Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the Quarterly Period Ended September 30, 2010
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number 0-22010
THOMAS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
72-0843540
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
5221 North OConnor Boulevard, Suite 500
Irving, TX 75039-3714
(Address of principal executive offices, including zip code)
(972) 869-3400
(Registrants telephone number, including area code)
NONE
(Former name, former address
and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of large accelerated filer, and accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of November 12, 2010, there were 2,181,553 shares of the
registrants common stock outstanding. Effective at 6:01 pm ET, August 13,
2010, the registrant effected a 1-for-5 reverse stock split of its common
stock. The consolidated financial statements, notes and other references to
share and per share data contained in this Quarterly Report on Form 10-Q
have been retroactively adjusted to reflect such reverse stock split for all
periods presented.
Table of
Contents
PART I. FINANCIAL INFORMATION
ITEM 1Financial
Statements
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
(Unaudited)
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,331
|
|
$
|
5,004
|
|
Trade accounts receivable,
net of allowance of $0 and $5 at September 30, 2010 and December 31, 2009, respectively
|
|
297
|
|
849
|
|
Unbilled receivables
|
|
99
|
|
378
|
|
Deferred tax asset,
current, net of allowance of $123 and $4 at September 30, 2010 and December 31,
2009, respectively
|
|
|
|
111
|
|
Income tax receivable
|
|
109
|
|
2,835
|
|
Other current assets
|
|
138
|
|
281
|
|
Total Current Assets
|
|
4,974
|
|
9,458
|
|
Property and equipment,
net of accumulated depreciation of $2,306 and $2,110 at September 30, 2010
and December 31, 2009, respectively
|
|
422
|
|
618
|
|
Deferred tax asset, net of
allowance of $3,057 and $54 at September 30, 2010 and December 31, 2009,
respectively
|
|
|
|
1,471
|
|
Other assets
|
|
31
|
|
31
|
|
|
|
$
|
5,427
|
|
$
|
11,578
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
$
|
290
|
|
$
|
725
|
|
Accrued wages and benefits
|
|
425
|
|
478
|
|
Income taxes payable
|
|
15
|
|
14
|
|
Note payable
|
|
13
|
|
149
|
|
Total Current Liabilities
|
|
743
|
|
1,366
|
|
Other long-term
obligations
|
|
50
|
|
126
|
|
Total Liabilities
|
|
793
|
|
1,492
|
|
Stockholders Equity
|
|
|
|
|
|
Common stock, $.01 par
value; 25,000,000 shares authorized; 2,768,708 and 2,768,708 shares issued
and 2,181,553 and 2,096,902 shares outstanding at September 30, 2010 and
December 31, 2009, respectively
|
|
28
|
|
138
|
|
Additional paid-in capital
|
|
28,131
|
|
30,761
|
|
Retained earnings
(deficit)
|
|
(2,904
|
)
|
2,949
|
|
Treasury stock, 587,155
and 671,806 shares at September 30, 2010 and December 31, 2009, respectively,
at cost
|
|
(20,621
|
)
|
(23,762
|
)
|
Total Stockholders Equity
|
|
4,634
|
|
10,086
|
|
|
|
$
|
5,427
|
|
$
|
11,578
|
|
See accompanying notes to
condensed consolidated financial statements
3
Table of
Contents
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue before
reimbursements
|
|
$
|
442
|
|
$
|
1,783
|
|
$
|
2,834
|
|
$
|
6,939
|
|
Reimbursements
|
|
77
|
|
315
|
|
330
|
|
1,067
|
|
Total revenue
|
|
519
|
|
2,098
|
|
3,164
|
|
8,006
|
|
Cost of sales before
reimbursable expenses
|
|
275
|
|
1,071
|
|
1,995
|
|
3,898
|
|
Reimbursable expenses
|
|
77
|
|
315
|
|
330
|
|
1,067
|
|
Total cost of sales
|
|
352
|
|
1,386
|
|
2,325
|
|
4,965
|
|
Gross profit
|
|
167
|
|
712
|
|
839
|
|
3,041
|
|
Selling, general and
administrative
|
|
1,666
|
|
2,595
|
|
5,257
|
|
9,107
|
|
Operating loss
|
|
(1,499
|
)
|
(1,883
|
)
|
(4,418
|
)
|
(6,066
|
)
|
Interest income, net of
expense
|
|
(1
|
)
|
|
|
(2
|
)
|
6
|
|
Other income
|
|
|
|
302
|
|
180
|
|
329
|
|
Loss from operations
before income taxes
|
|
(1,500
|
)
|
(1,581
|
)
|
(4,240
|
)
|
(5,731
|
)
|
Income tax expense
(benefit)
|
|
2
|
|
(557
|
)
|
1,613
|
|
(2,128
|
)
|
Net loss
|
|
$
|
(1,502
|
)
|
$
|
(1,024
|
)
|
$
|
(5,853
|
)
|
$
|
(3,603
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.70
|
)
|
$
|
(0.48
|
)
|
$
|
(2.76
|
)
|
$
|
(1.69
|
)
|
Diluted
|
|
$
|
(0.70
|
)
|
$
|
(0.48
|
)
|
$
|
(2.76
|
)
|
$
|
(1.69
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
2,152
|
|
2,123
|
|
2,122
|
|
2,131
|
|
Diluted
|
|
2,152
|
|
2,123
|
|
2,122
|
|
2,131
|
|
See accompanying notes to condensed consolidated financial statements.
4
Table of
Contents
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(5,853
|
)
|
$
|
(3,603
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
|
196
|
|
269
|
|
Gain on disposal of assets
|
|
|
|
(5
|
)
|
Foreign currency
translation (gain) loss
|
|
9
|
|
(64
|
)
|
Stock - based compensation
expense
|
|
419
|
|
114
|
|
Bad debt expense
(recovery)
|
|
(5
|
)
|
68
|
|
Deferred tax expense
(benefit)
|
|
1,582
|
|
(25
|
)
|
Other
|
|
17
|
|
(22
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
(Increase) decrease in
trade accounts receivable
|
|
548
|
|
181
|
|
(Increase) decrease in
unbilled receivables
|
|
279
|
|
228
|
|
(Increase) decrease in
income tax receivable
|
|
2,726
|
|
1,548
|
|
(Increase) decrease in
other current assets
|
|
143
|
|
154
|
|
Increase (decrease) in
accounts payable and accrued liabilities
|
|
(504
|
)
|
(487
|
)
|
Increase (decrease) in
note payable
|
|
(136
|
)
|
|
|
Increase (decrease) in
other liabilities
|
|
(60
|
)
|
(27
|
)
|
Increase (decrease) in
income taxes payable
|
|
1
|
|
(56
|
)
|
Net cash used in operating
activities
|
|
(638
|
)
|
(1,727
|
)
|
|
|
|
|
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
|
5
|
|
Net cash provided by investing activities
|
|
|
|
5
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
Purchase of stock
|
|
(18
|
)
|
(145
|
)
|
Issuance of common stock
|
|
|
|
1
|
|
Tax effect of option
exercises
|
|
|
|
(45
|
)
|
Net cash used in financing
activities
|
|
(18
|
)
|
(189
|
)
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash
|
|
(17
|
)
|
22
|
|
|
|
|
|
|
|
Net change in cash
|
|
(673
|
)
|
(1,889
|
)
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Beginning of period
|
|
5,004
|
|
8,349
|
|
End of period
|
|
$
|
4,331
|
|
$
|
6,460
|
|
See accompanying notes to
condensed consolidated financial statements.
5
Table of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis
of Presentation
The unaudited condensed consolidated financial
statements of Thomas Group, Inc. (the Company) include all adjustments,
which include only normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly our results of operations for the
interim periods presented. The unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes thereto in our
Form 10-K for the 2009 fiscal year, filed with the Securities and Exchange
Commission. The results of operations for the three and nine month periods
ended September 30, 2010 are not necessarily indicative of the results of
operations for the entire year ending December 31, 2010.
2.
Liquidity
Our cash balance was $4,331,000 at September 30, 2010. Our
available liquidity is limited to our existing working capital and cash flow
that we will be able to generate from operations. Our ability to generate
additional cash from operations is determined primarily by our ability to
generate substantial new revenue. We currently believe we have sufficient
liquidity to sustain our operations at least through the first quarter of 2011.
If circumstances change, we could be required to seek other sources of
liquidity during 2010 or 2011. There can be no assurance that existing cash
will be sufficient, that we will have access to the capital or credit markets
if needed or that any of our strategies can be implemented on satisfactory
terms, on a timely basis or at all to provide additional liquidity.
