UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended March 31, 2012 |
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 001-34006
THE MANAGEMENT NETWORK GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 48-1129619 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7300 COLLEGE BLVD., SUITE 302, OVERLAND PARK, KS | 66210 | |
(Address of principal executive offices) | (Zip Code) |
913-345-9315
Registrant’s telephone number, including area code
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 þ No ¨
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 þ No ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 10, 2012, TMNG had outstanding 7,104,483 shares of common stock.
THE MANAGEMENT NETWORK GROUP, INC. INDEX
PAGE | ||
PART I. FINANCIAL INFORMATION: | ||
ITEM 1. Condensed Consolidated Financial Statements (unaudited): | ||
Condensed Consolidated Balance Sheets — March 31, 2012 and December 31, 2011 | 3 | |
Condensed Consolidated Statements of Operations and Comprehensive Loss — Thirteen weeks ended March 31, 2012 and April 2, 2011 | 4 | |
Condensed Consolidated Statements of Cash Flows — Thirteen weeks ended March 31, 2012 and April 2, 2011 | 5 | |
Notes to Condensed Consolidated Financial Statements | 6 | |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | 16 | |
ITEM 4. Controls and Procedures | 16 | |
PART II. OTHER INFORMATION | ||
ITEM 1. Legal Proceedings | 16 | |
ITEM 1A. Risk Factors | 16 | |
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
ITEM 3. Defaults Upon Senior Securities | 16 | |
ITEM 4. Mine Safety Disclosures | 16 | |
ITEM 5. Other Information | 16 | |
ITEM 6. Exhibits | 16 | |
Signatures | 18 | |
Exhibits | 19 | |
Executive Incentive Compensation Plans |
2 |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 10,042 | $ | 13,250 | ||||
Accounts receivable, net | 12,446 | 11,428 | ||||||
Prepaid and other current assets | 1,062 | 755 | ||||||
Total current assets | 23,550 | 25,433 | ||||||
NONCURRENT ASSETS: | ||||||||
Property and equipment, net | 1,765 | 1,653 | ||||||
Goodwill | 8,121 | 7,995 | ||||||
Other noncurrent assets | 199 | 206 | ||||||
Total Assets | $ | 33,635 | $ | 35,287 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Trade accounts payable | $ | 1,121 | $ | 908 | ||||
Accrued payroll, bonuses and related expenses | 2,512 | 4,147 | ||||||
Deferred revenue | 552 | 287 | ||||||
Other accrued liabilities | 1,544 | 1,297 | ||||||
Total current liabilities | 5,729 | 6,639 | ||||||
NONCURRENT LIABILITIES: | ||||||||
Deferred income tax liabilities | 396 | 366 | ||||||
Other noncurrent liabilities | 624 | 461 | ||||||
Total noncurrent liabilities | 1,020 | 827 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Total stockholders’ equity | 26,886 | 27,821 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 33,635 | $ | 35,287 |
See notes to unaudited condensed consolidated financial statements.
3 |
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
Thirteen Weeks Ended | ||||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
Revenues | $ | 13,846 | $ | 16,923 | ||||
Cost of services | 8,755 | 10,614 | ||||||
Gross Profit | 5,091 | 6,309 | ||||||
Operating Expenses: | ||||||||
Selling, general and administrative | 6,249 | 7,281 | ||||||
Intangible asset amortization | - | 212 | ||||||
Total operating expenses | 6,249 | 7,493 | ||||||
Loss from operations | (1,158 | ) | (1,184 | ) | ||||
Other income | 2 | 31 | ||||||
Loss before income taxes | (1,156 | ) | (1,153 | ) | ||||
Income tax provision | (30 | ) | (30 | ) | ||||
Net loss | (1,186 | ) | (1,183 | ) | ||||
Other comprehensive income: | ||||||||
Foreign currency translation adjustment | 248 | 416 | ||||||
Unrealized gain on marketable securities | - | 12 | ||||||
Comprehensive loss | $ | (938 | ) | $ | (755 | ) | ||
Loss per common share | ||||||||
Basic and diluted | $ | (0.17 | ) | $ | (0.17 | ) | ||
Weighted average shares used in calculation of net loss per basic and diluted common share | 7,094 | 7,073 |
See notes to unaudited condensed consolidated financial statements.
4 |
THE MANAGEMENT NETWORK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Thirteen Weeks Ended | ||||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,186 | ) | $ | (1,183 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 200 | 420 | ||||||
Share-based compensation | 3 | 40 | ||||||
Deferred income taxes | 30 | 30 | ||||||
Bad debts | 9 | - | ||||||
Other changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (905 | ) | (2,243 | ) | ||||
Prepaid and other assets | (291 | ) | (454 | ) | ||||
Trade accounts payable | 209 | 344 | ||||||
Deferred revenue | 259 | (201 | ) | |||||
Accrued liabilities | (1,557 | ) | (438 | ) | ||||
Net cash used in operating activities | (3,229 | ) | (3,685 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisition of property and equipment | (49 | ) | (316 | ) | ||||
Net cash used in investing activities | (49 | ) | (316 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings on line of credit | - | 2,625 | ||||||
Payments made on unfavorable and other contractual obligations | - | (61 | ) | |||||
Net cash provided by financing activities | - | 2,564 | ||||||
Effect of exchange rate on cash and cash equivalents | 70 | 128 | ||||||
Net decrease in cash and cash equivalents | (3,208 | ) | (1,309 | ) | ||||
Cash and cash equivalents, beginning of period | 13,250 | 6,786 | ||||||
Cash and cash equivalents, end of period | $ | 10,042 | $ | 5,477 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during period for interest | $ | - | $ | 6 | ||||
Accrued property and equipment additions | $ | 346 | $ | 270 |
See notes to unaudited condensed consolidated financial statements.
