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 March 31, 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 May 14, 2010, there were 10,607,765 shares of the registrants
common stock outstanding.
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)
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,373
|
|
$
|
5,004
|
|
Trade
accounts receivable, net of allowance of $0 and $5 at March 31, 2010 and
December 31, 2009, respectively
|
|
1,112
|
|
849
|
|
Unbilled
receivables
|
|
307
|
|
378
|
|
Deferred
tax asset, current, net of allowance of $119 and $4 at March 31, 2010
and December 31, 2009, respectively
|
|
|
|
111
|
|
Income
tax receivable
|
|
2,821
|
|
2,835
|
|
Other
current assets
|
|
245
|
|
281
|
|
Total
Current Assets
|
|
7,858
|
|
9,458
|
|
Property
and equipment, net of accumulated depreciation of $2,176 and $2,110 at
March 31, 2010 and December 31, 2009, respectively
|
|
552
|
|
618
|
|
Deferred
tax asset, net of allowance of $1,987 and $54 at March 31, 2010 and
December 31, 2009, respectively
|
|
|
|
1,471
|
|
Other
assets
|
|
31
|
|
31
|
|
|
|
$
|
8,441
|
|
$
|
11,578
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
502
|
|
$
|
725
|
|
Accrued
wages and benefits
|
|
434
|
|
478
|
|
Income
taxes payable
|
|
12
|
|
14
|
|
Note
payable
|
|
89
|
|
149
|
|
Total
Current Liabilities
|
|
1,037
|
|
1,366
|
|
Other
long-term obligations
|
|
101
|
|
126
|
|
Total
Liabilities
|
|
1,138
|
|
1,492
|
|
Commitments
and Contingencies
|
|
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
Common
stock, $.01 par value; 25,000,000 shares authorized; 13,843,541 and
13,843,541 shares issued and 10,607,765 and 10,484,509 shares
outstanding at March 31, 2010 and December 31, 2009, respectively
|
|
138
|
|
138
|
|
Additional
paid-in capital
|
|
29,848
|
|
30,761
|
|
Retained
earnings
|
|
44
|
|
2,949
|
|
Treasury
stock, 3,235,776 and 3,359,032 shares at March 31, 2010 and
December 31, 2009, respectively, at cost
|
|
(22,727
|
)
|
(23,762
|
)
|
Total
Stockholders Equity
|
|
7,303
|
|
10,086
|
|
|
|
$
|
8,441
|
|
$
|
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
March 31,
|
|
|
|
2010
|
|
2009
|
|
Consulting
revenue before reimbursements
|
|
$
|
1,519
|
|
$
|
2,920
|
|
Reimbursements
|
|
132
|
|
368
|
|
Total
revenue
|
|
1,651
|
|
3,288
|
|
Cost
of sales before reimbursable expenses
|
|
1,015
|
|
1,478
|
|
Reimbursable
expenses
|
|
132
|
|
368
|
|
Total
cost of sales
|
|
1,147
|
|
1,846
|
|
Gross
profit
|
|
504
|
|
1,442
|
|
Selling,
general and administrative
|
|
1,976
|
|
3,362
|
|
Operating
loss
|
|
(1,472
|
)
|
(1,920
|
)
|
Interest
income, net of expense
|
|
(1
|
)
|
4
|
|
Other
income
|
|
162
|
|
6
|
|
Loss
from operations before income taxes
|
|
(1,311
|
)
|
(1,910
|
)
|
Income
tax (expense) benefit
|
|
(1,594
|
)
|
685
|
|
Net loss
|
|
$
|
(2,905
|
)
|
$
|
(1,225
|
)
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
Basic:
|
|
$
|
(0.28
|
)
|
$
|
(0.11
|
)
|
Diluted:
|
|
$
|
(0.28
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
Basic
|
|
10,463
|
|
10,678
|
|
Diluted
|
|
10,463
|
|
10,678
|
|
See accompanying notes to
condensed consolidated financial statements.
