Item 6, “Critical Accounting
Policies and Estimates”.] As a result of this review, Teknowledge determined
that additional reserves of $1,500,000 should be accrued in 2004 to provide for
a potential negative result if the Company is unsuccessful in its contract
appeal process. The cumulative reserve at September 30, 2007 was
$2,246,000.
Loss
of a large customer may affect financial results
The
Company has in the past, and probably will in the future, rely on large sales to
certain customers. Loss of a single large customer could have a material impact
on the sales revenue and profitability of the Company.
Teknowledge’s
success depends on retaining sufficient technical staff and attracting
additional technical staff
The
Company recognizes that the loss of one or more key management and technical
personnel, who are employed on an at-will basis, could adversely affect the
Company’s business. The Company relies on its executives and business managers
for the acquisition and negotiation of new business, the management of services
contracts and product development, and the management of ongoing operations. A
proportion of the technical support base for operations is provided by outside
consultants, and it is anticipated that this trend will continue in the future.
The use of outside consultants allows the Company to expand or constrict its
operations quickly both inside and outside the U.S.
Teknowledge
will incur increased costs as a result of the implementation of new rules,
regulations, and pronouncements from the SEC, including the provisions of the
Sarbanes-Oxley Act of 2002
Recently
enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules
adopted or proposed by the SEC and new accounting pronouncements, will result in
increased costs to us as we evaluate the implications of these laws, regulations
and standards and respond to their requirements. In 2005, the Company was
delisted from the Nasdaq SmallCap Market due to its low stockholders’ equity and
past financial performance. Nonetheless, to maintain high standards of corporate
governance and public disclosure, we intend to invest substantial resources to
comply with evolving standards. This investment may result in increased G&A
expenses and divert management time and attention from strategic revenue
generation and cost management activities. In addition, these new laws and
regulations could make it more difficult or more costly for us to obtain certain
types of insurance, including director and officer liability insurance, and we
may be forced to accept reduced policy limits and coverage or incur
substantially higher premiums to obtain the same or similar coverage. The impact
of these events could also make it more difficult for us to attract and retain
qualified personal to serve on our board of directors, our board committees or
as executive officers. We are taking steps to comply with the recently enacted
laws and regulations in accordance with the deadlines by which compliance is
required, but cannot predict or estimate the amount or timing of additional
costs that we may incur to respond to their requirements.
Item
3. Controls And
Procedures
(a) Evaluation of disclosure
controls and procedures. Our principal executive officer and principal
financial officer evaluated our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly report. Based on
this evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time
periods.
In
connection with its audit of the Company’s consolidated financial statements for
the year ended December 31, 2005, Burr, Pilger & Mayer LLP (“BPM”), the
Company’s registered public accounting firm, advised the Audit Committee and
management of internal control matters with respect to certain financial
reporting controls that they considered to be a material weakness, which is
described below. A material weakness is a control deficiency, or a
combination of control deficiencies, that results in there being more than a
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The material weakness
that we had identified at December 31, 2005 was as follows:
A
material weakness existed in our control environment relating to inadequate
staffing of our technical accounting function, including a lack of sufficient
personnel with skills, training and familiarity with certain complex technical
accounting pronouncements that have or may affect our financial statements and
disclosures.
The
Company considered these matters in connection with the year end closing process
and the preparation of the December 31, 2006 consolidated financial statements
included in this Form 10-KSB and also determined that no prior period financial
statements were materially affected by such matters. In response to the
observations made by BPM, in 2006 the Company implemented certain enhancements
to its internal controls and procedures, which it believes addressed the matters
raised by Burr, Pilger & Mayer LLP.
As
described in Item 8A of our Form 10-KSB for the year ended December 31, 2003 and
in our Form 8-K filed March 3, 2005 and amended on April 1, 2005, our previous
independent auditor Grant Thornton LLP (“Grant Thornton”), advised our Audit
Committee and management regarding certain internal control matters that they
considered to be reportable conditions as that term is defined under standards
established by the American Institute of Certified Public Accountants. In
response to the comments made by Grant Thornton in 2003, the Company implemented
certain enhancements to its internal controls and procedures in the second
quarter of 2004, which it believes address the matters raised by Grant Thornton.
The enhancements included review of policies and procedures for processing and
controlling accounting transactions, closer supervisory and review of revenue
recognition practices, improved monitoring and control of closing procedures,
including certain high value reserves and accruals, and the migration of
important purchasing, billing, and contract administration functions to the most
experienced staff. Where applicable, the Company utilized available automated
and manual controls to further enhance existing controls. Some responsibilities
assigned to a single desk were redistributed to multiple employees to enhance
control. The Company believes that the control initiatives that began in the
second quarter 2004 were effective in addressing the concerns raised by the
predecessor accountants.