5 |
THE MANAGEMENT NETWORK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Reporting
The condensed consolidated financial statements and accompanying notes of The Management Network Group, Inc. and its subsidiaries (“TMNG,” “TMNG Global,” “we,” “us,” “our,” or the “Company”) as of March 31, 2012, and for the thirteen weeks ended March 31, 2012 and April 2, 2011 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the Company’s condensed consolidated financial position, results of operations, and cash flows as of these dates and for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, these statements do not include all the disclosures normally required by U.S. GAAP for annual financial statements nor those normally made in the Company’s annual report on Form 10-K. Accordingly, reference should be made to the Company’s annual consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011, included in the 2011 Annual Report on Form 10-K (“2011 Form 10-K”) for additional disclosures, including a summary of the Company’s accounting policies. The Condensed Consolidated Balance Sheet as of December 31, 2011 has been derived from the audited Consolidated Balance Sheet at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Company has evaluated subsequent events for recognition or disclosure through the date these unaudited consolidated financial statements were issued.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management of the Company, all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements have been included. The results of operations for the thirteen weeks ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year ending December 29, 2012.
Revenue Recognition — The Company recognizes revenue from time and materials consulting contracts in the period in which its services are performed. In addition to time and materials contracts, the Company's other types of contracts include fixed fee contracts. The Company recognizes revenues on milestone or deliverables-based fixed fee contracts and time and materials contracts not to exceed contract price using the percentage of completion-like method described by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-35, "Revenue Recognition — Construction-Type and Production-Type Contracts". For fixed fee contracts where services are not based on providing deliverables or achieving milestones, the Company recognizes revenue on a straight-line basis over the period during which such services are expected to be performed. In connection with some fixed fee contracts, the Company may receive payments from customers that exceed revenues up to that point in time. The Company records the excess of receipts from customers over recognized revenue as deferred revenue. Deferred revenue is classified as a current liability to the extent it is expected to be earned within twelve months from the date of the balance sheet.
The Company develops, installs and supports customer software in addition to the provision of traditional consulting services. The Company recognizes revenue in connection with its software sales agreements utilizing the percentage of completion-like method prescribed by FASB ASC 605-35. These agreements include software right-to-use licenses ("RTU's") and related customization and implementation services. Due to the long-term nature of software implementation and the extensive software customization based on normal customer specific requirements, both the RTU and implementation services are treated as a single element for revenue recognition purposes.
The FASB ASC 605-35 percentage-of-completion-like methodology involves recognizing revenue using the percentage of services completed, on a current cumulative cost to total cost basis, using a reasonably consistent profit margin over the period. Due to the longer term nature of these projects, developing the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed, and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs, and such revisions are reflected in income in the period in which the facts that give rise to that revision become known.
In addition to the professional services related to the customization and implementation of software, the Company also provides post-contract support ("PCS") services, including technical support and maintenance services. For those contracts that include PCS service arrangements which are not essential to the functionality of the software solution, the Company separates the FASB ASC 605-35 software services and PCS services utilizing the multiple-element arrangement model prescribed by FASB ASC 605-25, "Revenue Recognition — Multiple-Element Arrangements". FASB ASC 605-25 addresses the accounting treatment for an arrangement to provide the delivery or performance of multiple products and/or services where the delivery of a product or system or performance of services may occur at different points in time or over different periods of time. The Company utilizes FASB ASC 605-25 to separate the PCS service elements and allocate total contract consideration to the contract elements based on the relative fair value of those elements utilizing PCS renewal terms as evidence of fair value. Revenues from PCS services are recognized ratably on a straight-line basis over the term of the support and maintenance agreement.
The Company may also enter into contingent fee contracts, in which revenue is subject to achievement of savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee contracts, the Company recognizes costs as they are incurred on the project and defers revenue recognition until the revenue is realizable and earned as agreed to by its clients. Although these contracts can be very rewarding, the profitability of these contracts is dependent on the Company's ability to deliver results for its clients and control the cost of providing these services. These types of contracts are typically more results-oriented and are subject to greater risk associated with revenue recognition and overall project profitability than traditional time and materials contracts. Revenues associated with contingent fee contracts were not material during the thirteen weeks ended March 31, 2012 and April 2, 2011.
Fair Value Measurement — For cash and cash equivalents, current trade receivables and current trade payables, the carrying amounts approximate fair value because of the short maturity of these items.
The Company utilizes the methods of fair value measurement as described in FASB ASC 820, “Fair Value Measurements” to value its financial assets and liabilities. As defined in FASB ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
6 |
Research and Development and Software Development Costs —During the thirteen weeks ended March 31, 2012 and April 2, 2011, software development costs of $186,000 and $144,000, respectively, were expensed as incurred. No software development costs were capitalized during the thirteen weeks ended March 31, 2012 and April 2, 2011.
Foreign Currency Transactions and Translation — TMNG Europe, Cartesian and the international operations of CSMG conduct business primarily denominated in their respective local currency, which is their functional currency. Assets and liabilities have been translated to U.S. dollars at the period-end exchange rates. Revenues and expenses have been translated at exchange rates which approximate the average of the rates prevailing during each period. Translation adjustments are reported as a separate component of other comprehensive income in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Accumulated other comprehensive loss resulting from foreign currency translation adjustments totaled $4.1 million and $4.3 million, respectively, as of March 31, 2012 and December 31, 2011, and is included in Total Stockholders’ Equity in the Condensed Consolidated Balance Sheets. Assets and liabilities denominated in other than the functional currency of a subsidiary are re-measured at rates of exchange on the balance sheet date. Resulting gains and losses on foreign currency transactions are included in the Company’s results of operations. Realized and unrealized exchange gains and losses included in the results of operations were not significant during the thirteen weeks ended March 31, 2012 and April 2, 2011.
Net Loss Per Share — The Company has not included the effect of stock options and non-vested shares in the calculation of diluted loss per share for the thirteen weeks ended March 31, 2012 and April 2, 2011 as the Company reported a net loss for these periods and the effect would have been anti-dilutive.
