covering the basic process
and technology that enables VoIP communications. Our patented technology enables
telecommunications customers to originate a phone call on a traditional handset,
transmit any part of that call via the Internet, and then terminate the call
over the traditional telephone network. The Company has engaged, and intends
to
engage, in licensing agreements with third parties domestically and
internationally. At present, no royalties are being paid to the Company. The
Company plans to obtain licensing and royalty revenue from the target market
for
its patents. In this regard, in the third quarter of 2005, the Company retained
legal counsel with expertise in the enforcement of intellectual property rights,
and on June 15, 2006 C2 Communications Technologies Inc., a wholly-owned
subsidiary of the Company, filed a patent infringement lawsuit against AT&T,
Inc., Verizon Communications, Inc., Qwest Communications International, Inc.,
Bellsouth Corporation, Sprint Nextel Corporation, Global Crossing Limited,
and
Level 3 Communications, Inc. The complaint was filed in the Marshall Division
of
the United States District Court for the Eastern District of Texas, and alleges
that these companies’ VoIP services and systems infringe the Company’s U.S.
Patent No. 6,243,373, entitled “Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”.
The
complaint seeks an injunction, monetary damages and costs. In April 2007, a
trial date of September 2, 2008 was set for the lawsuit. In June 2007, the
complaint against Bellsouth Corporation was dismissed without prejudice. In
February 2008, the Company settled the complaints against AT&T and Verizon
by entering into settlement and license agreements, and in May 2008 settled
the
complaint against Sprint by entering into a similar agreement, as described
above.
We
expect
to generate licensing and royalty revenue in this business as we gain
recognition of the underlying value in our VoIP Patent Portfolio through the
enforcement of our intellectual property rights. In connection with the 2003
acquisition of U.S. Patent No. 6,243,373, the Company agreed to remit, to the
former owner of the patent, 35% of the net proceeds from future revenue derived
from the licensing of the VoIP Patent Portfolio. Net proceeds are defined as
amounts collected from third parties net of the direct costs associated with
the
maintenance, licensing and enforcement of the VoIP Patent Portfolio.
Patent
licensing revenues
were
$1,900 during the three months ended June 30, 2008 and $0 during the same period
in 2007. These revenues, as noted above, were from a settlement and license
agreement entered into with Sprint.
Patent
licensing expense
was
$1,308 during the three months ended June 30, 2008 and $0 during the same period
in 2007. This expense includes four components: disbursements directly related
to patent licensing, contingency fees earned by our legal counsel, ongoing
business expenses related to patent licensing, and the participation fee of
35%
payable to the vendor of the VoIP Patent.
Selling,
general, administrative and other expense
was $280
during the three months ended June 30, 2008 as compared to $314 for the three
months ended June 30, 2007. The significant items included:
· |
Compensation
expense was $59 in the second quarter of 2008, compared to $78 in
the
second quarter of 2007. The quarterly salary earned by the CEO of
C2
remained unchanged at $34; however, stock-based compensation expense
decreased by $20, from $44 in 2007 to $24 in 2008.
|
· |
Legal
expense was $24 in the second quarter of 2008, compared to $22 in
the
second quarter of 2007.
|
· |
Accounting
and tax consulting expenses were $27 in the second quarter of
2008, compared to $31 in the second quarter of
2007.
|
· |
Directors’
fees were $32 in the second quarter of 2008, an increase of $6 from
$26 in
the second quarter of 2007. The increase reflects the addition of
a Class
III director in January 2008.
|
· |
Management
fees charged by our controlling stockholder, Counsel, were $90 in
the
second quarter of 2008 as compared to $56 in the second quarter of
2007.
The increase reflects the additional use of Counsel resources in
connection with the patent licensing litigation and the Company’s
investments in Internet-based e-commerce
businesses.
|
31
· |
Directors
and officers liability insurance expense was $37 in the second quarter
of
both 2008 and 2007.
|
· |
In
the second quarter of 2007, the Company incurred expenses of $60
with
respect to filing fees for patents being issued in various European
countries. There was no corresponding expense in
2008.
|
· |
In
the second quarter of 2007, the Company recorded a credit of $12
to tax
expense due to a change in estimate. There were no similar items
in
2008.
|
Depreciation
and amortization
- This
expense was $5 in the second quarter of both 2008 and 2007, and relates to
the
amortization of the cost of the VoIP Patent.