Effective November 1, 2010, we implemented temporary partial
furloughs and salary reductions for members of our management team in order to
reduce SG&A costs. Members of our management team are subject to a flexible
work schedule and adjusted compensation based on job requirements, including
utilization on client engagements. The work schedule of all members of our
management team will be re-evaluated periodically. Work schedules and salaries
may be adjusted as needed to ensure that necessary functions are performed
during this period and to accommodate further changes in business conditions
and changes in individual utilization on client engagements.
3.
Reverse Stock Split
Our Board of
Directors and stockholders approved a 1-for-5 reverse split of our outstanding
common stock that became effective at 6:01 pm ET, August 13, 2010. The new
shares began trading on the Nasdaq Capital Market on August 16, 2010. As a
result of the reverse stock split, every five shares of our issued and
outstanding common stock, all treasury shares, and all unawarded or unvested shares
under our approved stock plans were combined into one share. The reverse stock
split did not change the number of authorized shares or par value of our common
stock. All share and per share amounts have been adjusted to reflect the stock
split for all periods presented.
4.
Earnings
Per Share
Basic loss per share is based on the number of
weighted average shares outstanding. Diluted loss per share includes the effect
of dilutive securities such as stock options, stock warrants, and restricted
stock awards expected to vest. The following table reconciles basic loss per
share to diluted loss per share under the provisions of ASC 260,
Earnings Per Share.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
In thousands, except
per share data
|
|
In thousands, except
per share data
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,502
|
)
|
$
|
(1,024
|
)
|
$
|
(5,853
|
)
|
$
|
(3,603
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
2,152
|
|
2,123
|
|
2,122
|
|
2,131
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
|
|
|
|
|
|
|
Restricted stock awards expected to vest
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
2,152
|
|
2,123
|
|
2,122
|
|
2,131
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.70
|
)
|
$
|
(0.48
|
)
|
$
|
(2.76
|
)
|
$
|
(1.69
|
)
|
Diluted
|
|
$
|
(0.70
|
)
|
$
|
(0.48
|
)
|
$
|
(2.76
|
)
|
$
|
(1.69
|
)
|
Diluted loss per share is the same as basic loss per share for the
three and nine month periods ended September 30, 2010 because the effect
of outstanding options and unvested restricted stock would have been antidilutive
due to the net loss.
Stock options and unvested restricted stock awards outstanding that are
not included in the diluted loss per share computation due to the antidilutive
effects were approximately 50,110 for the three and nine month periods ended September 30,
2010, and 86,533 for the three and nine month periods ended September 30,
2009.
6
Table of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We did not issue any stock options in 2009. During the third quarter of
2010 ending September 30, 2010, we issued 20,000 options under the 2005
Omnibus Plan.
5.
Options
and Restricted Stock Awards
All share amounts subject to
outstanding awards under the 2005 Omnibus Stock and Incentive Plan for Thomas
Group, Inc, ( 2005 Omnibus Plan) and the 2008 Omnibus Stock and
Incentive Plan for Thomas Group, Inc, ( 2008 Omnibus Plan) have been
restated for the reverse stock split of 1 new share for each 5 old shares of
our common stock. Effective August 13,
2010, we amended the 2005 Omnibus Plan and the 2008 Omnibus Plan to reflect the
reverse stock split by adjusting the number of shares of common stock reserved
for issuance under the plans. Options
to purchase shares of our common stock have been granted to directors, officers
and employees. At September 30, 2010, options to purchase 20,110 shares of
our common stock were outstanding and 110 were exercisable.
On March 1, 2008, the Compensation Committee granted Michael
McGrath, our newly appointed Executive Chairman, an initial award of 20,000
restricted shares of our common stock which vested upon the date of grant, and
a performance share award entitling Mr. McGrath to receive up to 70,000
shares of our common stock if certain conditions related to our profitability
were satisfied. The initial restricted share award was granted pursuant to the
2005 Omnibus Plan. The performance share award was granted pursuant to the 2008
Omnibus Plan.
In December 2009, we determined that we would not achieve the
annual profit goal for 2009 that was required for Mr. McGraths
performance share award to vest with respect to 2009. It was also determined to
be highly unlikely that we will meet the minimum profitability target required
in 2010 for the catch up provision of Mr. McGraths performance share
award to be effective. Since we determined that the catch up performance
targets were unlikely to be achieved in 2010, the previously recognized
compensation cost for Mr. McGrath for 2008 and 2009 was reversed in
December 2009. On March 9, 2010, with the consent of
Mr. McGrath, the Compensation and Corporate Governance Committee of our Board
of Directors cancelled Mr. McGraths entire performance share award
granted in 2008.
On March 9, 2010, an award entitling Mr. McGrath to receive
up to an aggregate of 120,000 shares of restricted stock was granted to
Mr. McGrath with vesting of 30,000 shares at the end of each calendar
quarter, contingent upon his being employed by us at the end of such calendar
quarter. On March 31, 2010, the first 30,000 shares vested and were issued
to Mr. McGrath. On June 30, 2010, the second 30,000 shares vested and
were issued to Mr. McGrath. On September 30, 2010, the third 30,000
shares were issued to Mr. McGrath.
On March 10, 2008, the Compensation Committee granted Earle
Steinberg, our former President and Chief Executive Officer, an initial award
of 10,000 restricted shares of our common stock which vested on March 10,
2009, the one year anniversary of their grant, and a performance share award
entitling Mr. Steinberg to receive up to 76,000 shares of our common stock
if certain conditions related to our profitability were satisfied. The initial
restricted share award was granted pursuant to the 2005 Omnibus Plan. The
performance share award was granted pursuant to the 2008 Omnibus Plan.
Effective December 21, 2009, Earle Steinberg was removed by the
Board of Directors from his role as CEO and President. His employment agreement
provided for payment of his salary for six months following separation, under
certain circumstances. This amount of potential liability was accrued at
December 31, 2009 and September 30, 2010. We ceased payments to
Mr. Steinberg as of February 1, 2010 and have disputed our continuing
liability for future payments under the employment agreement. He is no longer
eligible for any outstanding performance stock awards as of December 21,
2009. Thus, all accrued but unvested stock-based compensation cost for 2008 and
2009 was reversed in December 2009.
The restricted share awards were valued on the date of grant using the
closing price of our common stock on the Nasdaq Capital Market on that date.
Compensation expense is recognized over the applicable period of service.
5.
Significant
Clients
We had three clients who each accounted for more
than 10% of our revenue in the three month period ended September 30,
2010. We had five clients who each accounted for more than 10% of our revenue
in the nine month period ended September 30, 2010. Four clients each
accounted for more than 10% of our revenue in the three and nine month period
ended September 30, 2009.
7
Table of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
Revenue (In thousands)
|
|
Revenue (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
$
|
237
|
|
$
|
|
|
$
|
392
|
|
$
|
|
|
Client B
|
|
$
|
147
|
|
$
|
1
|
|
$
|
346
|
|
$
|
27
|
|
Client C
|
|
$
|
89
|
|
$
|
|
|
$
|
381
|
|
$
|
|
|
Client D
|
|
$
|
|
|
$
|
560
|
|
$
|
|
|
$
|
2,098
|
|
Client E
|
|
$
|
|
|
$
|
464
|
|
$
|
669
|
|
$
|
1,305
|
|
Client F
|
|
$
|
|
|
$
|
452
|
|
$
|
|
|
$
|
1,441
|
|
Client G
|
|
$
|
|
|
$
|
315
|
|
$
|
|
|
$
|
911
|
|
Client H
|
|
$
|
|
|
$
|
|
|
$
|
332
|
|
$
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
%
of revenue
|
|
%
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
46
|
%
|
0
|
%
|
12
|
%
|
0
|
%
|
Client B
|
|
28
|
%
|
0
|
%
|
11
|
%
|
0
|
%
|
Client C
|
|
17
|
%
|
0
|
%
|
12
|
%
|
0
|
%
|
Client D
|
|
0
|
%
|
27
|
%
|
0
|
%
|
26
|
%
|
Client E
|
|
0
|
%
|
22
|
%
|
21
|
%
|
16
|
%
|
Client F
|
|
0
|
%
|
22
|
%
|
0
|
%
|
18
|
%
|
Client G
|
|
0
|
%
|
15
|
%
|
0
|
%
|
11
|
%
|
Client H
|
|
0
|
%
|
0
|
%
|
11
|
%
|
0
|
%
|
There were no other clients from whom revenue exceeded 10% of total
revenue in the three and nine month periods ended September 30, 2010 and
2009, respectively.
6.