Recent Accounting Pronouncements — In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance seeks further convergence of the fair value recognition standards between U.S GAAP and that of the International Financial Reporting Standards (IFRS). The ASU contains clarification of certain terminology to match the guidance provided by the IFRS standard, but also provides more specific guidance related to the treatment of premiums or discounts in the measurement of fair value, among other guidance, as well as prescribes additional disclosure requirements, including the level in the fair value hierarchy of assets or liabilities that are not measured at fair value in the balance sheet, but yet have fair value disclosure requirements. This update is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a significant effect on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements by removing the existing options available for the presentation of comprehensive income but rather requiring comprehensive income to be reported in either a separate continuous statement of comprehensive income or in a two statement presentation format that would highlight the components of income as the first statement and then a separate but yet consecutive statement presenting the components and totals of comprehensive income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which indefinitely defers the effective date of certain provisions under ASU 2011-05, Presentation of Comprehensive Income. The amendments in ASU 2011-12 defer the requirement under ASU 2011-05 to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented. This deferral was prompted by constituents’ concerns that the presentation requirements would be costly to implement and could add unnecessary complexity to financial statements. All other requirements in ASU 2011-05 remain effective for fiscal years, and for interim periods within those years, beginning after December 15, 2011. The Company currently presents comprehensive income in accordance with this standard.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. The ASU includes changes to the accounting guidance for the purpose of simplifying the approach to test goodwill for impairment. The guidance allows an entity to first assess whether facts or circumstances at an interim date indicate that there is greater than 50% likelihood that a reporting unit’s carrying amount exceeds its fair value. If the totality of the facts and circumstances, in management’s judgment, do not result in greater than 50% likelihood, the goodwill impairment testing need not be performed. Likewise, the guidance also allows for entities to perform the goodwill impairment test at an interim date without considering the qualitative facts and circumstances that, when taken together, may indicate that a reporting unit’s carrying amount exceeds its fair value. The amendment is effective for goodwill impairment tests performed for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a significant effect on our consolidated financial statements.
2. Goodwill and Long-Lived Assets
The changes in the carrying amount of goodwill for the thirteen weeks ended March 31, 2012 are as follows (in thousands):
North | ||||||||||||
America | EMEA | Total | ||||||||||
Balance as of December 31, 2011 | $ | 3,947 | $ | 4,048 | $ | 7,995 | ||||||
Changes in foreign currency exchange rates | - | 126 | 126 | |||||||||
Balance as of March 31, 2012 | $ | 3,947 | $ | 4,174 | $ | 8,121 |
The Company evaluates goodwill for impairment on an annual basis on the last day of the first fiscal month of the fourth quarter and whenever events or circumstances indicate that these assets may be impaired. The Company performs its impairment testing for goodwill in accordance with FASB ASC 350, “Intangibles-Goodwill and Other.” Management determined that there were no events or changes in circumstances during the thirteen weeks ended March 31, 2012 which indicated that goodwill needed to be tested for impairment during the period.
The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable in accordance with the provisions of FASB ASC 360, “Property, Plant and Equipment” and FASB ASC 350, “Intangibles-Goodwill and Other.” Management determined that there were no events or changes in circumstances during the thirteen weeks ended March 31, 2012 which indicated that long-lived assets and intangible assets needed to be reviewed for impairment during the period.
3. Share-Based Compensation
The Company issues stock option awards and non-vested share awards under its share-based compensation plans. The key provisions of the Company's share-based compensation plans are described in Note 5 to the Company's consolidated financial statements included in the 2011 Form 10-K.
The Company recognized no income tax benefits related to share-based compensation arrangements during the thirteen weeks ended March 31, 2012 and April 2, 2011.
7 |
1998 Equity Incentive Plan
Stock Options
A summary of the option activity under the Company's Amended and Restated 1998 Equity Incentive Plan (the "1998 Plan"), as of March 31, 2012 and changes during the thirteen weeks then ended is presented below:
Shares | Weighted Average Exercise Price | |||||||
Outstanding at December 31, 2011 | 515,492 | $ | 10.79 | |||||
Forfeited/cancelled | (10,153 | ) | $ | 11.61 | ||||
Outstanding at March 31, 2012 | 505,339 | $ | 10.77 | |||||
Options vested and expected to vest at March 31, 2012 | 503,607 | $ | 10.80 | |||||
Options exercisable at March 31, 2012 | 500,539 | $ | 10.85 |
There were no options granted during the thirteen weeks ended March 31, 2012.
Non-vested Shares
There were no shares of non-vested stock outstanding as of March 31, 2012 or December 31, 2011. No shares of non-vested stock were issued during the thirteen weeks ended March 31, 2012.
2000 Supplemental Stock Plan
A summary of the option activity under the Company's 2000 Supplemental Stock Plan (the "Supplemental Stock Plan") as of March 31, 2012 and changes during the thirteen weeks then ended is presented below:
Shares | Weighted Average Exercise Price | |||||||
Outstanding at December 31, 2011 | 154,700 | $ | 11.43 | |||||
Forfeited/cancelled | (3,750 | ) | $ | 7.36 | ||||
Outstanding at March 31, 2012 | 150,950 | $ | 11.53 | |||||
Options vested and expected to vest at March 31, 2012 | 150,670 | $ | 11.54 | |||||
Options exercisable at March 31, 2012 | 150,250 | $ | 11.55 |
The Supplemental Stock Plan expired on May 23, 2010. No new awards will be issued pursuant to the plan. The outstanding awards issued pursuant to the Supplemental Stock Plan remain subject to the terms of the Supplemental Stock Plan following expiration of the plan.
4. Business Segments and Major Customers
The Company identifies its segments based on the way management organizes the Company to assess performance and make operating decisions regarding the allocation of resources. In accordance with the criteria in FASB ASC 280 "Segment Reporting," the Company has concluded it has two reportable segments: the North America segment and the EMEA segment. The North America segment is comprised of three operating segments (North America Cable and Broadband, North America Telecom and Strategy), which are aggregated into one reportable segment based on the similarity of their economic characteristics. The EMEA segment is a single reportable, operating segment that encompasses the Company’s operational, technology and software consulting services outside of North America. Both reportable segments offer management consulting, custom developed software, and technical services.