4
Table
of Contents
THOMAS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,905
|
)
|
$
|
(1,225
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
|
66
|
|
90
|
|
Foreign
currency translation (gain) loss
|
|
8
|
|
(35
|
)
|
Stock
based compensation expense
|
|
140
|
|
57
|
|
Bad
debt expense (recovery)
|
|
(5
|
)
|
(5
|
)
|
Deferred
tax expense (benefit)
|
|
1,582
|
|
(134
|
)
|
Other
|
|
9
|
|
31
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
(Increase)
decrease in trade accounts receivable
|
|
(266
|
)
|
(150
|
)
|
(Increase)
decrease in unbilled receivables
|
|
72
|
|
71
|
|
(Increase)
decrease in income tax receivable
|
|
13
|
|
328
|
|
(Increase)
decrease in other assets
|
|
36
|
|
80
|
|
Increase
(decrease) in accounts payable and accrued liabilities
|
|
(282
|
)
|
(230
|
)
|
Increase
(decrease) in note payable
|
|
(60
|
)
|
|
|
Increase
(decrease) in other liabilities
|
|
(9
|
)
|
(9
|
)
|
Increase
(decrease) in income taxes payable
|
|
(3
|
)
|
27
|
|
Net
cash used in operating activities
|
|
(1,604
|
)
|
(1,104
|
)
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Purchase
of stock
|
|
(18
|
)
|
(52
|
)
|
Issuance
of common stock
|
|
|
|
1
|
|
Tax
effect of option exercises
|
|
|
|
(45
|
)
|
Net
cash used in financing activities
|
|
(18
|
)
|
(96
|
)
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
(9
|
)
|
(31
|
)
|
|
|
|
|
|
|
Net
change in cash
|
|
(1,631
|
)
|
(1,231
|
)
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
Beginning
of period
|
|
5,004
|
|
8,349
|
|
End
of period
|
|
$
|
3,373
|
|
$
|
7,118
|
|
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. 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 month period ended March 31, 2010
are not necessarily indicative of the results of operations for the entire year
ending December 31, 2010.
2.
Liquidity
Our cash balance was $3,373,000
at March 31, 2010. We expect to receive Federal income tax refunds in the
first half of 2010 of approximately $2.7 million. Our available liquidity
is limited to our existing working capital, the proceeds from our anticipated tax
refund, and cash flow that we will be able to generate from operations in 2010.
We currently believe we have sufficient liquidity to sustain our operations at
least through March 31, 2011. If circumstances change, we could be
required to seek other sources of liquidity during 2010. There can be no
assurance that such additional liquidity would be available, or available on
terms acceptable to us.
3.
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
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
In thousands, except
per share data
|
|
Numerator:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,905
|
)
|
$
|
(1,225
|
)
|
Denominator:
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
Basic
|
|
10,463
|
|
10,678
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
Common
stock options
|
|
1
|
|
46
|
|
Restricted
stock awards expected to vest
|
|
450
|
|
409
|
|
Diluted
|
|
10,914
|
|
11,133
|
|
Loss
per share:
|
|
|
|
|
|
Basic
|
|
$
|
(0.28
|
)
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.28
|
)
|
$
|
(0.11
|
)
|
Diluted loss per share is the same as basic loss per share for the
three month period ended March 31, 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 450,950 for the three month period ended March 31,
2010, and 454,510 for the three month period ended March 31, 2009.
We have not issued any stock options since January 2003.
4.
Options
and Restricted Stock Awards
Options to purchase shares of our
common stock have been granted to directors, officers and employees. The
majority of the options granted become exercisable at the rate of 33% per year
and generally expire ten years after the date of grant. At March 31, 2010,
options to purchase 950 shares of our common stock were outstanding and
exercisable.
Since the adoption of our 2005 Omnibus Stock and Incentive Plan (the 2005
Omnibus Plan), we have granted our employees restricted stock awards
representing 880,000 shares of our common stock pursuant to that plan. The
880,000 shares covered by such awards have either vested or been forfeited by
the award holders according to the terms of the respective awards. As
6
Table of
Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of
March 31, 2010, no awards remained outstanding and subject to
restrictions. At March 31, 2010, 616,666 shares remain authorized and
available for grant under the 2005 Omnibus Plan. The 2005 Omnibus Plan will
terminate on December 20, 2015.