Concentration
of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of trade receivables. We
encounter a certain amount of credit risk as a result of a concentration of
receivables among a few significant customers. The trade receivables (in
dollars and as a percentage of accounts receivable) from such significant customers
are set forth below:
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
In thousands
|
|
% of AR
|
|
In thousands
|
|
% of AR
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
$
|
78
|
|
13
|
%
|
$
|
|
|
0
|
%
|
Client B
|
|
$
|
44
|
|
7
|
%
|
$
|
95
|
|
11
|
%
|
Client C
|
|
$
|
189
|
|
31
|
%
|
$
|
|
|
0
|
%
|
Client D
|
|
$
|
|
|
0
|
%
|
$
|
58
|
|
0
|
%
|
Client E
|
|
$
|
66
|
|
11
|
%
|
$
|
267
|
|
31
|
%
|
Client F
|
|
$
|
|
|
0
|
%
|
$
|
62
|
|
7
|
%
|
Client G
|
|
$
|
|
|
0
|
%
|
$
|
86
|
|
10
|
%
|
Client H
|
|
$
|
|
|
0
|
%
|
$
|
|
|
0
|
%
|
7.
Supplemental
Disclosure of Cash Flow Information
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
In thousands
|
|
Interest paid
|
|
$
|
3
|
|
$
|
3
|
|
Taxes paid
|
|
$
|
11
|
|
$
|
38
|
|
8
Table of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
Geographical
Data
We provide services within one industry segment and conduct our
business primarily in North America and Europe with only occasional activities
elsewhere. Information regarding these areas follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
In thousands
|
|
In thousands
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
516
|
|
$
|
1,538
|
|
$
|
2,829
|
|
$
|
5,309
|
|
South America
|
|
|
|
|
|
|
|
17
|
|
Europe
|
|
3
|
|
560
|
|
335
|
|
2,680
|
|
Total revenue
|
|
$
|
519
|
|
$
|
2,098
|
|
$
|
3,164
|
|
$
|
8,006
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
164
|
|
$
|
602
|
|
$
|
735
|
|
$
|
1,931
|
|
South America
|
|
|
|
|
|
|
|
17
|
|
Europe
|
|
3
|
|
110
|
|
104
|
|
1,093
|
|
Total gross profit
|
|
$
|
167
|
|
$
|
712
|
|
$
|
839
|
|
$
|
3,041
|
|
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
In thousands
|
|
Long-lived assets:
|
|
|
|
|
|
North America
|
|
$
|
422
|
|
$
|
618
|
|
Total
|
|
$
|
422
|
|
$
|
618
|
|
9.
Property
and Equipment
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
In thousands
|
|
Equipment
|
|
$
|
864
|
|
$
|
864
|
|
Furniture and fixtures
|
|
541
|
|
541
|
|
Leasehold improvements
|
|
990
|
|
990
|
|
Computer software
|
|
333
|
|
333
|
|
|
|
2,728
|
|
2,728
|
|
Less accumulated depreciation and amortization
|
|
(2,306
|
)
|
(2,110
|
)
|
|
|
$
|
422
|
|
$
|
618
|
|
There were no investments in property and equipment during the three
and nine month periods ended September 30, 2010.
10.
Stockholders
Equity
At
6:01 pm ET on August 13, 2010, we effected a reverse stock split of our
Common Stock. Pursuant to this reverse stock split, each 5 shares of
Common Stock issued and outstanding as of the date following the reverse stock
split were converted into 1 share of Common Stock. This reverse stock
split reduced the number of shares of Common Stock outstanding. All per
share data has been retroactively restated to reflect this reverse stock split.
On March 9, 2010, an award entitling Mr. McGrath to receive
up to an aggregate of 120,000 shares of restricted stock was granted to
Mr. McGrath with vesting of 30,000 shares at the end of each calendar
quarter, contingent upon his being employed by us at the end of such calendar
quarter. On March 31, 2010, the first 30,000 shares vested and were issued
to Mr. McGrath out of treasury shares. On June 30, 2010, the second
30,000 shares vested and were issued to Mr. McGrath out of treasury
shares. On September 30, 2010, the third 30,000 shares vested and were
issued to Mr. McGrath. These shares were issued from treasury stock at a
historical average cost of $35.12 per share adjusted for the reverse stock
split. This led to a decrease in our treasury stock and additional paid-in
capital of $1.1 million for the three month period ended September 30,
2010 and $3.2 million for the nine month period ended September 30, 2010.
9
Table
of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options
A
summary of the status of our stock options issued to employees for the nine
month period ended September 30, 2010 is presented below. As of
September 30, 2010, there were 20,000 unvested stock options related to
outstanding stock options.
Common Option Shares
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Life (years)
|
|
Outstanding at January 1, 2010
|
|
2,800
|
|
$
|
48.59
|
|
|
|
Granted
|
|
20,000
|
|
$
|
2.80
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Expired
|
|
(2,690
|
)
|
$
|
49.99
|
|
|
|
Outstanding at September 30, 2010
|
|
20,110
|
|
$
|
2.86
|
|
5.20
|
|
Options exercisable at September 30, 2010
|
|
110
|
|
14.19
|
|
0.73
|
|
At September 30, 2010 there was approximately $24,000 of
stock-based compensation costs related to unvested options to be recognized
over the performance period through December 31, 2011. For 2010 these
awards were valued at $1.38 per share.
Restricted Stock
A summary of the restricted stock award activity for the nine month
period ended September 30, 2010 is presented below.
Restricted Stock
|
|
Shares
|
|
|
|
|
|
Outstanding award grants at January 1, 2010
(1)
|
|
24,266
|
|
Awards granted (2)
|
|
120,000
|
|
Awards cancelled
|
|
(24,266
|
)
|
Vested (1)
|
|
(90,000
|
)
|
Outstanding grants at September 30, 2010
|
|
30,000
|
|
Authorized awards to be granted in future years
|
|
|
|
Authorized awards at September 30, 2010 (2)
|
|
30,000
|
|
(1)
Authorized awards are future
rights to shares, usually subject to conditions. Grants are authorized awards
for which there is a mutual understanding of the key terms and conditions
applicable to the award. Vested shares are shares on which all restrictions
have lapsed under the terms of the award and that have been issued to the
holder and constitute outstanding common stock. A holder of vested shares has
all rights, powers and privileges of a holder of unrestricted shares of our
common stock.
(2)
Authorized awards of 120,000
shares consisting of fully restricted shares were approved and granted to
Mr. McGrath on March 9, 2010. Of the 120,000 shares, 30,000 shares
vested on March 31, 2010, 30,000 shares vested on June 30, 2010, and
30,000 shares vested on September 30, 2010.
At September 30, 2010 there was approximately $35,000 of
stock-based compensation costs related to unvested restricted stock awards to
be recognized over the performance period of the remainder of 2010. For 2010
these awards were valued at $3.75 per share.
11.
Income
Taxes
We follow ASC 740,
Income Taxes
,
which requires use of the asset and liability method of accounting for deferred
income taxes and providing deferred income taxes for all significant temporary
differences and ASC 740-10-25,
Income
Taxes Recognition
, which prescribes a comprehensive model for how
companies should recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax
return.
Income tax expense of $1.6 million for the nine month period ended
September 30, 2010 reflected an effective tax rate of 38%, compared to
income tax benefit of $2.1 million, or an effective tax rate of 37%, for the
nine month period ended September 30, 2009. In the first quarter of 2010,
our cumulative losses began to exceed our cumulative earnings. Additionally, we
are not currently profitable and we determined that, as of March 31, 2010,
it was no longer probable that we will recover our deferred tax asset. Thus, we
established a valuation allowance to completely offset the deferred tax asset.
The combined tax effect was to cause a deferred income tax expense for the nine
month period ended September 30, 2010 of $1.6 million. Until we return to
profitability, this will
10
Table of Contents
THOMAS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
have
the effect of increasing the net loss as well as the loss per share compared to
prior quarters. If we are able to return to sustained profitability and can
comply with all the requirements of ASC 740-10-25, we should be able to recover
all or part of our deferred tax asset.
We had no ASC 740 liabilities as of September 30, 2010 or
December 31, 2009.
12.
Financing
Agreements
On December 15, 2006, we entered into a credit
agreement with JPMorgan Chase Bank, N.A. providing for a $5.5 million revolving
line of credit maturing March 31, 2009 to be used as necessary for ongoing
working capital needs and general corporate purposes. We did not draw on this
credit facility and at March 31, 2009 we chose to allow the credit
facility to expire.
For the three month period ended March 31, 2009, we had no
borrowings or repayments on that credit facility.
As of September 30, 2010, we had a note payable of $13,000 for
insurance premiums for 2010.
13.
Issuer
Repurchases of Shares
On March 6, 2008, we announced that our
Board of Directors had reactivated a common stock repurchase program
authorizing us to repurchase up to 101,090 shares of our common stock from time
to time, subject to market conditions. In October 2008, our Board of
Directors approved an expansion of our stock repurchase program, authorizing us
to repurchase up to an additional 60,000 shares from time to time, subject to
market conditions. The purpose of this stock repurchase program was to reduce
the dilution from potential stock incentive payments for new employees.