Management evaluates segment performance based upon income (loss) from operations, excluding share-based compensation (benefits), depreciation and intangibles amortization. There were no inter-segment revenues during the thirteen weeks ended March 31, 2012 or April 2, 2011. In addition, in its administrative division, entitled “Not Allocated to Segments,” the Company accounts for non-operating activity and the costs of providing corporate and other administrative services to all the segments. Summarized financial information concerning the Company’s reportable segments is shown in the following table (amounts in thousands):
8 |
North America | EMEA | Not Allocated to Segments | Total | |||||||||||||
As of and for the thirteen weeks ended March 31, 2012: | ||||||||||||||||
Revenues | $ | 10,437 | $ | 3,409 | $ | 13,846 | ||||||||||
Income (loss) from operations | 2,728 | 564 | $ | (4,450 | ) | (1,158 | ) | |||||||||
Total assets | $ | 8,388 | $ | 4,058 | $ | 21,189 | $ | 33,635 | ||||||||
As of the fiscal year ended December 31, 2011 | ||||||||||||||||
Total assets | $ | 7,895 | $ | 3,533 | $ | 23,859 | $ | 35,287 | ||||||||
As of and for the thirteen weeks ended April 2, 2011: | ||||||||||||||||
Revenues | $ | 13,065 | $ | 3,858 | $ | 16,923 | ||||||||||
Income (loss) from operations | 3,081 | 678 | $ | (4,943 | ) | (1,184 | ) | |||||||||
Total assets | $ | 13,993 | $ | 5,006 | $ | 23,805 | $ | 42,804 | ||||||||
As of the fiscal year ended January 1, 2011 | ||||||||||||||||
Total assets | $ | 11,124 | $ | 5,406 | $ | 24,565 | $ | 41,095 |
Segment assets, regularly reviewed by management as part of its overall assessment of the segments’ performance, include both billed and unbilled trade accounts receivable, net of allowances, and certain other assets, if applicable. Assets not assigned to segments include cash and cash equivalents, current and non-current investments, property and equipment, goodwill and intangible assets and deferred tax assets, excluding deferred tax assets recognized on accounts receivable reserves, which are assigned to their segments.
In accordance with the provisions of FASB ASC 280-10, revenues earned in the United States and internationally based on the location where the services are performed are shown in the following table (amounts in thousands):
For the Thirteen Weeks Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
United States | $ | 9,970 | $ | 12,593 | ||||
International: | ||||||||
United Kingdom | 3,279 | 4,040 | ||||||
Other | 597 | 290 | ||||||
Total | $ | 13,846 | $ | 16,923 |
Major customers in terms of significance to TMNG’s revenues (i.e. in excess of 10% of revenues) and accounts receivable were as follows (amounts in thousands). All major customers are within the North America segment.
Revenues | ||||||||
For the thirteen weeks | For the thirteen weeks | |||||||
ended March 31, 2012 | ended April 2, 2011 | |||||||
Customer A | $ | 4,099 | $ | 4,232 | ||||
Customer B | $ | 510 | $ | 2,814 | ||||
Customer C | $ | 1,584 | $ | 2,414 | ||||
Customer D | $ | 1,694 | $ | 1,319 |
Accounts Receivable | ||||||||
As of March 31, 2012 | As of April 2, 2011 | |||||||
Customer A | $ | 2,731 | $ | 3,303 | ||||
Customer B | $ | 802 | $ | 6,007 | ||||
Customer C | $ | 1,287 | $ | 2,255 | ||||
Customer D | $ | 1,242 | $ | 787 |
Revenues from the Company’s ten most significant customers accounted for approximately 83.8% and 86.1% of revenues during the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively.
5. Income Taxes
In both thirteen week periods ended March 31, 2012 and April 2, 2011, the Company recorded an income tax provision of $30,000. The tax provisions for both thirteen week periods ended March 31, 2012 and April 2, 2011 are due to deferred taxes recognized on intangible assets amortized for income tax purposes but not for financial reporting purposes. The Company has reserved all of its domestic and international net deferred tax assets with a valuation allowance as of March 31, 2012 and December 31, 2011 in accordance with the provisions of FASB ASC 740, "Income Taxes," which requires an estimation of the recoverability of the recorded income tax asset balances. As of March 31, 2012, the Company has recorded $34.5 million of valuation allowances attributable to its net deferred tax assets.
9 |
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB ASC 740 “Income Taxes.” There was no material activity related to the liability for uncertain tax positions during the thirteen weeks ended March 31, 2012 and April 2, 2011, and the Company has determined it does not have any material uncertain tax positions to reserve for at March 31, 2012.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. As of March 31, 2012, the Company has no income tax examinations in process.
6. Commitments and Contingencies
On January 10, 2012, Richard P. Nespola, the Company’s former chief executive officer and former chairman of the board and a current member of the Company’s Board of Directors, filed an action, Richard P. Nespola v. The Management Network Group, Inc., against the Company with the American Arbitration Association. In this action, Mr. Nespola claims that the Company breached his employment agreement and an implied covenant of good faith and fair dealing by: (i) improperly deciding not to renew his employment agreement, and (ii) subsequently deciding to terminate his employment for cause. Further, Mr. Nespola claims the Company defamed him by publishing to the Board of Directors of the Company allegedly false reasons for terminating his employment for cause. Mr. Nespola seeks in excess of $1.6 million in damages plus attorneys’ fees and costs. TMNG denies Mr. Nespola’s allegations, does not believe the action has any merit and intends to defend against it vigorously. This proceeding is at a preliminary stage and the Company is unable to reasonably estimate any possible loss or range of possible loss given the current status of the arbitration and given the inherent uncertainty in predicting any future judicial or arbitration decision or other resolution of the proceeding. The arbitration is currently stayed pending resolution of Richard P. Nespola v. The Management Network Group, Inc., and American Arbitration Association, a New York state court action filed by Mr. Nespola alleging that the American Arbitration Association improperly transferred the arbitration proceedings from New York to Overland Park, Kansas and requesting that the New York state court overturn the transfer and assign a New York arbitrator. The Company is currently opposing this action as well as it believes the American Arbitration Association decision was valid.