On March 1, 2008, the Compensation and Corporate Governance
Committee of our Board of Directors (the Compensation Committee) and our
Board of Directors, upon the Compensation Committees recommendation, approved
a new incentive compensation plan titled the 2008 Omnibus Stock and Incentive
Plan for Thomas Group, Inc. (the 2008 Omnibus Plan). The 2008 Omnibus
Plan provides a means for us to grant awards to officers, employees or
consultants in the form of options, restricted shares, performance awards and
stock appreciation rights. A total of 1,000,000 shares of our common stock was
reserved for issuance pursuant to awards to be made under the 2008 Omnibus
Plan. The 2008 Omnibus Plan received stockholder approval at our 2008 Annual
Meeting of Stockholders, held on June 26, 2008. The 2008 Omnibus Plan will
terminate on March 1, 2018.
On March 1, 2008, the Compensation Committee granted Michael
McGrath, our newly appointed Executive Chairman, an initial award of 100,000
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 350,000
shares of our common stock if certain conditions related to the profitability are 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 all of Mr. McGraths
performance share award granted in 2008.
On March 9, 2010, an award entitling Mr. McGrath to receive
up to an aggregate of 600,000 shares of restricted stock was granted to Mr. McGrath
with vesting of 150,000 shares at the end of each calendar quarter, contingent
upon his being employed by the company at the end of such calendar quarter. On March 31,
2010, the first 150,000 shares vested and 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 50,000 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 380,000 shares of our common
stock if certain conditions related to the Companys profitability are
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. 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 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.
7
Table of
Contents
THOMAS
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Significant
Clients
We had four clients who each accounted for more than 10% of
our revenue in the three month period ended March 31, 2010. One of those
clients and two other clients each accounted for more than 10% of our revenue
in the three month period ended March 31, 2009.
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
Revenue ($ thousands)
|
|
|
|
|
|
|
|
Client A
|
|
$
|
461
|
|
$
|
384
|
|
Client B
|
|
$
|
332
|
|
$
|
|
|
Client C
|
|
$
|
216
|
|
$
|
|
|
Client D
|
|
$
|
186
|
|
$
|
34
|
|
Client E
|
|
$
|
|
|
$
|
1,109
|
|
Client F
|
|
$
|
|
|
$
|
679
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
% of Revenue
|
|
|
|
|
|
|
|
Client A
|
|
28
|
%
|
12
|
%
|
Client B
|
|
20
|
%
|
0
|
%
|
Client C
|
|
13
|
%
|
0
|
%
|
Client D
|
|
11
|
%
|
1
|
%
|
Client E
|
|
0
|
%
|
34
|
%
|
Client F
|
|
0
|
%
|
21
|
%
|
There were no other clients from whom revenue exceeded 10% of total
revenue in the three month period ended March 31, 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:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
$ thousands
|
|
%
of AR
|
|
$ thousands
|
|
%
of AR
|
|
|
|
|
|
|
|
|
|
|
|
Client A
|
|
$
|
149
|
|
13
|
%
|
$
|
267
|
|
31
|
%
|
Client
B
|
|
$
|
108
|
|
10
|
%
|
$
|
|
|
0
|
%
|
Client
C
|
|
$
|
216
|
|
19
|
%
|
$
|
2
|
|
0
|
%
|
Client
D
|
|
$
|
186
|
|
17
|
%
|
$
|
|
|
0
|
%
|
Client
E
|
|
$
|
|
|
0
|
%
|
$
|
58
|
|
7
|
%
|
Client
F
|
|
$
|
|
|
0
|
%
|
$
|
62
|
|
7
|
%
|
7.