During the first quarter of 2008, we established a written plan
pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which
provided for the purchase of our common stock in support of our announced share
repurchase program. During the first quarter of 2010, we repurchased 5,349
shares for a total of $17,737, or an average of $3.31 per share including
commissions and fees.
As of January 31, 2010, we completed the authorized repurchase of
161,090 shares under the plan at a total cost of $1,259,640, or $7.81 per
share, including commissions and fees.
14.
Recently
Issued Accounting Pronouncements
In October 2009, the FASB
issued ASU No. 2009-13 on ASC 605,
Revenue
Recognition Multiple Deliverable Revenue Arrangements a consensus of the
FASB Emerging Issues Task Force.
The objective of this Update is to
address the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit. Vendors often provide multiple products or services to their
customers. Those deliverables often are provided at different points in time or
over different time periods. This Update provides amendments to the criteria in
Subtopic 605-25 for separating consideration in multiple-deliverable
arrangements. The amendments in this Update establish a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor specific objective
evidence nor third-party evidence is available. The amendments in this Update
also will replace the term fair value in the revenue allocation guidance with
selling price to clarify that the allocation of revenue is based on
entity-specific assumptions rather than assumptions of a marketplace
participant. This Update is effective for fiscal years beginning on or after
June 15, 2010. We do not believe that this new accounting
update will have any significant impact on our consolidated financial
statements.
15.
Subsequent events
Effective November 1,
2010, we implemented temporary partial furloughs and salary reductions for
members of our management team in order to reduce SG&A costs. Members of
our management team are subject to a flexible work schedule and adjusted
compensation based on job requirements, including utilization on client
engagements. The work schedule of all members of our management team will be
re-evaluated periodically. Work schedules and salaries may be adjusted as
needed to ensure that necessary functions are performed during this period and
to accommodate further changes in business conditions and changes in individual
utilization on client engagements. In
the near term, our primary sales focus will be on governmental entities,
although we will continue to pursue commercial business where we have the
opportunity to do so. As a result of this change in focus, Barbara D. Stinnett,
Executive Vice President and Chief Customer Officer Worldwide Customer
Operations resigned effective October 31, 2010, to pursue other
opportunities more closely aligned with her interests.
11
Table of Contents
ITEM
2Managements Discussion and Analysis of Financial Condition and Results of
Operations
Safe Harbor Statement Under The Private Securities
Litigation Reform Act:
Various sections contained or incorporated by reference in this
Quarterly Report on Form 10-Q include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, Section 21E
of the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may be identified by the context
of the statement and generally arise when we are discussing our beliefs,
estimates or expectations. Such statements may contain the words believe, anticipate,
expect, estimate, intend, project, could, should, may, will be,
will likely continue, will likely result, or words or phrases of similar
meaning. These statements are not historical facts or guarantees of future
performance but instead represent only our belief at the time the statements
were made regarding future events. In particular, statements under Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements, including but not limited to
statements regarding our expectations regarding the sufficiency of our
liquidity sources and the expected impact of legal proceedings with which we
may become involved. All forward-looking statements are based largely on the
expectations of management and are subject to a number of risks and
uncertainties which may cause actual results and outcomes to differ materially
from what we express or forecast in these forward-looking statements. In
evaluating these statements, you should consider the risks and uncertainties
discussed under Item 1A. Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, as well as the
following list of some but not all of the factors that could cause actual
results or events to differ materially from anticipated results or events:
·
difficulty in
obtaining new consulting engagements that generate revenues sufficient to allow
us to return to profitability;
·
the possibility
that we may not generate cash flow from operations sufficient to meet our cash
needs before we exhaust existing resources;
·
the potential
for receiving a going concern opinion from our independent registered public
accounting firm if our business does not improve during 2010;
·
the possibility
of being delisted from the Nasdaq Capital Market as a result of any future
failure to maintain compliance with applicable listing standards;
·
a prolonged
economic downturn;
·
further
disruption in our relationships with major customers;
·
an inability to
successfully sustain sufficient cost containment initiatives;
·
the competitive
environment of the industry in which we operate; and
·
an inability to
attract, hire, develop, train and retain experienced consultants.
These forward-looking statements and such risks, uncertainties and
other factors speak only as of the date of this Quarterly Report on
Form 10-Q, and we expressly disclaim any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in our expectations with regard thereto, or any
other change in events, conditions or circumstances on which any such statement
is based.
Current Market Conditions
The U.S. and worldwide economies are undergoing unprecedented upheaval,
turmoil and uncertainty due in part to the curtailment or reduction of credit
available to both individuals and to businesses. It is difficult to predict the
impact that these conditions will have on our operations. Even the experts are
having difficulty agreeing upon the appropriate remedies or the expected duration
of this situation.
We are in the business of helping clients improve profitability and
reduce costs. While we expect the current economic environment to make our
recovery more difficult in some respects, we believe that successful companies
should focus more efforts on reducing costs and improving profitability as
achieving revenue growth and obtaining external funding become more
challenging. We believe that the nature of our product and service offerings
and the value proposition that we offer to our clients place us in a strong
position to help those companies accelerate and magnify their internal efforts
to reduce costs and improve profitability.
12
Table of
Contents
Despite our view of the value of our product and service offerings,
prospective clients are more cautious in making commitments to new engagements
and may delay the commencement of projects. This has made our efforts to grow
our revenue much more difficult than we had anticipated.
Overview
We
are a professional services firm that executes and implements process
improvements and culture change management operations strategies to produce
improved operational and financial performance for our clients globally. We are
a Delaware corporation founded in 1978 and headquartered in Irving, Texas.
Through
our proprietary Process Value Management, or PVM methodology, our consultants
refine processes throughout an organization to give our clients a competitive
advantage that increases revenues, lowers costs, and generates cash. With our
more than 30 years of change management experience, innovation, and
knowledge leadership, we have demonstrated our ability to apply this methodology
in hundreds of clients in both the private and the public sector.
Process
Value Management is our proprietary methodology to identify, prioritize, and
quantify the amount and timing of cross-functional business improvement
opportunities. The PVM approach and methodology is designed to help an
organization increase overall effectiveness by focusing on performance drivers
throughout the organization like speed (cycle time), quality (first pass
yield), and productivity. The PVM approach and methodology is widely applicable
to almost all types of enterprises, including government entities, military
organizations, for-profit companies in many industries, and not-for-profit
enterprises, to help drive sustainable improvements in operations and reduced costs.
For
marketing purposes, we are organized into two business units, the Government
Business Unit and the Commercial Business Unit.
The
Commercial Business Unit focuses on sales to aerospace firms, to airports, to
transportation firms, to healthcare entities including hospitals, medical
practices and pharmaceutical firms, and to industrial clients.
The
Government Business unit is focused on sales to U.S. government agencies, to
all branches of the military, and to state and local government entities.
In
the future we may create additional practices as we see potential market
opportunities, or we may combine or eliminate practices in response to market
conditions. Our practice leaders and principals are responsible for sales and
marketing to prospective clients.
Through
the years, we have developed a number of service offerings that employ the PVM
approach and methodology to drive productivity improvements within multiple
areas of our clients enterprises. Although we continue to provide solutions to
client problems in many areas of need, over the past two years we have refined
our offerings to focus our marketing more often on specific solutions in
·
Culture and
Change Management,
·
Business
Decision Processes,
·
Product and
Service Innovation,
·
Operations, Improvement
and Cost Reduction,
·
Physician
Practice Management (in healthcare),
·
Supply Chain
Management,
·
Finance and
Administration, and
·
Marketing and
Sales.
13
Table of Contents
Historically, most of our clients have been large, diversified
commercial or government enterprises in North America, Europe, South America
and Asia. For several years prior to
April 2008, however, the majority of our revenue was derived from
engagements with the U.S. Navy, both directly and through an intermediary.
In 2010, we have focused on diversifying our client base by delivering
our solutions in North America, both to the U.S. government and to commercial
entities. Beginning November 2010, we are concentrating our sales focus on
government related organizations, although we will continue to pursue
commercial business on an opportunistic basis for the short term. We also
expect to engage in some business in Europe, and perhaps elsewhere, on an
opportunistic basis.
While we believe our methodologies are applicable to any organization,
we have developed a significant amount of subject matter expertise relevant to
specific industries and governmental entities. Consequently, we can leverage
our consultants prior executive experiences to obtain business and determine
appropriate client project teams. Our goal is to diversify our business among
our various practice areas. We are actively pursuing new business in each of
these areas.
