Business Context and Reporting Period
Company: C2 Global Technologies Inc. (formerly Acceris Communications Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2005
C2 Global Technologies Inc. is a Florida corporation that changed its name in August 2005 to reflect a strategic shift following the disposition of its Telecommunications business in the third quarter of 2005. The Company's primary business is now the licensing of its Voice over Internet Protocol (VoIP) patent portfolio (U.S. Patent Nos. 6,243,373 and 6,438,124). The Company currently has no operating revenues from licensing and relies on the enforcement of its intellectual property rights to generate future cash flows. The Company is 91% owned by Counsel Corporation.
Key Financial Metrics
| Metric (in thousands) | 2005 | 2004 |
|---|---|---|
| Revenues (Continuing Ops) | $0 | $540 |
| Net Loss | $(18,489) | $(22,783) |
| Loss from Continuing Operations | $(14,934) | $(11,105) |
| Loss from Discontinued Operations | $(3,555) | $(11,678) |
| Total Assets | $3,490 | $24,009 |
| Total Liabilities | $81,432 | $85,974 |
| Stockholders' Deficit | $(77,942) | $(61,965) |
| Working Capital Deficit | $(78,055) | $(21,352) |
| Cash and Cash Equivalents | $327 | $44 |
| Restricted Cash | $1,506 | $0 |
| Total Debt (Gross) | $77,162 | $57,425 |
Note: All dollar amounts are in thousands unless otherwise noted. The 2005 results include a gain of $6,387 on the sale of the Telecommunications business, which is reported in discontinued operations.
Material Changes vs. Prior Period
- Discontinued Operations: The Company sold its Telecommunications business (Acceris Communications Corp.) on September 30, 2005. This resulted in a net gain on disposition of $6,387. Consequently, the loss from discontinued operations decreased significantly from $(11,678) in 2004 to $(3,555) in 2005.
- Revenue: Continuing operations revenue dropped to $0 in 2005 from $540 in 2004. The 2004 revenue was the tail end of a contract with a Japanese company; no new licensing revenue was generated in 2005.
- Debt Structure: Total debt increased to $77,162 in 2005 from $57,425 in 2004. This increase is primarily due to related party debt from Counsel Corporation, which rose to $73,646 (95% of total debt). Related party debt was reclassified as current liabilities due to its maturity on December 31, 2006.
- Operating Expenses: Selling, general, and administrative expenses decreased by 32% to $2,785 in 2005, driven by reduced staff levels and lower legal fees following the sale of the telecommunications segment.
- Interest Expense: Related party interest expense increased 43% to $12,154 due to higher average loan balances and the amortization of beneficial conversion features.
Guidance, Outlook, Risks, and Contingencies
Going Concern and Liquidity
The independent auditors have issued a "going concern" qualification for 2003, 2004, and 2005 due to recurring losses and negative cash flows. The Company has a stockholders' deficit of $77,942 and a working capital deficit of $78,055. Operations are funded by a "Keep Well" agreement from Counsel Corporation, which guarantees funding through December 31, 2006. There is significant doubt about the Company's ability to obtain financing beyond this date without generating licensing revenue.
Outlook and Strategy
Management plans to generate revenue by enforcing its VoIP patents against carriers and equipment manufacturers. The Company retained legal counsel in Q3 2005 to assist with enforcement. No royalties were received in 2005. The Company expects to hire additional employees in 2006 to pursue this strategy.
Risks and Contingencies
- Debt Maturity: Approximately $73.6 million of debt is owed to Counsel and matures on December 31, 2006. The Company cannot repay this debt while the Laurus Master Fund, Ltd. note remains outstanding. Counsel has subordinated its debt to Laurus.
- Third-Party Debt: The Company owes $3,235 to Laurus Master Fund, Ltd. under a convertible note secured by all Company assets. This debt matures in October 2007.
- Legal Proceedings:
- Derivative/Securities Actions: Stockholders filed derivative and securities actions in California in 2004 alleging breach of fiduciary duty and mismanagement. A trial date was vacated in February 2006.
- Patent Litigation: Litigation with ITXC Corp. regarding VoIP patents was terminated in March 2006 via a Consent Order where C2 covenanted not to sue ITXC, as the litigation was deemed not economically prudent.
- Appraisal Rights: Dissenting stockholders from a 2003 corporate amendment are seeking judicial determination of fair value for their shares. The Company is currently staying this action pending the resolution of the California lawsuits.
- Internal Controls: The Company previously reported material weaknesses in internal controls (last reported Q2 2004), which management states have been remedied.
Investor Verification Checklist
- Going Concern Status: Verify the Company's ability to secure funding beyond the December 31, 2006 expiration of the Counsel "Keep Well" agreement.
- Debt Subordination: Confirm the terms of the subordination agreement between Counsel and Laurus Master Fund, Ltd., specifically regarding the inability to repay Counsel while Laurus debt is outstanding.
- Patent Enforcement Progress: Monitor the status of new patent enforcement actions and any resulting licensing agreements or royalty payments, as the Company currently has zero operating revenue.
- Legal Outcomes: Track the resolution of the California derivative/securities lawsuits and the Florida appraisal rights litigation, as unfavorable outcomes could materially impact liquidity.
- Stock Dilution: Assess the potential dilution from the conversion of the Laurus note (approx. 3.7 million shares) and Counsel's convertible debt (approx. 3.6 million shares).