In addition, the Company may become involved in various legal and administrative actions arising in the normal course of business. These could include actions brought by taxing authorities challenging the employment status of consultants utilized by the Company. In addition, future customer bankruptcies could result in additional claims on collected balances for professional services near the bankruptcy filing date. The resolution of any of such actions, claims, or the matters described above may have an impact on the financial results for the period in which they occur.
During fiscal year 2009, the Company entered into an agreement under which it had a commitment to purchase a minimum of $401,000 in computer software over a three year period. As of December 31, 2011, the Company had an obligation of $21,000 remaining under this commitment. As of March 31, 2012, the Company has completely satisfied its obligations under the original agreement. During the thirteen weeks ended March 31, 2012, this purchase agreement was renewed. Under the renewal, the Company has a commitment to purchase a minimum of $285,000 in computer software over a three year period. As of March 31, 2012, the Company has an obligation of $285,000 remaining under this commitment.
During fiscal year 2010, the Company entered into an agreement to purchase telecommunications equipment in the amount of $99,000 over a three year period. As of March 31, 2012, the Company has an obligation of $55,000 remaining under this commitment.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statement Regarding Forward-Looking Statements. In addition to historical information, this quarterly report contains forward-looking statements. Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements of assumptions underlying such statements, and statements of the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future. Forward-looking statements can often be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "should," "could," "intends," "plans," "estimates" or "anticipates," variations thereof or similar expressions. Certain risks and uncertainties could cause actual results to differ materially from those reflected in such forward-looking statements. Factors that might cause a difference include, but are not limited to, conditions in the industry sectors that we serve, including the slowing of client decisions on proposals and project opportunities along with scope reduction of existing projects, overall economic and business conditions, including the current economic slowdown, our ability to retain the limited number of large clients that constitute a major portion of our revenues, technological advances and competitive factors in the markets in which we compete, and the factors discussed in the sections entitled "Cautionary Statement Regarding Forward-Looking Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the fiscal year ended December 31, 2011. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date of this report. We undertake no obligation to revise, or publicly release the results of any revision to, these forward-looking statements. Readers should carefully review the cautionary statements contained in our annual report and in other documents that we file from time to time with the Securities and Exchange Commission.
The following should be read in connection with Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in our annual report on Form 10-K for the fiscal year ended December 31, 2011.
OVERVIEW
TMNG is among the leading providers of professional services and technical solutions to the global leaders in the communications, digital media, and technology industries. We offer a fully integrated suite of consulting offerings including strategy, organizational development, knowledge management, marketing, operational, and technology consulting services. We have consulting experience with almost all major aspects of managing a global communications company. Our portfolio of solutions includes proprietary methodologies and toolsets, deep industry experience, and hands-on operational expertise and licensed software. These solutions assist clients in tackling complex business problems.
Our global investments in targeting the cable industry have re-positioned us to better serve consolidating telecommunications carriers and the converging global media and entertainment companies. The convergence of communications with media and entertainment, the pace of technological change in the sector, and the consolidation of large telecommunications carriers have required us to focus our strategy on serving our clients in both North America and European markets, continuing to expand our offerings with software products and strengthening our position within the large carriers and media and entertainment companies. Subject to the effects of cyclical economic conditions, our efforts are helping us build what we believe is a more sustainable revenue model over the long-term, which will enable us to expand our global presence. We continue to focus our efforts on identifying, adapting to and capitalizing on the changing dynamics prevalent in the converging communications, media and entertainment industries, as well as providing our wireless and IP services within the communications sector.
In the first quarter of 2012, we established Mobile Device Lease xChange, or MDLx, as a wholly-owned subsidiary to provide carriers with a viable smartphone leasing offering. MDLx is intended to operate as a third party administration company for wireless carriers who will provide a comprehensive and integrated business and operating model for mobile device leasing and the complete technology platform for lease administration and accounting. MDLx provides an end-to-end solution that quickly allows carriers to reduce the economic impact of handset subsidies while providing consumers with access to more frequent mobile device upgrade opportunities.
Our financial results are affected by macroeconomic conditions, credit market conditions, and the overall level of business confidence. Economic volatility has continued to impact our customer base and has resulted in continued higher levels of unemployment, and significant employee layoffs and reductions in capital and operating expenditures for some of our significant clients in the communications, media and entertainment sectors. We are also experiencing greater pricing pressure and an increased need for enhanced return on investment for projects or added sharing of risk and reward.
Revenues are driven by the ability of our team to secure new project contracts and deliver those projects in a way that adds value to our client in terms of return on investment or assisting clients to address a need or implement change. For the thirteen weeks ended March 31, 2012, revenues decreased 18.2% to $13.8 million from $16.9 million for the thirteen weeks ended April 2, 2011 driven primarily by the completion of a significant Tier 1 carrier engagement in fiscal year 2011. Our international revenues were approximately 28.0% of total revenues for the thirteen weeks ended March 31, 2012 as compared to 25.6% for the thirteen weeks ended April 2, 2011. Our revenues are denominated in multiple currencies and may be impacted by currency rate fluctuations.
Generally our client relationships begin with a short-term consulting engagement utilizing a few consultants. Our sales strategy focuses on building long-term relationships with both new and existing clients to gain additional engagements within existing accounts and referrals for new clients. Strategic alliances with other companies are also used to sell services. We anticipate that we will continue to pursue these marketing strategies in the future. The volume of work performed for specific clients may vary from period to period and a major client from one period may not use our services or the same volume of services in another period. In addition, clients generally may end their engagements with little or no penalty or notice. If a client engagement ends earlier than expected, we must re-deploy professional service personnel as any resulting non-billable time could harm margins.
Cost of services consists primarily of compensation for consultants who are employees as well as fees paid to independent contractor organizations and related expense reimbursements. Employee compensation includes certain non-billable time, training, vacation time, benefits and payroll taxes. Gross margins are primarily impacted by the type of consulting services provided; the size of service contracts and negotiated discounts; changes in our pricing policies and those of competitors; utilization rates of consultants and independent subject matter experts; and employee and independent contractor costs, which tend to be higher in a competitive labor market.