We perform services and provide solutions for clients pursuant to
contracts that typically have terms of two weeks to one year or longer. We are
compensated for our professional services and solutions in one or more of three
ways:
·
fixed fees,
·
task-based fees, or
·
incentive fees.
Our fee type and structure for each client engagement depends on a
number of variables, including the size of the client, the complexity and
geographic dispersion of its business, the extent of the opportunity for us to
improve the clients processes and other factors. Some of our contracts may be
cancelled with little notice. We do not report bookings or backlog because we
believe the uncertainties associated with cancellable contracts, particularly
in our commercial business, may render such information misleading.
The majority of our revenue is derived from fixed fee and task-based
fee contracts.
Fixed fee revenue is recognized on the proportional performance model
(which approximates the percentage completion method), based on direct labor
hours expended and, when applicable, the completed performance model. In order
to calculate the completion ratio on a given project, time and effort to date
are divided by the total estimated time and effort for the entire project. This
ratio is then multiplied by the total fixed fee to be earned on the project,
resulting in the amount of revenue earned to date. A few of our fixed fee
contracts, primarily assessments, are recognized using the completed contract
performance model as these contracts are generally one to six weeks in duration
and conclude with a presentation or agreed upon deliverable to the clients
management. Revenues attributable to fixed fees were 49% and 80% of consolidated
revenue for the three and nine month periods ended September 30, 2010, and
72% and 66% of consolidated revenue for the three and nine month periods ended
September 30, 2009.
Task-based fees are recognized as revenue when the relevant task is
completed, usually on a monthly basis. Revenues attributable to task-based fees
were 36% and 10% for the three and nine month periods ended September 30,
2010, and 12% of consolidated revenue for the each of the three and nine month
periods ended September 30, 2009.
Incentive fees are tied to improvements in a variety of client
performance measures typically involving cycle time, asset utilization and
productivity. Incentive fee revenue is recognized in the period in which the
related client improvements are achieved and we obtain the clients acceptance.
Our incentive fee agreements with our clients define in advance the performance
improvement standards that will form the basis for the payment of incentive
fees. In order to mitigate the risk of disputes arising over the achievement of
performance improvements, which drive incentive fees, we obtain customer
agreement to these achievements prior to recognizing revenue. Typically these
contracts are for commercial customers and they provide for a base fee and an
additional incentive fee earned according to a formula specified in the
applicable contract. Incentive fees are affected by our clients business
performance and prevailing economic conditions. We had no revenues attributable
to incentive fees for the three and nine month periods ended September 30,
2010, but 1% and 8% of consolidated revenue for the three and nine month
periods ended September 30, 2009 was attributable to incentive fees. As of
September 30, 2010, we had no contracts that provided for incentive fees.
Reimbursement revenue represents repayment by our clients of our
mutually agreed upon travel expenses as incurred. All billable travel expenses
are submitted to and approved by the client. Revenues attributable to
reimbursement were 15% and 10% of consolidated revenue for the three and nine
month periods ended September 30, 2010, and 15% and 13% of consolidated
revenue for the three and nine month periods ended September 30, 2009. For
some clients, the fixed fee or task-based fee is inclusive of travel. In these
cases, the travel expense is included in cost of sales.
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Consulting
contracts typically are awarded by both government entities and private
organizations on the basis of sole-source negotiations, that is, direct
negotiation between the client and a single vendor such as Thomas Group, or on
the basis of competitive bidding, generally in response to a Request for
Proposal, or RFP. Whenever possible, we prefer to work under sole source
contract arrangements. Competitive bids can require extensive time, effort and
cost to submit a qualified bid, and the outcome is unpredictable. In many
competitive bid situations, we compete against far larger companies with far
greater resources to devote to the proposal process. In some cases, we team
with another company that has capabilities complementary to ours in order to
increase the competitiveness of our bid. In some other cases, we use an
intermediary who has the capability to respond more effectively in this
process.
Contracts
related to U.S. government engagements often are executed within the U.S
governments budget cycle and may be fully funded for up to one year at a time.
They may be renewed annually for successive one-year periods if the life of the
engagement extends beyond one fiscal year. For our engagements with the U.S.
government, we contract either directly with the government through our listing
with the General Services Administration or we use an intermediary that acts as
a prime contractor providing contracting and administrative services for the
majority of our government programs.
Cost of sales represents the direct costs involved in providing services
and solutions to our clients. The components include direct labor and benefit costs, support costs
such as telecommunications and computer costs, travel costs and other costs
incurred in providing services and solutions to our clients.
Selling, general and administrative expenses include the costs of all
labor and other goods and services necessary for our selling and marketing
efforts, human resource support, accounting and finance services, legal and
other professional services, facilities and equipment, information technology
and telecommunications support and services, and other corporate functions.
Selling, general and administrative expenses also include depreciation and
amortization on the fixed assets used to support these functions.
Critical Accounting Policies
General
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the accompanying financial statements and
related notes. Management bases its estimates and assumptions on historical
experience, observance of industry trends and various other sources of
information and factors. Actual results could differ from these estimates.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions.
Revenue Recognition
Revenue is
recognized when realizable and earned generally as services and solutions are
provided over the life of a contract. Fixed fee revenue is recognized using a
proportional performance model (which approximates the percentage completion
method), based on direct labor hours expended and, when applicable, the
completed performance model. Task-based, or deliverable-based, fees are
recognized when the relevant task or deliverable is completed. Incentive fee
revenue is recognized in the period in which the related improvements are
achieved. Our incentive fee agreements with our clients define in advance the
performance improvement standards that will form the basis of our incentive
fees earned. We do not recognize incentive fee revenue until the client has
agreed that performance improvements have in fact been achieved.
Unbilled Receivables
Although
fixed fee revenue recognition generally coincides with billings, as an
accommodation to our clients, we may structure fee billings in a different
pattern. In such instances, amounts collectible for services provided but not
yet billed are represented in unbilled receivables.
Deferred Revenue
We occasionally
receive advance payments of a portion of our fees. Advance payments are
classified as deferred revenue upon receipt and recorded as revenue when
earned.
Deferred Taxes
Income taxes
are calculated using the asset and liability method required by ASC
740-10-25,
Income Taxes
.
Deferred income taxes are recognized for the tax consequences resulting from
timing differences by applying enacted statutory tax rates applicable to future
years. These timing differences are associated with differences between the
financial and the tax basis of existing assets and liabilities. Under ASC
740-10, a statutory change in tax rates will be recognized immediately in
deferred taxes and income. Net deferred taxes are recorded both as a current
deferred income tax asset and as other long-term liabilities based upon the
classification of the related timing difference. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely
than not that some portion or all of a deferred tax asset will not be realized.
All available evidence, both positive and negative, is considered when
determining the need for a valuation allowance. Judgment is used in considering
the relative impact of negative and positive evidence. The weight given to the
potential effect of negative and positive evidence is commensurate with the
extent to which it can be objectively verified. In accordance with ASC 740-10,
evidence, such as operating results during the most recent three-year period,
is given more weight than our expectations of future profitability, which are
inherently uncertain.
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In assessing the realizability of deferred tax assets, we considered
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. In the first quarter of 2010, our cumulative
losses began to exceed our cumulative earnings. Our analyses of the positive
and negative evidence indicate that it is more likely than not that all of the
net deferred tax asset will not be realized, and a full valuation allowance is
required. Additionally, we are not currently profitable and we determined that,
as of March 31, 2010, it was no longer probable that we will recover our
deferred tax asset. The combined tax effect was to cause an income tax expense
for the nine month period ended September 30, 2010 of $1.6 million. Until
we return to profitability, this will have the effect of increasing the net
loss as well as the loss per share compared to prior quarters. At
September 30, 2010, we increased our valuation allowance by $0.5 million.
If we are able to return to sustained profitability and we can comply with all
of the requirements of ASC 740-10-25, we should be able to recover all or part
of our deferred tax asset.
As of September 30, 2010, we had a valuation allowance of $3.2
million of which $58,000 is subject to the limitations of Section 382 of
the Internal Revenue Code.
For the third quarter ended September 30, 2010 we had no income
tax expense compared to an income tax benefit of $0.6 million in the same
quarter of last year. For the nine month period ended September 30, 2010
we incurred income tax expense of $1.6 million compared to an income tax
benefit of $2.1 million for the nine month period ended September 30,
2009. At September 30, 2010, we booked a net operating loss of $4.1
million which is available to carry forward. As of September 30, 2010, we
had a $6.9 million net operating loss to carry forward.