Supplemental
Disclosure of Cash Flow Information
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
In thousands of dollars
|
|
Interest paid
|
|
$
|
1
|
|
$
|
3
|
|
Taxes paid
|
|
$
|
3
|
|
$
|
3
|
|
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
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
In thousands of dollars
|
|
Revenue:
|
|
|
|
|
|
North
America
|
|
$
|
1,319
|
|
$
|
1,920
|
|
South
America
|
|
|
|
17
|
|
Europe
|
|
332
|
|
1,351
|
|
Total
revenue
|
|
$
|
1,651
|
|
$
|
3,288
|
|
Gross
profit:
|
|
|
|
|
|
North
America
|
|
$
|
401
|
|
$
|
635
|
|
South
America
|
|
|
|
17
|
|
Europe
|
|
103
|
|
790
|
|
Total
gross profit
|
|
$
|
504
|
|
$
|
1,442
|
|
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
In thousands of dollars
|
|
Long-lived assets:
|
|
|
|
|
|
North America
|
|
$
|
552
|
|
$
|
618
|
|
Total
|
|
$
|
552
|
|
$
|
618
|
|
9.
Property
and Equipment
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
In thousands of dollars
|
|
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
|
|
(2,176
|
)
|
(2,110
|
)
|
|
|
$
|
552
|
|
$
|
618
|
|
There were no investments in property and equipment during the three
month period ended March 31, 2010.
10.
Stockholders Equity
On March 9, 2010, an award entitling Mr. McGrath to receive
up to an aggregate of 600,000 shares of restricted stock was granted to Mr. McGrath
with vesting of 150,000 shares at the end of each calendar quarter, contingent
upon his being employed by the company at the end of such calendar quarter. On March 31,
2010, the first 150,000 shares vested and were issued to Mr. McGrath.
These shares were issued from treasury stock at a historical average cost of
$7.02 per share. This led to a decrease in our treasury stock and additional
paid-in capital of $1.1 million.
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 three
month period ended March 31, 2010 is presented below. As of March 31,
2010, there were no unvested stock options or remaining stock-based
compensation costs related to outstanding stock options.
Common Option Shares
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Outstanding at January 1, 2010
|
|
14,000
|
|
$
|
9.72
|
|
Granted
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
Expired
|
|
(13,050
|
)
|
$
|
10.19
|
|
Outstanding at March 31, 2010
|
|
950
|
|
$
|
3.23
|
|
Options exercisable at March 31, 2010
|
|
950
|
|
$
|
3.23
|
|
Weighted average life of outstanding options
(years)
|
|
|
|
0.77
|
|
Restricted Stock
A summary of the restricted stock award activity for the three month
period ended March 31, 2010 is presented below.
Restricted Stock
|
|
Shares
|
|
|
|
|
|
Outstanding award grants at January 1, 2010
(1)
|
|
121,334
|
|
Awards granted
|
|
600,000
|
|
Awards cancelled
|
|
(121,334
|
)
|
Vested (1)
|
|
(150,000
|
)
|
Outstanding grants at March 31, 2010
|
|
450,000
|
|
Authorized awards to be granted in future years
|
|
|
|
Authorized awards at March 31, 2010
|
|
450,000
|
(2)
|
(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 600,000 shares consisting of fully restricted shares were approved
and granted to Mr. McGrath on March 9, 2010. Of the 600,000 shares,
150,000 shares vested on March 31, 2010.
At March 31, 2010 there was approximately $295,000 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 $0.75 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 three month period ended March 31,
2010 reflected an effective tax rate of 97%, compared to income tax benefit of
$0.7 million, or an effective tax rate of 21%, for the three month period ended
March 31, 2009. Our 2009 tax losses are available for carryback for
Federal tax purposes and we expect to receive refunds of taxes paid in prior
years. 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
10
Table of
Contents
THOMAS
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
tax
expense for the quarter of $1.6 million. Until we can demonstrate that we have
returned to profitability, we will not be able to book a deferred income tax
asset resulting from losses incurred in each period. This will have the effect
of increasing the net loss as well as the loss per share compared to prior
quarters.
We had no ASC 740 liabilities as of March 31, 2010 or December 31,
2009.
12.
Financing
Agreement
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 March 31, 2010, we had a note payable of $89,000 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 505,450 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 300,000 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 26,744
shares for a total of $17,737, or an average of $0.66 per share including
commissions and fees.
As of January 31, 2010, we completed the authorized repurchase of
805,450 shares under the plan at a total cost of $1,259,640, or $1.56 per
share, including commissions and fees. At this time we have no plans for
additional stock repurchases.
14.
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 issuance date of February 24,
2010.