Gross margins were 36.8% in the thirteen weeks ended March 31, 2012 compared to 37.3% in the thirteen weeks ended April 2, 2011. In general, the most significant items that impact our margins include the mix of project types, utilization of personnel and competitive pricing decisions, including volume discounts.
Sales and marketing expenses consist primarily of personnel salaries, bonuses, and related costs for direct client sales efforts and marketing staff. We primarily use a relationship sales model in which partners, principals and senior consultants generate revenues. In addition, sales and marketing expenses include costs associated with marketing collateral, product development, trade shows and advertising. General and administrative expenses consist mainly of costs for accounting, recruiting and staffing, information technology, personnel, insurance, rent and outside professional services incurred in the normal course of business.
Selling, general and administrative expenses were $6.2 million for the thirteen weeks ended March 31, 2012 compared to $7.3 million for the thirteen weeks ended April 2, 2011. Selling, general and administrative expenses during the thirteen weeks ended March 31, 2012 decreased from the comparable 2011 period primarily due to proactive measures to lower salary and other personnel related costs and a reduction in travel and entertainment expenditures during the period to better align the cost structure with our customer base and core revenue generating activities. We continue to evaluate selling, general and administrative expenses in an effort to maintain an appropriate cost structure relative to revenue levels.
There was no intangible asset amortization included in operating expenses in the thirteen weeks ended March 31, 2012 compared to $0.2 million in the thirteen weeks ended April 2, 2011. The decrease in amortization expense was due to the completion of amortization of all intangibles recorded in connection with our acquisitions of Cartesian Ltd and RVA Consulting LLC.
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We recorded a net loss of $1.2 million in both thirteen week periods ended March 31, 2012 and April 2, 2011, respectively. The rate of change in the communications industry, driving convergence of media and telecommunications, consolidation of smaller providers and expanded deployment of wireless capabilities have added both opportunity and uncertainty for our clients. The general result is overall reduced client spending on many capital and operational initiatives. This reduction in spending, coupled with increased competition pursuing fewer opportunities, could result in further price reductions, fewer client projects, under-utilization of consultants, reduced operating margins and loss of market share. Declines in our revenues can have a significant impact on our financial results. Although we have a flexible cost base comprised primarily of employee and related costs, there is a lag in time required to scale the business appropriately if revenues are reduced. In addition, our future revenues and operating results may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, consultant utilization rates, general economic conditions and other factors.
Cash and cash equivalents decreased by $3.2 million during the thirteen weeks ended March 31, 2012 due primarily to operating activities, including changes in working capital and negative cash flow from operations. At March 31, 2012, we had working capital of approximately $17.8 million. Working capital decreased by $1.0 million from December 31, 2011 due primarily to operating losses.
CRITICAL ACCOUNTING POLICIES
While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies are the most critical to our condensed consolidated financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:
• | Impairment of Goodwill and Long-lived Assets; |
• | Revenue Recognition; |
• | Accounting for Income Taxes; and |
• | Research and Development and Software Development Costs. |
Impairment of Goodwill and Long-lived Assets — As of March 31, 2012, we had $8.1 million in goodwill, which is subject to periodic review for impairment. FASB ASC 350 "Intangibles-Goodwill and Other" requires an evaluation of indefinite-lived intangible assets and goodwill annually and whenever events or circumstances indicate that such assets may be impaired. The evaluation is conducted at the reporting unit level and compares the calculated fair value of the reporting unit to its book value to determine whether impairment has been deemed to occur. As of March 31, 2012, we have approximately $3.9 million and $4.2 million in goodwill allocated to the North America Carrier and EMEA reporting units, respectively. Any impairment charge would be based on the most recent estimates of the recoverability of the recorded goodwill. If the remaining book value assigned to goodwill in an acquisition is higher than the estimated fair value of the reporting unit, there is a requirement to write down these assets.
Fair value of our reporting units is determined using a combination of the income approach and the market approach. The income approach uses a reporting unit's projection of estimated cash flows discounted using a weighted-average cost of capital analysis that reflects current market conditions. We also consider the market approach to valuing our reporting units utilizing revenue and EBITDA multiples. We compare the results of our overall enterprise valuation as determined by the combination of the two approaches to our market capitalization. Significant management judgments related to these approaches include:
• | Anticipated future cash flows and terminal value for each reporting unit — The income approach to determining fair value relies on the timing and estimates of future cash flows, including an estimate of terminal value. The projections use management's estimates of economic and market conditions over the projected period including growth rates in revenues and estimates of expected changes in operating margins. Our projections of future cash flows are subject to change as actual results are achieved that differ from those anticipated. Because management frequently updates its projections, we would expect to identify on a timely basis any significant differences between actual results and recent estimates. |
• | Selection of an appropriate discount rate — The income approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is affected by changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants was used in the weighted average cost of capital analysis. Given the current volatile economic conditions, it is possible that the discount rate will fluctuate in the near term. |
• | Selection of an appropriate multiple – The market approach requires the selection of an appropriate multiple to apply to revenues or EBITDA based on comparable guideline company or transaction multiples. It is often difficult to identify companies or transactions with a similar profile in regards to revenue, geographic operations, risk profile and other factors. Given the current volatile economic conditions, it is possible that multiples of guideline companies will fluctuate in the near term. |
In accordance with FASB ASC 360, "Property, Plant and Equipment," we use our best estimates based upon reasonable and supportable assumptions and projections to review for impairment of finite-lived assets and finite-lived identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of our assets might not be recoverable.
Revenue Recognition — We recognize revenues from time and materials consulting contracts in the period in which our services are performed. We recognized $5.1 and $8.0 million in revenues from time and materials contracts during the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. In addition to time and materials contracts, our other types of contracts include fixed fee contracts. We recognize revenues on milestone or deliverables-based fixed fee contracts and time and materials contracts not to exceed contract price using the percentage of completion-like method described by FASB ASC 605-35, "Revenue Recognition — Construction-Type and Production-Type Contracts." For fixed fee contracts where services are not based on providing deliverables or achieving milestones, we recognize revenues on a straight-line basis over the period during which such services are expected to be performed. During the thirteen weeks ended March 31, 2012 and April 2, 2011, we recognized $8.7 million and $8.9 million in revenues on fixed fee contracts, respectively. In connection with some fixed fee contracts, we receive payments from customers that exceed recognized revenues. We record the excess of receipts from customers over recognized revenue as deferred revenue. Deferred revenue is classified as a current liability to the extent it is expected to be earned within twelve months from the date of the balance sheet.