We also follow the guidance under ASC 740-10-25, which prescribes a
comprehensive model for how companies should recognize, measure, present, and
disclose in their financial statements uncertain tax positions taken or
expected to be taken on a tax return. Tax law is subject to varied
interpretation, and whether a tax position will ultimately be sustained may be
uncertain. Under ASC 740-10-25, tax positions are initially recognized in the
financial statements when it is more likely than not that the position will be
sustained upon examination by the tax authorities. Such tax positions are initially
and subsequently measured as the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and all relevant facts. ASC
740-10-25 also requires additional disclosures about unrecognized tax benefits
associated with uncertain income tax positions and a reconciliation of the
change in the unrecognized benefit. In addition, ASC 740-10-25 requires
interest to be recognized on the full amount of deferred benefits for uncertain
tax positions. An income tax penalty is recognized as expense when the tax
position does not meet the minimum statutory threshold to avoid the imposition
of a penalty. As of September 30, 2010, we did not have any liabilities or
associated interest under ASC 740-10-25.
Stock-Based Compensation
We account
for stock-based compensation arrangements in accordance with the provisions of
ASC 718,
Stock Compensation
. ASC
718-30 requires us to measure all stock-based compensation awards at the
grant date using a fair value method and to record expense in the financial
statements over the requisite service period of the award. We estimate the fair
value of options using the Black-Scholes method, which considers a risk-free
interest rate, volatility, expected life, forfeitures, and dividend rates. We
use the U.S. 10-year Treasury Bond yield to estimate the risk-free interest
rate; and, our estimate of volatility is based on our historical stock price
for a period of at least or equal to the expected life of award. Our estimate
of forfeitures considers the term of the awards granted and historical
forfeiture experience and our estimate of the expected life of awards is based
on the anticipated time the award is held. The restricted stock awards are
valued on the date of grant using the closing price of our common stock on the
Nasdaq Capital Market on that date. Performance share awards are expensed over
the applicable year(s) of service at the closing price on the Nasdaq
Capital Market on the date when there is mutual understanding of the key terms
and conditions affecting the performance award for the year(s).
Recently Adopted Accounting Pronouncements
In
February 2010, the FASB issued ASU No. 2010-09, which updates the
guidance in ASC 855,
Subsequent Events.
This amendment eliminated the
requirement for companies that file with the United States Securities and
Exchange Commission to indicate the date through which they have analyzed
subsequent events. This amendment was effective upon the issuance date of
February 24, 2010. The adoption of ASU No. 2010-09 had no impact on
our financial statements.
In
October 2009, the FASB issued ASU No. 2009-13 on ASC 605,
Revenue Recognition Multiple Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force.
The
objective of this Update is to address the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Vendors often provide
multiple products or services to their customers. Those deliverables often are
provided at different points in time or over different time periods. This
Update provides amendments to the criteria in Subtopic 605-25 for separating
consideration in multiple-deliverable arrangements. The amendments in this
Update establish a selling price hierarchy for determining the selling price of
a deliverable. The selling price used for each deliverable will be based on
vendor specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor specific objective evidence nor third-party evidence is
available. The amendments in this Update also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. This Update is effective for fiscal
years beginning on or after
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June 15,
2010. We do not believe that this new accounting update will
have any significant impact on our consolidated financial statements.
Results of Operations
The
following table sets forth the percentages of revenue for the identified items
in our consolidated statements of operations:
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
|
|
67.8
|
%
|
66.1
|
%
|
73.5
|
%
|
62.0
|
%
|
Gross profit
|
|
32.2
|
%
|
33.9
|
%
|
26.5
|
%
|
38.0
|
%
|
Selling, general and administrative
|
|
321.0
|
%
|
123.7
|
%
|
166.2
|
%
|
113.8
|
%
|
Operating loss
|
|
(288.8
|
)%
|
(89.8
|
)%
|
(139.6
|
)%
|
(75.8
|
)%
|
Interest income (expense), net
|
|
(0.2
|
)%
|
|
%
|
(0.1
|
)%
|
0.1
|
%
|
Other income (expense)
|
|
|
%
|
14.4
|
%
|
5.7
|
%
|
4.1
|
%
|
Loss before income taxes
|
|
(289.0
|
)%
|
(75.4
|
)%
|
(134.0
|
)%
|
(71.6
|
)%
|
Income taxes expense (benefit)
|
|
0.4
|
%
|
(26.5
|
)%
|
51.0
|
%
|
(26.6
|
)%
|
Net income (loss)
|
|
(289.4
|
)%
|
(48.9
|
)%
|
(185.0
|
)%
|
(45.0
|
)%
|
Three Month Period Ended September 30, 2010
Compared to the Three Month Period Ended September 30, 2009
Revenue
In the third
quarter of 2010, total revenues decreased $1.6 million, or 75%, to
$0.5 million from $2.1 million in the third quarter of 2009. Task-based
revenue was $0.2 million, or 36% of revenue, in the third quarter of 2010,
compared to $0.3 million, or 12% of revenue, in the third quarter of 2009.
Fixed fee revenue was $0.2 million, or 49% of revenue, in the third
quarter of 2010, compared to $1.5 million, or 72% of revenue, in the third
quarter of 2009. Reimbursement revenues were $0.1 million, or 15% of
revenue, in the third quarter of 2010, compared to $0.3 million, or 15% of
revenue, in the third quarter of 2009. There was no incentive revenue in the
third quarter of 2010, compared to $0.03 million, or 1% of revenue, in the
third quarter of 2009. As of November 12, 2010, we had no active
incentive-based contracts.
North America region revenue decreased $1.0 million, or 66%, to
$0.5 million in the third quarter of 2010, compared to $1.5 million
in the third quarter of 2009. The decrease in North America revenues for the
third quarter of 2010 compared to the third quarter of 2009 is due primarily to
a decrease in our government business. The decrease in task-based revenue,
which is associated with our government contracts, is due primarily to the
ending of some programs which were not replaced by new business. The decrease
in fixed fee revenue, which is associated with our commercial contracts, is due
primarily to having a lower volume of commercial contracts, along with the
contracts having a lower contract value for the three month period ended
September 30, 2010 compared to the three month period ended
September 30, 2009. Reimbursable revenues, which also are associated with
our commercial contracts, decreased due to the decrease in commercial activity.
We had no revenue in Europe in the third quarter of 2010. Our Europe
region revenue was $0.6 million in the third quarter of 2009. Although we
discontinued our owned Europe operations in 2006, we maintain a strategic
relationship in Europe through which we may periodically obtain business.
Gross Profit
Gross profit
margins were 32% of revenue, or $0.2 million, in the third quarter of
2010, compared to 34%, or $0.7 million, in the third quarter of 2009.
Costs of sales consist of direct labor, travel, and other direct costs incurred
by our consultants to provide services to our clients and to complete client
related projects, including training. The drop in the quarterly gross margins
is related to the slowdown of our government and commercial programs, to lower
utilization rates of our consultants, and to lower pricing on some engagements
in this period.
Selling, General and Administrative
Expenses
SG&A costs for the third quarter of 2010 were
$1.7 million, compared to $2.6 million in the third quarter of 2009. The
$0.9 million decrease is related primarily to a $0.8 million decrease
in payroll costs due to the decline in the number of consultants employed, a
$0.1 million decrease in travel related expenses, a $0.1 million decrease in
bad debt expense, and a $0.2 million decrease in other costs due to a decline
in activity as compared to the same period in 2009, offset by a $ 0.2 million
increase in sales commissions and executive bonus due to the reversal of
executive bonus in the third quarter of 2009, and $0.1 million increase in
stock-based compensation during the third quarter of 2010.
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Income Tax (Expense) Benefit
For the third
quarter of 2010 we incurred no income tax expense compared to an income tax
benefit of $0.6 million in the same quarter of last year. In the first quarter
of 2010, our cumulative losses began to exceed our cumulative earnings.
Additionally, we are not currently profitable and we determined that, as of
March 31, 2010, it was no longer probable that we will recover our deferred
tax asset. We established a valuation allowance to completely offset our
deferred tax assets. Until we can return to profitability, this will have the
effect of increasing the net loss as well as the loss per share compared to
prior quarters. If we able to return to sustained profitability and when we can
comply with all of the requirements of ASC 740-10-25, we should be able to
recover all or part of our deferred tax asset.
Nine Month Period Ended September 30, 2010 Compared to the Nine
Month Period Ended September 30, 2009
Revenue
In the first
nine months of 2010, total revenues decreased $4.8 million, or 60%, to
$3.2 million from $8.0 million in the first nine months of 2009.