The adoption of
ASU
No. 2010-09
had no impact on our financial statements.
15.
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 are
currently evaluating the impact, if any, that this new accounting
update may have on our consolidated financial statements.
11
Table
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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 over time;
·
the potential
for receiving a going concern opinion from our independent 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 our 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
will have to 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
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 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 the 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,
·
Finance and
Administration,
·
Marketing and
Sales,
·
Operations,
·
Product and
Service Innovation, and
·
Supply Chain
Management.
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 continue to focus on diversifying our client base by
delivering our solutions in North America, both to the U.S. government and to
commercial entities. We also expect to engage in some business in Europe, and
perhaps elsewhere, on an opportunistic basis.
13
Table of
Contents
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 are
cancellable 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 92% of consolidated
revenue for the three month period ended March 31, 2010, and 59% of
consolidated revenue for the three month period ended March 31, 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 0% of consolidated revenue for the three month period ended March 31,
2010, and 11% of consolidated revenue for the three month period ended March 31,
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. Revenues attributable to
incentive fees were 0% of consolidated revenue for the three month period ended
March 31, 2010, and 19% of consolidated revenue for the three month period
ended March 31, 2009. As of March 31, 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 8% of consolidated revenue for the three month period ended March 31,
2010, and 11% of consolidated revenue for the three month period ended March 31,
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.
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.
14
Table of Contents
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, but are not
limited to, 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.
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 quarter of $1.6 million. Until we can demonstrate that we have returned
to profitability, we will not be able to book a deferred income tax asset
resulting from losses incurred in each period. This will have the effect of
increasing the net loss as well as the loss per share compared to prior
quarters. At March 31, 2010, we increased our valuation allowance by $2.0
million.
15
Table of
Contents
As of March 31, 2010, we had a valuation allowance of $2.1 million
of which $58,000 is subject to the limitations of Section 382 of the
Internal Revenue Code.
Our 2009 tax losses are available for carryback for Federal tax
purposes and we expect to receive refunds of taxes paid in prior years. For the
first quarter of 2010 we incurred income tax expense of $1.6 million compared
to an income tax benefit of $0.7 million in the same quarter of last year. At March 31,
2010, we booked a net operating loss of $1.3 million which is available to
carry forward. As of March 31, 2010, we had a $4.1 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 March 31, 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 June 15, 2010. We are currently evaluating the impact,
if any, that this new accounting update may have on our consolidated
financial statements.
16
Table of
Contents
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 March 31,
|
|
|
|
2010
|
|
2009
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
Cost
of sales
|
|
69.5
|
%
|
56.1
|
%
|
Gross
profit
|
|
30.5
|
%
|
43.9
|
%
|
Selling,
general and administrative
|
|
119.7
|
%
|
102.3
|
%
|
Operating
income (loss)
|
|
(89.2
|
)%
|
(58.4
|
)%
|
Interest
income (expense), net of expense
|
|
(0.1
|
)%
|
0.1
|
%
|
Other
income
|
|
9.8
|
%
|
0.2
|
%
|
Income
(loss) before income taxes
|
|
(79.5
|
)%
|
(58.1
|
)%
|
Income
tax expense (benefit)
|
|
96.5
|
%
|
(20.8
|
)%
|
Net
income (loss)
|
|
(176.0
|
)%
|
(37.3
|
)%
|
Three Month Period Ended March 31, 2010 Compared
to the Three Month Period Ended March 31, 2009
Revenue
In the first
quarter of 2010, total revenues decreased $1.6 million, or 50%, to
$1.7 million from $3.3 million in the first quarter of 2009. There
was no task-based revenue in the first quarter of 2010, compared to $0.4 million,
or 11% of revenue, in the first quarter of 2009. Fixed fee revenue was
$1.5 million, or 92% of revenue, in the first quarter of 2010, compared to
$1.9 million, or 59% of revenue, in the first quarter of 2009.
Reimbursement revenues were $0.1 million, or 8% of revenue, in the first
quarter of 2010, compared to $0.4 million, or 11% of revenue, in the first
quarter of 2009. There was no incentive revenue in the first quarter of 2010,
compared to $0.6 million, or 19% of revenue, in the first quarter of 2009.