The
changes in other
income (expense)
are
primarily related to the following:
· |
In
the second quarter of 2008, the Company recorded $8 as earnings of
equity
accounted investments. This consists of $5 representing the Company’s
share of the operating income of LIMOS.com, and $3 representing the
Company’s share of the earnings of Knight’s Bridge
GP.
|
· |
In
the second quarter of 2008, the Company had other income of $5, as
compared to other income of $1 during the second quarter of 2007.
In 2008
this consists of $3 interest income and $2 received as a reduction
of
prior years’ insurance premiums, and in 2007 it consists of interest
income.
|
· |
Related
party interest expense was $0 in the second quarter of 2008, as compared
to $47 in the second quarter of 2007. The loan to Counsel was repaid
in
March 2008 and therefore the Company incurred no interest expense
subsequent to that date.
|
Discontinued
operations
- In the
second quarter of 2008, the Company had a loss of $6 (net of tax of $0) from
discontinued operations, as compared to a loss of $18 (net of tax of $0)
incurred in the second quarter of 2007. The 2008 loss consisted of
telecommunications-related regulatory fees. The 2007 loss primarily consisted
of
$14 of network expenses relating to liabilities that were retained when the
Company sold its telecommunications operations in 2005, with the balance being
telecommunications-related taxes and regulatory fees.
Six-Month
Period Ended June 30, 2008 Compared to Six-Month Period Ended June 30,
2007
Patent
licensing revenues
were
$8,125 during the six months ended June 30, 2008 and $0 during the same period
in 2007. These revenues, as noted above, were from settlement and license
agreements entered into with AT&T, Verizon and Sprint.
Patent
licensing expense
was
$4,492 during the six months ended June 30, 2008 and $0 during the same period
in 2007. This expense includes four components: disbursements directly related
to patent licensing, contingency fees earned by our legal counsel, ongoing
business expenses related to patent licensing, and the participation fee of
35%
payable to the vendor of the VoIP Patent.
Selling,
general, administrative and other expense
was $556
during the six months ended June 30, 2008 as compared to $593 for the six months
ended June 30, 2007. The significant items included:
· |
Compensation
expense was $116 in the first half of 2008, compared to $155 in the
first
half of 2007. The salary earned by the CEO of C2 remained unchanged
at
$69; however, stock-based compensation expense decreased by $39,
from $86
in 2007 to $47 in 2008.
|
· |
Legal
expenses in the first half of 2008 were $35, compared to $43 in the
first
half of 2007.
|
32
· |
Accounting
and tax consulting expenses were $57 in the first half of 2008, compared
to $69 in the first half of 2007.
|
· |
Fees
paid to the members of our Board of Directors were $63 in the first
half
of 2008, as compared to $53 in the first half of 2007. The increase
reflects the addition of a Class III director in January
2008.
|
· |
Management
fees charged by our controlling stockholder, Counsel, were $180 in
the
first half of 2008 as compared to $113 in the first half of 2007.
The
increase reflects the additional use of Counsel resources in connection
with the patent licensing litigation and the Company’s investments in
Internet-based e-commerce
businesses.
|
· |
Directors
and officers liability insurance expense was $75 in the first half
of both
2008 and 2007.
|
· |
In
the second quarter of 2007, the Company incurred expenses of $60
with
respect to filing fees for patents being issued in various European
countries. There was no corresponding expense in
2008.
|
· |
In
the second quarter of 2007, the Company recorded a credit of $12
to tax
expense due to a change in estimate. There were no similar items
in
2008.
|
Depreciation
and amortization
- This
expense was $10 in the first half of both 2008 and 2007, and relates to the
amortization of the cost of the VoIP Patent.