Task-based revenue was 0.3 million, or 10% of revenue, in the first nine months
of 2010 , compared to $1.0 million, or 12% of revenue, in the first nine
months of 2009. Fixed fee revenue was $2.6 million, or 80% of revenue, in
the first nine months of 2010, compared to $5.3 million, or 66% of
revenue, in the first nine months of 2009. Reimbursement revenues were
$0.3 million, or 10% of revenue, in the first nine months of 2010,
compared to $1.1 million, or 13% of revenue, in the first nine months of
2009. We had no revenue attributable to incentive fees in the first nine months
of 2010, compared to $0.7 million, or 8% of revenue, in the first nine
months of 2009. As of November 12, 2010, we had no active incentive-based
contracts.
North America region revenue decreased $2.5 million, or 47%, to
$2.8 million in the first nine months of 2010, compared to
$5.3 million in the first nine months of 2009. The decrease in North
America revenues for the first nine months of 2010 compared to the first nine
months of 2009 is due primarily to a decrease in our government business. The
decrease in task-based revenue, which is associated with our government
contracts, is due primarily to the ending of some of our U.S. Navy programs
following the governments decision to consolidate these programs into a single
contracting vehicle for which we were not named as a provider. The decrease in
fixed fee revenue, which is associated with our commercial contracts, is due
primarily to having a lower volume of our commercial contracts, along with the
contracts having a lower contract value for the first nine months of 2010
compared to the first nine months of 2009. Reimbursable revenues, which also
are associated with our commercial contracts, decreased due to the decrease in
commercial activity.
We had no revenue in South America during the first nine months of
2010. Our South America region revenue was $17,000 during the first nine months
of 2009.
During the first nine months of 2010, we recorded $0.3 million in
revenue from a client located in Europe, compared to $2.7 million in revenue in
the first nine months of 2009. Although we discontinued our Europe operations
in 2006, we maintain a strategic relationship in Europe through which we may
periodically obtain business.
Gross Profit
Gross profit
margins were 27% of revenue, or $0.8 million, in the first nine months of
2010, compared to 38%, or $3.0 million, in the first nine months of 2009.
Costs of sales consists of direct labor, travel, and other direct costs
incurred by our consultants to provide services to our clients and to complete
client related projects, including training. The drop in the year-to-date gross
margins is related to the slowdown of our government and commercial programs
during the first nine months of 2010, to lower utilization rates of our
consultants in the first nine months of 2010, and to lower pricing on some
engagements in this period.
Selling, General and Administrative
Expenses
SG&A costs for the first nine months of 2010
were $5.3 million compared to $9.1 million in the first nine months of 2009.
The $3.8 million decrease is primarily related to a $2.4 million
decrease in payroll costs due to the decline in the number of consultants
employed, a $0.2 million decrease in sales commissions and executive bonus, a
$0.5 million decrease in travel related expenses, a $0.3 million decrease in
legal expenses, a $0.2 million decrease in outside consultants used related to
the decrease in activity, a $0.1 million decrease in audit, tax and accounting
service costs, a $0.1 million decrease in maintenance and license agreements, a
$0.1 million decrease in bad debt expense, a $0.1 million decrease in
depreciation and amortization costs, and a $0.1 million decline in other
costs due to a decrease in activity and the lower number of consultants
employed as compared to prior year, offset by a $0.3 million increase in
stock-based compensation during the first nine months of 2010.
Other Income
Other income
for the first nine of 2010 included the collection of $0.2 million from the
final liquidation of a former subsidiary in Europe and $0.02 million for
credits received from audit adjustments on insurance premiums.
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Liquidity and Capital Resources
Cash and cash equivalents decreased by $0.7 million during the
first nine months of 2010 compared to a $1.9 million decrease during the first
nine months of 2009. The major components of these changes are discussed below.
Cash Flows from Operating Activities
For the first
nine months of 2010, net cash used in operating activities was $0.6 million,
compared to net cash used of $1.7 million for the first nine months of 2009.
This decrease in net cash used in operating activities is due primarily to the
income tax refund received in the first nine months of 2010 of $2.7 million
offset by a non-cash decrease in deferred tax assets of $1.6 million, a
decrease in our accrued liabilities, and increased collection of our accounts
receivable offset by the net loss for the first nine months of 2010.
Cash Flows from Investing Activities
There were no
investing activities in the first nine months of 2010, compared to $5,000 in
the first nine months of 2009, related to proceeds from the sale of assets.
Cash Flows from Financing Activities
Cash used in
financing activities for the first nine months of 2010 was $0.02 million
related to the purchase of stock under our stock repurchase plan, compared to
$0.2 million in the first nine months of 2009, related to the $0.1 million
purchase of stock under our stock repurchase plan and the net tax effect of
stock issuances.
On March 6, 2008 we announced that our Board of Directors had
reactivated a common stock repurchase program, authorizing us to repurchase up
to 101,090 shares of our common stock from time to time, subject to market
conditions. In October 2008, our Board of Directors approved an expansion
of our stock repurchase program, authorizing us to repurchase up to an
additional 60,000 shares from time to time, subject to market conditions.
During the first quarter of 2008, we established a written plan
pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which
provided for the purchase of our common stock in support of our announced share
repurchase program. During the first quarter of 2010, we repurchased 5,349
shares for a total of $17,737, or an average of $3.31 per share including
commissions and fees.
As of January 31, 2010, we completed the authorized repurchase of
161,090 shares under the plan at a total cost of $1,259,640, or $7.81 per share
including commissions and fees.
$5.5 million Credit Facility
with JPMorgan Chase Bank, N.A.
On December 15, 2006,
we entered into a credit agreement with JPMorgan Chase Bank, N.A. to be used
for ongoing working capital needs and general corporate purposes. We did not
draw on this credit facility and at March 31, 2009 we had a zero balance
on the credit facility. The obligations under that credit facility were secured
by first priority liens on all of our accounts and proceeds thereof. This
credit facility also imposed certain affirmative and negative covenants on our
operations and business. This credit facility matured on March 31, 2009.
All liens were removed upon expiration of this credit agreement.
Our Liquidity Plan
Our ability
to generate cash from operations is determined primarily by our ability to
generate substantial new revenue. Our ability to generate this required new
revenue will be affected by prevailing economic conditions, among other factors.
In
recent periods we have taken steps to reduce our costs in many areas, and we
will continue to do so to the maximum extent we believe is prudent. If future
cash flows and capital resources are insufficient to meet our obligations and
commitments, we may be forced to reduce or delay activities and capital
expenditures, obtain additional equity capital or take other steps to refinance
our business or otherwise implement or seek alternative strategies.
Our ability to achieve positive gross margins, control costs and
generate cash flow from operations in the future will determine our ability to
arrange debt facilities in the future. We regularly evaluate our business to
enhance our liquidity position.
We currently believe that our available working capital of $4.2 million
at September 30, 2010 is sufficient to provide the necessary resources for
us at least through the first quarter of 2011. Our cash balance at September 30,
2010 was $4.3 million, or $2.04 per diluted share. Our available liquidity is limited
to our existing working capital and cash flow that we will be able to generate
from operations in 2010. There can be no assurance that existing cash will be
sufficient, that we will have access to the capital or credit markets if needed
or that any of our strategies can be implemented on satisfactory terms, on a
timely basis or at all.
Effective November 1, 2010, we implemented temporary partial
furloughs and salary reductions for members of the Companys management team in
order to reduce Expenses. Members of the management team are subject to a
flexible work schedule and adjusted compensation based on job requirements,
including utilization on client engagements. The work schedule of all members
of the management team will be re-evaluated periodically. Work schedules and
salaries may be adjusted as needed to ensure that
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necessary
functions are performed during this period and that client service and sales
efforts continue uninterrupted to accommodate further changes in business
conditions and changes in individual utilization on client engagements.
Inflation
Although our
operations are influenced by general economic conditions, we do not believe
inflation had a material effect on the results of operations during the three
month period ended September 30, 2010 or 2009. However, there can be no
assurance our business will not be affected by inflation in the future.
Commitments and Off-Balance Sheet
Arrangements
As of September 30, 2010, we had no material
commitments for capital expenditures or any obligations that would qualify to
be disclosed as off-balance sheet arrangements.
ITEM 3Quantitative and Qualitative
Disclosure About Market Risk
There have been no material changes in circumstances affecting our
exposure to interest rate or foreign exchange rate risk since December 31,
2009.
ITEM 4
Controls and Procedures
Based on the evaluation of our disclosure controls and procedures as of
the end of the period covered by this quarterly report, Michael McGrath, our
Executive Chairman, President and Chief Executive Officer, and Frank Tilley,
our Vice President and Chief Financial Officer, have concluded that, as of
September 30, 2010, in their judgment, our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us, including our subsidiaries, in the reports we file, or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. Our disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act
is accumulated and communicated to our management, including our Executive
Chairman, President and Chief Executive Officer and Vice President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding managements control objectives.