As of May 14, 2010, we had no active incentive- based contracts.
North America region revenue decreased $0.6 million, or 31%, to
$1.3 million in the first quarter of 2010, compared to $1.9 million
in the first quarter of 2009. The decrease in North America revenues for the
first quarter of 2010 compared to the first 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 March 31,
2010 compared to the three month period ended March 31, 2009. Reimbursable
revenues, which also are associated with our commercial contracts, decreased
due to the decrease in commercial activity.
Europe region revenue decreased $1.0 million, or 75%, to
$0.3 million in the first quarter of 2010, compared to $1.4 million
in the first quarter of 2009 due to completion of contracts with two clients.
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 31% of revenue, or $0.5 million, in the first quarter of
2010, compared to 44%, or $1.4 million, in the first quarter 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 first quarter gross
margins is related to the slow down of our government and commercial programs
during the first quarter of 2010 and to lower utilization rates of our
consultants in the first quarter of 2010.
Selling, General and Administrative
Expenses
SG&A costs for the first quarter of 2010 were
$2.0 million, compared to $3.4 million in the first quarter of 2009. The
$1.4 million decrease is related primarily to a $0.7 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 $0.2 million
decrease in travel related expenses, a $0.2 million decrease in legal expenses,
a $0.1 million decrease in our use of outside consultants, and a $0.1 million
decrease in other costs due to a decline in activity as compared to the same
period in 2009 offset by a $0.1 million increase in stock-based compensation during
the first quarter of 2010.
Other Income
Other income
for the first quarter of 2010 included the collection of $0.2 million from the
liquidation of a former subsidiary in Europe.
17
Table of Contents
Income Tax Expense (Benefit)
For the first
quarter of 2010 we incurred income tax expense of $1.6 million compared to an
income tax benefit of $0.7 million in the same quarter of last year. Our 2009
tax losses are available for carryback for Federal tax purposes and we expect
to receive refunds of taxes paid in prior years. 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.
The combined tax effect was to cause an income tax expense for the quarter of
$1.6 million. Until we can demonstrate a return to profitability, we will not
be able to book a deferred income tax asset resulting from losses incurred in
each period. This will have the effect of increasing the net loss as well as
the loss per share compared to prior quarters.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $1.6 million during the
first quarter of 2010 compared to a $1.2 million decrease during the first
quarter of 2009. The major components of these changes are discussed below.
Cash Flows from Operating Activities
For the first
quarter of 2010, net cash used in operating activities was $1.6 million,
compared to $1.1 million for the first quarter of 2009. This increase is due
primarily to our operating loss for the first quarter of 2010, a decrease in
our accrued liabilities, a decrease in deferred tax assets and decreased
collection of our accounts receivable.
Cash Flows from Investing Activities
There were no investing activities in the
first quarters of 2010 or 2009.
Cash Flows from Financing Activities
Cash used for
financing activities for the first quarter of 2010 was $0.02 million related to
the purchase of stock under our stock repurchase plan, compared to $0.1 million
in the first quarter of 2009, related to the $0.05 million purchase of stock
under our stock repurchase plan, and the $0.05 million 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 505,450 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 300,000 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 26,744
shares for a total of $17,737, or an average of $0.66 per share including
commissions and fees.
As of January 31, 2010, we completed the authorized repurchase of
805,450 shares under the plan at a total cost of $1,259,640, or $1.56 per share
including commissions and fees. At this time we have no plans for additional
stock repurchases.
$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.
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 $6.8 million
at March 31, 2010 is sufficient to provide the necessary resources for us
in 2010. Our cash balance at March 31, 2010 was $3.4 million, or $0.32 per
diluted share. We expect to receive Federal income tax refunds in the first
half of 2010 of approximately $2.7 million.
For the past several years,
we have had a line of credit available to us, but we did not draw on it for
over three years. Based on our forecast of revenues and expenses at that time,
and in part to reduce costs, we did not request an extension of our line of
credit when it expired on March 31, 2009. Thus, our
18
Table of Contents
available
liquidity is limited to our existing working capital, the proceeds from our
anticipated tax refund, and cash flow that we will be able to generate from
operations in 2010. We currently believe we have sufficient liquidity to
sustain our operations at least through March 31, 2011.