The
changes in other
income (expense)
are
primarily related to the following:
· |
In
the first half of 2008, the Company recorded $7 as earnings of equity
accounted investments. This consists of $4 representing the Company’s
share of the operating inc.ome of LIMOS.com, and $3 representing
the
Company’s share of the earnings of Knight’s Bridge
GP.
|
· |
In
the first half of 2008, the Company had other income of $5, as compared
to
other expense of $292 during the first half of 2007. In 2008 this
consists
of $3 interest income and $2 received as a reduction of prior years’
insurance premiums. The other expense in 2007 consists of the $293
cost
incurred by the Company related to its repayment of the debt owed
to the
third party lender, as noted above, and interest income of
$1.
|
· |
There
was no third party interest expense during the first half of 2008,
as
compared to $12 during the first half of 2007. All of the interest
expense
in 2007 related to the debt held by the Company’s third party lender. The
loan was repaid in full effective January 10,
2007.
|
· |
Related
party interest expense was $43 in the first half of 2008, as compared
to
$83 in the first half of 2007. The loan to Counsel was repaid in
March
2008 and therefore the Company incurred no interest expense subsequent
to
that date. At June 30, 2007, the balance of the related party debt
was
$2,148.
|
Discontinued
operations
- In the
first half of 2008, the Company reported a loss of $6 (net of tax of $0) from
discontinued operations, as compared to a loss of $20 (net of tax of $0)
reported in the first half of 2007. The 2008 loss consisted of
telecommunications-related regulatory fees. The 2007 loss primarily consisted
of
$14 of network expenses relating to liabilities that were retained when the
Company sold its telecommunications operations in 2005, with the balance being
telecommunications-related taxes and regulatory fees.
Inflation.
Inflation did not have a significant impact on our results during the last
fiscal quarter.
Off-Balance
Sheet Transactions.
We have
not engaged in material off-balance sheet transactions.
33
Item 3.
Quantitative and Qualitative Disclosures about Market
Risk.
Our
exposure to market risk is limited to interest rate sensitivity, which is
affected by changes in the general level of interest rates. Due to the fact
that
our cash and cash equivalents are deposited with major financial institutions,
we believe that we are not subject to any material interest rate risk as it
relates to interest income. As to interest expense, we do not believe that
we
are subject to material market risk on our fixed rate debt with Counsel in
the
near term, which had a zero balance at June 30, 2008.
We
did
not have any foreign currency hedges or other derivative financial instruments
as of June 30, 2008. We do not enter into financial instruments for trading
or
speculative purposes and do not currently utilize derivative financial
instruments. Our operations are conducted primarily in the United States and
as
such are not subject to material foreign currency exchange rate
risk.
Item 4T.
Controls and Procedures.
As
of the
end of the period covered by this Quarterly Report, our Chief Executive Officer
and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of
our disclosure controls and procedures. As defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the term “disclosure controls and procedures” means controls and other
procedures of an issuer that are designed to ensure that information required
to
be disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including the Certifying Officers, to allow timely
decisions regarding required disclosure. Based on this evaluation, the
Certifying Officers have concluded that our disclosure controls and procedures
were effective.
Further,
there were no changes in our internal control over financial reporting during
the second fiscal quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
34
PART
II - OTHER INFORMATION
Item 1.
Legal Proceedings
Please
see Note 11 of the unaudited condensed consolidated financial statements, which
are included in Part I of this Report, and hereby incorporated by reference
into
this Part II, for a discussion of the Company’s legal proceedings.
Item
1A. Risk Factors
There
have been no significant changes to the risk factors discussed in our Annual
Report on Form 10-K for the year ended December 31, 2007, as filed with the
SEC
on March 11, 2008.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5. Other Information.
None.
35
Item 6.
- Exhibits.
(a) Exhibits
Exhibit No. | Identification of Exhibit | |
10.1
|
Settlement
and License Agreement dated as of May 30, 2008.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a)
as adopted under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
36
SIGNATURES
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 thereunder
duly authorized.
C2
Global Technologies Inc.
|
||
|
|
|
Date:
August 5, 2008
|
By: | /s/ Allan C. Silber |
Allan C. Silber |
||
Chairman
of the Board and Chief Executive
Officer
|
By: | /s/ Stephen A. Weintraub | |
Stephen
A. Weintraub
|
||
Chief
Financial Officer and Corporate
Secretary
|
37