The design of any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There were no changes in our internal controls over financial reporting
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
Effective December 21, 2009, Earle Steinberg was removed from his
role as CEO and President. His employment agreement (the Agreement) provided
for payment of his salary for six months following separation, under certain
circumstances. We ceased making such payments to Mr. Steinberg as of
February 1, 2010 and have disputed our continuing liability for the unpaid
amount under the Agreement. On May 24, 2010, Mr. Steinberg filed suit
against us in the District Court of Dallas County claiming breach of this
Agreement and asserting a total claim of $206,000 plus attorneys fees. We
intend to vigorously defend against this claim. However, this amount of
potential liability (excluding legal fees) was accrued at December 31,
2009 and September 30, 2010.
We have notified our employment liability insurance carrier of this
claim, and we expect that much of our legal costs for this lawsuit will be
covered by insurance, subject to a deductible. We have expensed our legal costs
to date in the period incurred. Through September 2010,
our legal costs in this matter have been $17,000.
We may become subject to various other claims and legal matters, such
as collection matters initiated by us in the ordinary course of conducting our
business. As of the date of this Quarterly Report on Form 10-Q, we believe
neither such claims and legal matters nor the cost of prosecuting and/or
defending such claims and legal matters will have a material adverse effect on
our consolidated results of operations, financial condition or cash flows.
ITEM 1A Risk Factors
On September 7, 2010, we received notice from
The Nasdaq Stock Market confirming that we had regained compliance with Nasdaqs
listing standards following our 1-for-5 reverse stock split, and our common
stock continues to be listed on The Nasdaq Stock Market. As a result, the risk
factor in our Annual Report on Form 10-K for the year ended December 31,
2009, titled We are
20
Table of Contents
currently
not in compliance with Nasdaq rules for continued listing on the Nasdaq
Capital Market and are at risk of being delisted, which may decrease the
liquidity of our common stock and subject us to the SECs penny stock rules is
no longer applicable.
If we are unable to return to profitability
during 2010, we may receive a going concern opinion from our independent
auditors at the end of 2010. This could materially and adversely affect our
potential to sign contracts with new clients, further limiting our opportunity
to return to profitability.
Our
management believes that, as of September 30, 2010, we met the
requirements of U.S. generally accepted accounting principles, or GAAP, for a going
concern, which contemplates the realization of assets and discharge of
liabilities in the ordinary course of business. Management has prepared the
financial statements included in this Quarterly Report on Form 10-Q on
that basis. Accordingly, the financial statements do not include any
adjustments to reflect the possible future effects that may result from the
outcome of various uncertainties described in these risk factors and elsewhere
in this Quarterly Report. If we are unable to develop sufficient new business
from existing and new clients to allow us to return to profitability, we may no
longer meet this requirement as of the end of 2010. In that event, the report of
our independent registered public accounting firm with respect to our financial
statements for the year ended December 31, 2010 may contain an explanatory
paragraph with respect to our ability to continue as a going concern. Such a
statement may make it more difficult for us to sign new contracts with clients
and to obtain necessary capital or credit, and may have other effects that
further adversely impact our ability to return to profitability.
In order to help maintain our continued
listing on Nasdaq, we have executed a reverse stock split. This reduced our
shares outstanding by 80%, which reduced the trading volume in our stock
proportionally. This may result in reduced liquidity for all shareholders and
may result in increased volatility in our stock price over time.
The
reduced trading volume which results from the decreased number of shares that
are publically held (i.e. not held by insiders) may make it more difficult to
buy or sell our stock, even though we may maintain our listing on the Nasdaq Capital
Market. The reduced volume of stock trades that may result may also increase
the volatility of our stock price over time. Also, some owners will now own odd
lots (i.e. less than 100 shares) that may become more difficult or costly to
trade.
Although we believe we are currently
in compliance with the listing requirements of the Nasdaq Capital Market, there
is no assurance that we will continue to remain so. If we fail to remain in
compliance, we will be exposed to possible delisting and the liquidity of our
stock may be further negatively impacted.
We believe that we are currently in compliance with all of the listing
requirements of the Nasdaq Capital Market. There is no assurance that we will
continue to remain in compliance. There are several criteria for continued
listing on the Nasdaq Capital Market. If we fail to meet any of them in the
future, we may again receive notice of our failure to meet the requirements. If
we are unable to regain compliance during the permitted time frame following receipt
of any such notice, we may again risk being delisted by Nasdaq and listed on
the pink sheets with potentially further adverse impact on the liquidity of
our stock as well as from the SECs penny stock rules if our stock price
again falls below the $1 per share closing bid price for an extended period.
If we fail to maintain adequate
internal control over financial reporting or if we are unable to timely
complete our assessment of the effectiveness of our internal control over
financial reporting, we may be subject to a loss of public confidence and other
negative consequences, and the trading price of our stock could be negatively
impacted.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the Dodd-Frank Act) was enacted and signed into law.
The Dodd-Frank Act, among other things, amends Section 404 of the
Sarbanes-Oxley Act of 2002 to provide that non-accelerated filers, including
smaller reporting companies, are permanently exempt from the requirement to obtain
an attestation of managements assessment of internal controls over financial
reporting from the reporting companys independent registered public accounting
firm. As a smaller reporting company,
our management must still complete an internal assessment of our internal
controls, but we are no longer required to seek attestation of our assessment
from our independent registered public accounting firm. Effective internal controls assist us in
providing reliable financial reports and to effectively detect and prevent
fraud. As we have become a much smaller company with fewer general and
administrative staff, however, it has become more difficult to achieve and
maintain the existing internal control structure, and to afford the costs of
doing so.
While we intend to try to maintain effective internal controls, if we
fail, we may experience a loss of investor confidence in the reliability of our
financial statements. This could harm our ability to sign new contracts with
clients and to obtain financing for the business. It may also negatively impact the trading
price of our common stock.
There have been no other material changes from the information
previously reported under Item 1A of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009.
21
Table of
Contents
ITEM 2 Unregistered Sales of Equity Securities and
Use of Proceeds
None.
ITEM 3 Defaults Upon Senior Securities
None.
ITEM 4
Removed and
Reserved
ITEM 5 Other Information
None.
ITEM 6 Exhibits
Exhibits
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Thomas Group filed July 10,
1998, with the State of Delaware Office of the Secretary of State (filed as
Exhibit 3.1 to our Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
|
3.2
|
|
Amended
and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 and incorporated herein by reference).
|
3.3
|
|
Amendment
No. 1 to Amended and Restated By-Laws dated March 25, 2009 (filed
as Exhibit 3.1 to our Current Report on Form 8-K filed
March 26, 2009 and incorporated herein by reference).
|
3.4
|
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation of Thomas
Group effective August 13, 2010 (filed as Exhibit 3.1 to our
Current Report on Form 8-K filed August 16, 2010 and incorporated
herein by reference).
|
* 10.1
|
|
Amendment
No. 1 to the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc.
dated effective August 13, 2010.
|
* 10.2
|
|
Amendment
No. 1 to the 2008 Omnibus Stock and Incentive Plan for Thomas Group, Inc.
dated effective August 13, 2010.
|
* 31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
* 31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 (a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
* 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.
|
* Filed herewith
22
Table of
Contents
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 thereunto duly authorized.
|
|
THOMAS GROUP, INC.
|
|
|
Registrant
|
|
|
|
November 12, 2010
|
|
/s/ MICHAEL E. MCGRATH
|
Date
|
|
Michael E. McGrath
|
|
|
Executive Chairman, President and CEO
|
23
Table of
Contents
Thomas Group, Inc.
Form 10-Q
Exhibit Index
Exhibit
Number
|
|
Description
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Thomas Group filed July 10,
1998, with the State of Delaware Office of the Secretary of State (filed as
Exhibit 3.1 to our Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).
|
3.2
|
|
Amended
and Restated By-Laws dated May 30, 2001 (filed as Exhibit 3.2 to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 and incorporated herein by reference).
|
3.3
|
|
Amendment
No. 1 to Amended and Restated By-Laws dated March 25, 2009 (filed
as Exhibit 3.1 to our Current Report on Form 8-K filed
March 26, 2009 and incorporated herein by reference).
|
3.4
|
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation of Thomas
Group effective August 13, 2010 (filed as Exhibit 3.1 to our
Current Report on Form 8-K filed August 16, 2010 and incorporated
herein by reference).
|
* 10.1
|
|
Amendment
No. 1 to the 2005 Omnibus Stock and Incentive Plan for Thomas Group, Inc.
dated effective August 13, 2010.
|
* 10.2
|
|
Amendment
No. 1 to the 2008 Omnibus Stock and Incentive Plan for Thomas Group, Inc.
dated effective August 13, 2010.
|
* 31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under
the Securities Exchange Act of 1934.
|
* 31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
* 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.
|
* Filed herewith
24
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