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 periods ended March 31, 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 March 31, 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 4Controls
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 Interim Chief Financial Officer, have concluded that, as
of March 31, 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 Interim
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 IIOTHER INFORMATION
ITEM 1Legal Proceedings
We may become subject to various claims and other legal matters, such
as collection matters initiated by us in the ordinary course of conducting our
business. 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. No material claims are currently pending; however, no assurances
can be given that future claims, if any, will not be material.
ITEM 1ARisk Factors
We are 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.
On
September 16, 2009, we received two Nasdaq Staff Deficiency Letters
indicating that we no longer complied with (i) the minimum bid price
requirements as set forth in Listing Rule 5450(a)(1) of the Nasdaq
Stock Market, which requires that listed securities maintain a minimum closing
bid price of $1.00 per share, and (ii) the minimum market value of
publicly held shares as set forth in Listing Rule 5450(b)(1)(C), which
requires that the market value of publicly held shares be at least $5,000,000.
After considering the alternatives, on December 1, 2009, we voluntarily
submitted to the Nasdaq Stock Market an application to transfer the listing of
our common stock from the Nasdaq Global Market to the Nasdaq Capital Market.
Our request was approved effective December 11, 2009.
On
March 16, 2010, we received notification from the Nasdaq Stock Market that
we had not regained compliance with the Nasdaq Listing Rules requiring
that we maintain a minimum closing bid price of $1.00 per share. Failure to
regain compliance may result in the delisting of the Companys common stock
from the Nasdaq Capital Market. We appealed the Nasdaq Stock Markets
19
Table of Contents
determination and on May 10,
2010, the Nasdaq Listing Qualifications Panel granted our request to remain
listed on the Nasdaq Stock Market, subject to certain conditions, including
that on or before September 13, 2010, we must have evidenced a closing bid
price of $1.00 or more for a minimum of ten prior consecutive trading days.
In
order to facilitate one opportunity to regain compliance, at our 2010 annual
meeting of stockholders we intend to seek stockholder approval for a potential
reverse stock split that would reduce the number of shares of our common stock
outstanding in an attempt to proportionally increase the price of our common
stock. If this approval is obtained, our Board of Directors would have the
authority, in its discretion, to effect a reverse stock split at a ratio within
a range from one-for-two to one-for-five at any time on or before December 31,
2010. It is possible that even with a reverse stock split we may not be
successful in increasing the closing bid price above the required threshold.
Additional information, including risk factors related to a potential reverse
stock split, is contained in the definitive proxy statement that we filed with
the Securities and Exchange Commission on April 30, 2010.
If
we are unable to satisfy the minimum closing bid price requirement prior to September 13,
2010, through a reverse stock split or otherwise, trading in our common stock
may be transferred to the over-the-counter market on the OTC Bulletin Board or
in the pink sheets. This could adversely impact both the liquidity and price
of our stock. These alternative markets, however, are generally considered to
be less efficient than the Nasdaq Capital Market. Many over-the-counter stocks
trade less frequently and in smaller volumes than securities traded on the
Nasdaq markets, which would likely have a material adverse effect on the
liquidity of our common stock. If our common stock is delisted from the Nasdaq
Capital Market, there may be a limited market for our stock, trading in our
stock may become more difficult and our share price could decrease even
further. In addition, the trading of our common stock on over-the-counter
markets will materially adversely affect our access to the capital markets and
our ability to raise capital through alternative financing sources on terms
acceptable to us or at all. Securities that trade over-the-counter are no
longer eligible for margin loans, and a company trading over-the-counter cannot
avail itself of federal preemption of state securities or blue sky laws,
which adds substantial compliance costs to securities issuances, including those
pursuant to employee option plans, stock purchase plans and private or public
offerings of securities. If our securities are delisted and transferred to
either the OTC Bulletin Board or the pink sheets, there may also be other
negative implications, including the potential loss of confidence by suppliers,
customers and employees.