We also develop, install and support customer software in addition to our traditional consulting services. We recognize revenues in connection with our software sales agreements utilizing the percentage of completion-like method described in FASB ASC 605-35. These agreements include software right-to-use licenses ("RTU's") and related customization and implementation services. Due to the long-term nature of software implementation and the extensive software customization based on normal customer specific requirements, both the RTU and implementation services are treated as a single element for revenue recognition purposes.
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The FASB ASC 605-35 percentage-of-completion-like methodology involves recognizing revenue using the percentage of services completed, on a current cumulative cost to total cost basis, using a reasonably consistent profit margin over the period. Due to the longer term nature of these projects, developing the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed, and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs, and such revisions are reflected in income in the period in which the facts that give rise to that revision become known.
In addition to the professional services related to the customization and implementation of software, we also provide post-contract support ("PCS") services, including technical support and maintenance services. For those contracts that include PCS service arrangements which are not essential to the functionality of the software solution, we separate the FASB ASC 605-35 software services and PCS services utilizing the multiple-element arrangement model prescribed by FASB ASC 605-25, "Revenue Recognition — Multiple-Element Arrangements". FASB ASC 605-25 addresses the accounting treatment for an arrangement to provide the delivery or performance of multiple products and/or services where the delivery of a product or system or performance of services may occur at different points in time or over different periods of time. We utilize FASB ASC 605-25 to separate the PCS service elements and allocate total contract consideration to the contract elements based on the relative fair value of those elements utilizing PCS renewal terms as evidence of fair value. Revenues from PCS services are recognized ratably on a straight-line basis over the term of the support and maintenance agreement.
We also may enter into contingent fee contracts, in which revenue is subject to achievement of savings or other agreed upon results, rather than time spent. Due to the nature of contingent fee contracts, we recognize costs as they are incurred on the project and defer revenue recognition until the revenue is realizable and earned as agreed to by our clients. Although these contracts can be very rewarding, the profitability of these contracts is dependent on our ability to deliver results for our clients and control the cost of providing these services. These types of contracts are typically more results-oriented and are subject to greater risk associated with revenue recognition and overall project profitability than traditional time and materials contracts. Revenues associated with contingent fee contracts were not material during the thirteen weeks ended March 31, 2012 or April 2, 2011, respectively.
Accounting for Income Taxes — Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit. We account for income taxes in accordance with FASB ASC 740 "Income Taxes." As required by FASB ASC 740, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. FASB ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of March 31, 2012, cumulative valuation allowances in the amount of $34.5 million were recorded in connection with the net deferred income tax assets. As required by FASB ASC 740, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the guidance. Pursuant to FASB ASC 740, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As of March 31, 2012, we have no recorded liability for unrecognized tax benefits.
We have generated substantial deferred income tax assets related to our domestic operations, and to a lesser extent our international operations, primarily from the accelerated financial statement write-off of goodwill, the charge to compensation expense taken for stock options and net operating losses. Within our foreign operations, mostly domiciled within the United Kingdom, we have generated deferred tax assets primarily from the charge to compensation expense for stock options and operating losses. For us to realize the income tax benefit of these assets in the applicable jurisdiction, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we continue to report domestic or international operating losses for financial reporting in future years in either our domestic or international operations, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carry-forwards in the future.
International operations have become a significant part of our business. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We utilize a "cost plus fixed margin" transfer pricing methodology as it relates to inter-company charges for headquarters support services performed by our domestic entities on behalf of various foreign affiliates. The judgments and estimates used are subject to challenge by domestic and foreign taxing authorities. It is possible that such authorities could challenge those judgments and estimates and draw conclusions that would cause us to incur liabilities in excess of those currently recorded. We use an estimate of our annual effective tax rate at each interim period based upon the facts and circumstances available at that time, while the actual annual effective tax rate is calculated at year-end. Changes in the geographical mix or estimated amount of annual pre-tax income could impact our overall effective tax rate.
Research and Development and Software Development Costs — Software development costs are accounted for in accordance with FASB ASC 985-20, "Software — Costs of Software to Be Sold, Leased, or Marketed." Capitalization of software development costs for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when the product is available for general release. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management concerning certain external factors including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. We capitalize development costs incurred during the period between the establishment of technological feasibility and the release of the final product to customers. During the thirteen weeks ended March 31, 2012 and April 2, 2011, software development costs of $186,000 and $144,000, respectively, were expensed as incurred. No software development costs were capitalized during the thirteen weeks ended March 31, 2012 or April 2, 2011.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 31, 2012 COMPARED TO THIRTEEN WEEKS ENDED APRIL 2, 2011
REVENUES
Revenues decreased 18.2% to $13.8 million for the thirteen weeks ended March 31, 2012 from $16.9 million for the thirteen weeks ended April 2, 2011. The reduction in revenues was primarily related to our North America segment which had lower project volumes in the current quarter as a result of the completion of a significant Tier 1 carrier engagement in fiscal year 2011.
North America Segment — North America segment revenues decreased 20.1% to $10.4 million for the thirteen weeks ended March 31, 2012 from $13.1 million for the thirteen weeks ended April 2, 2011. During the thirteen weeks ended March 31, 2012, the North America segment provided services on 81 customer projects, compared to 88 projects performed in the thirteen weeks ended April 2, 2011. Average revenue per project was $129,000 in the thirteen weeks ended March 31, 2012, compared to $148,000 in the thirteen weeks ended April 2, 2011. Revenues recognized in connection with fixed price engagements totaled $6.9 million and $6.8 million for the thirteen weeks ended March 31, 2012 and April 2, 2011, representing 65.8% and 52.3% of the total revenues of the segment, respectively. There were no revenues from software licensing during the thirteen weeks ended March 31, 2012. Revenues from software licensing and related implementation fees during the thirteen weeks ended April 2, 2011 were $208,000.