PART
II. OTHER INFORMATION
Item 1. Legal
Proceedings
On April
1, 2006, Teknowledge filed a lawsuit against the United States Government in the
United States Court of Federal Claims. Teknowledge is requesting that the court
rule as improper a contracting officer’s decision dated January 19, 2006 that
Teknowledge must account for all Software Amortization costs as direct costs of
the Financial Services overhead pool, and that Teknowledge may, pursuant to the
Federal Acquisition Regulation (FAR), account for 31% of the Software
Amortization costs as indirect costs of the government overhead pool and recover
those costs. No trial date has been set. A Pretrial Scheduling Order was filed
on October 10, 2006 mandating that the parties submit a Joint Status Report by
October 15, 2007, which was extended by a subsequent Discovery Scheduling Order
to November 29, 2007.
On July
17, 2007, Teknowledge filed a lawsuit against Cellco Partnership dba Verizon
Wireless in the United States District Court for the Eastern District of
Texas. The Complaint stated a claim for patent infringement of the
‘175 patent and sought damages for infringement. The claims asserted in this
complaint concern the alert and notification features of the ‘175 patent, which
can be utilized to deliver alerts to users concerning changes to data items of
interest on a network.
The
Company may be subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on the Company’s consolidated results of operations or consolidated
financial position.
Item
6. Exhibits
(a)
Exhibits:
Set forth
below is a list of all exhibits filed herewith or incorporated by reference as
part of this Quarterly Report on Form 10–QSB.
|
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to rule 13a-14(a) and Section 302
of the Sarbanes-Oxley Act of 2002, dated May 29, 2008.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to rule 13a-14(a) and Section 302
of the Sarbanes-Oxley Act of 2002, dated May 29, 2008.
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated May 29, 2008.
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated May 29,
2008.
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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 hereunto
duly authorized.
|
Dated:
May 29, 2008
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Teknowledge
Corporation
|
|
|
(Registrant)
|
||
|
By: /s/ Neil
Jacobstein
|
||
|
Neil
Jacobstein
|
||
|
Chairman
of the Board of Directors
|
||
|
Chief
Executive Officer and President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on August 19, 2007.
|
/s/ Neil
Jacobstein
|
Chairman
of the Board of Directors,
|
May
29, 2008
|
|
Neil
Jacobstein
|
Chief
Executive Officer and President
|
|
|
(Principal
Executive Officer)
|
||
|
/s/ Michael D.
Kaplan
|
Vice
President and
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May
29, 2008
|
|
Michael
D. Kaplan
|
Chief
Financial Officer
|
Exhibit
31.1
CERTIFICATIONS
I, Neil
Jacobstein, Chief Executive Officer, certify that:
1. I
have reviewed this Form 10-QSB of Teknowledge Corporation.
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed
such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date: May
29,
2008 By: /s/ Neil Jacobstein
Neil
Jacobstein
Chairman of the Board
and
Chief Executive Officer
Exhibit
31.2
CERTIFICATIONS
I,
Michael D. Kaplan, Chief Financial Officer, certify that:
1. I
have reviewed this Form 10-QSB of Teknowledge Corporation.
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed
such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date: May
29,
2008 By: /s/ Michael
D. Kaplan
Michael D.
Kaplan
Vice President of Finance
and
Chief Financial
Officer
Exhibit
32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
AS
ADOPTED PURSUANT TO SECTION 906
OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying
Form 10-QSB of Teknowledge Corporation for the quarter ended September 30, 2007,
I, Neil Jacobstein, the Chairman of the Board and Chief Executive Officer of
Teknowledge Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002;
that:
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1)
|
such
Form 10-QSB for the quarter ended September 30, 2007 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C 78m or 78o(d));
and
|
|
2)
|
the
information contained in such Form 10-QSB for the quarter ended September
30, 2007 fairly presents, in all material respects, the financial
condition and results of operations of Teknowledge
Corporation.
|
Date:
May 29, 2008
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/s/
Neil Jacobstein
|
|
Neil
Jacobstein
|
|
Chairman
of the Board of Directors,
|
|
Chief
Executive Officer and President
|
|
(Principal
Executive Officer)
|
Exhibit
32.2
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
AS
ADOPTED PURSUANT TO SECTION 906
OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying
Form 10-QSB of Teknowledge Corporation for the quarter ended September 30, 2007,
I, Michael D. Kaplan, the Financial Reporting Manager of Teknowledge
Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002; that:
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1)
|
such
Form 10-QSB for the quarter ended September 30, 2007 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C 78m or 78o(d));
and
|
|
2)
|
the
information contained in such Form 10-QSB for the quarter ended September
30, 2007 fairly presents, in all material respects, the financial
condition and results of operations of Teknowledge
Corporation.
|
Date:
May 29, 2008
|
/s/
Michael D. Kaplan
|
|
Michael
D. Kaplan
|
|
Vice
President and
|
|
Chief
Financial Officer
|