In
addition, our common stock may become subject to penny stock rules. The SEC
generally defines penny stock as an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. We are not
currently subject to the penny stock rules because our common stock
qualifies for an exception to the SECs penny stock rules for companies
that have an equity security that is quoted on the Nasdaq Stock Market.
However, if we were delisted, our common stock would become subject to the
penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell our common stock. If our common stock were considered
penny stock, the ability of broker-dealers to sell our common stock and the
ability of our stockholders to sell their shares in the secondary market would
be limited and, as a result, the market liquidity for our common stock would be
adversely affected. We cannot assure that trading in our securities will not be
subject to these or other regulations in the future.
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.
ITEM 2Unregistered Sales of Equity Securities and Use
of Proceeds
On March 6, 2008 our Board of Directors reaffirmed our previously
existing stock repurchase program and authorized the repurchase of shares of
our common stock. At that time a total of 505,450 shares representing
approximately 5% of our outstanding shares remained subject to repurchase under
the stock repurchase program. On March 6, 2008 we entered into a Rule 10b5-1
repurchase plan to establish a systematic program authorizing a stockbroker to
execute repurchases in accordance with the terms of the Rule 10b5-1 plan.
After a waiting period, repurchases commenced on April 7, 2008. In October 2008,
our Board of Directors approved an expansion of our stock repurchase program, authorizing
us to repurchase an additional 300,000 shares from time to time, subject to
market conditions.
20
Table of Contents
The following table details our repurchases of shares of our common
stock during the three month period ended March 31, 2010:
eriod
|
|
Total
Number
of Shares
Purchased
|
|
Average Price
Per Share,
Including
Commissions
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
Maximum Number of
Shares that
May Yet be Purchased
Under the Plans
or Programs
|
|
Jan 1
31, 2010
|
|
26,744
|
|
$
|
0.66
|
|
26,744
|
|
|
|
Total
|
|
26,744
|
|
$
|
0.66
|
|
26,744
|
|
|
|
We purchased these shares with our available cash.
As of January 31, 2010, we completed the authorized repurchase of
805,450 shares under the plan at a total cost of $1,259,640, or $1.56 per
share, including commissions and fees. At this time we have no plans for
additional stock repurchases.
ITEM 3Defaults Upon Senior Securities
None.
ITEM 4
Removed
and Reserved
ITEM 5Other Information
None.
ITEM 6Exhibits
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).
|
10.1
|
|
Second Amendment to
Employment Agreement, dated March 2, 2010, by and between Thomas
Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our
Current Report on Form 8-K filed March 11, 2010 and incorporated
herein by reference).
|
10.2
|
|
Restricted Share Award
dated March 9, 2010 granted to Michael E. McGrath (filed as
Exhibit 10.2 to our Current Report on Form 8-K filed March 11,
2010 and incorporated herein by reference).
|
10.3
|
|
Cancellation dated
March 9, 2010 related to Performance Share Award dated March 1,
2008 granted to Michael E. McGrath (filed as Exhibit 10.3 to our Current
Report on Form 8-K filed March 11, 2010 and incorporated herein by
reference).
|
* 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
21
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
|
|
|
|
May 14, 2010
|
|
/s/ MICHAEL E. MCGRATH
|
Date
|
|
Michael E. McGrath
|
|
|
Executive Chairman, President and CEO
|
22
Table of Contents
Thomas Group, Inc.
Form
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).
|
10.1
|
|
Second Amendment to
Employment Agreement, dated March 2, 2010, by and between Thomas
Group, Inc. and Michael E. McGrath (filed as Exhibit 10.1 to our
Current Report on Form 8-K filed March 11, 2010 and incorporated
herein by reference).
|
10.2
|
|
Restricted Share Award
dated March 9, 2010 granted to Michael E. McGrath (filed as
Exhibit 10.2 to our Current Report on Form 8-K filed March 11,
2010 and incorporated herein by reference).
|
10.3
|
|
Cancellation dated
March 9, 2010 related to Performance Share Award dated March 1,
2008 granted to Michael E. McGrath (filed as Exhibit 10.3 to our Current
Report on Form 8-K filed March 11, 2010 and incorporated herein by
reference).
|
* 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
23
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