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EMEA Segment— EMEA segment revenues decreased 11.6% to $3.4 million for the thirteen weeks ended March 31, 2012 from $3.9 million for the thirteen weeks ended April 2, 2011. During the thirteen weeks ended March 31, 2012 and April 2, 2011, this segment provided services on 72 and 70 customer projects, respectively. Average revenue per project was approximately $37,000 and $45,000, respectively, for the thirteen weeks ended March 31, 2012 and April 2, 2011. Revenues from post-contract software related support services were approximately $727,000 and $708,000 for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. There were no revenues from software licensing during the thirteen weeks ended March 31, 2012 and April 2, 2011.
COSTS OF SERVICES
Costs of services decreased 17.5% to $8.8 million for the thirteen weeks ended March 31, 2012 from $10.6 million for the thirteen weeks ended April 2, 2011. Our gross margin was 36.8% for the thirteen weeks ended March 31, 2012 compared to 37.3% for the thirteen weeks ended April 2, 2011. Our North America segment gross margin was 38.2% for the thirteen weeks ended March 31, 2012 compared to 37.6% for the thirteen weeks ended April 2, 2011. The increase in gross margin in the first quarter of 2012 as compared to the same period of 2011 in our North America segment is primarily due to improved utilization and reduced volume discounts with clients partially offset by the completion of a significant Tier 1 carrier engagement in fiscal year 2011. Our EMEA segment gross margin was 32.4% for the thirteen weeks ended March 31, 2012, compared to 36.2% for the thirteen weeks ended April 2, 2011. Margin decreases in the EMEA segment are primarily related to declines in revenues and lower staff utilization.
OPERATING EXPENSES
Operating expenses decreased 16.6% to $6.2 million for the thirteen weeks ended March 31, 2012, from $7.5 million for the thirteen weeks ended April 2, 2011. Due to the complete amortization during 2011 of the remaining balances on all intangibles recorded in connection with acquisitions, operating expenses for the thirteen weeks ended March 31, 2012 includes only selling, general and administrative expenses while operating expenses for the thirteen weeks ended April 2, 2011 included selling, general and administrative expenses and intangible asset amortization.
Selling, general and administrative expenses decreased 14.2% to $6.2 million for the thirteen weeks ended March 31, 2012, compared to $7.3 million for the thirteen weeks ended April 2, 2011. The decrease in selling, general and administrative expenses for the thirteen weeks ended March 31, 2012 is primarily due to proactive management measures to lower salary and other personnel related costs in addition to a reduction in travel and entertainment expenditures. There was no intangible asset amortization during the thirteen weeks ended March 31, 2012 as compared with $212,000 for the thirteen weeks ended April 2, 2011. As noted above, this decrease is due to the completion of amortization of all intangibles recorded in connection with acquisitions.
OTHER INCOME AND EXPENSES
Other income was $2,000 and $37,000 for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively, and represented interest earned on invested balances. As of March 31, 2012, our holdings consist primarily of money market funds.
INCOME TAXES
During both thirteen week periods ended March 31, 2012 and April 2, 2011, we recorded an income tax provision of $30,000. The income tax provisions for both periods are related to deferred taxes recognized on intangibles amortized for income tax purposes but not for financial reporting purposes. For the thirteen weeks ended March 31, 2012 and April 2, 2011, we recorded no income tax benefit related to our domestic and international pre-tax losses in accordance with the provisions of FASB ASC 740, "Income Taxes", which requires an estimation of our ability to use recorded deferred income tax assets. We currently have recorded a valuation allowance against all domestic and international deferred income tax assets generated due to uncertainty about their ultimate realization as a result of our history of operating losses. If we continue to report net operating losses for financial reporting in either our domestic or international operations, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize the net operating loss carry-forwards in the future.
NET LOSS
We recorded a net loss of $1.2 million in both thirteen week periods ended March 31, 2012 and April 2, 2011, respectively.
STATEMENT REGARDING NON-GAAP FINANCIAL MEASUREMENT
In addition to net loss and net loss per share on a GAAP basis, our management uses a non-GAAP financial measure, "Non-GAAP adjusted net income or loss," in its evaluation of our performance, particularly when comparing performance to the prior year's period and on a sequential basis. This non-GAAP measure contains certain non-GAAP adjustments which are described in the following schedule entitled "Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Loss." In making these non-GAAP adjustments, we take into account certain non-cash expenses and benefits, including tax effects as applicable, and the impact of certain items that are generally not expected to be on-going in nature or that are unrelated to our core operations. Management believes the exclusion of these items provides a useful basis for evaluating underlying business performance, but should not be considered in isolation and is not in accordance with, or a substitute for, evaluating our performance utilizing GAAP financial information. We believe that providing such adjusted results allows investors and other users of our financial statements to better understand our comparative operating performance for the periods presented. Our non-GAAP measure may differ from similar measures by other companies, even if similar terms are used to identify such measures. Although management believes the non-GAAP financial measure is useful in evaluating the performance of our business, we acknowledge that items excluded from such measure have a material impact on our net loss and net loss per share calculated in accordance with GAAP. Therefore, management uses non-GAAP measures in conjunction with GAAP results. Investors and other users of our financial information should also consider the above factors when evaluating our results.
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RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED NET LOSS
(In thousands, except per share data)
(unaudited)
Thirteen Weeks Ended | ||||||||
March 31, | April 2, | |||||||
2012 | 2011 | |||||||
Reconciliation of GAAP net loss to non-GAAP adjusted net loss: | ||||||||
GAAP net loss | $ | (1,186 | ) | $ | (1,183 | ) | ||
Depreciation and amortization | 200 | 420 | ||||||
Non-cash share based compensation expense | 3 | 40 | ||||||
Tax effect of applicable non-GAAP adjustments | 30 | 30 | ||||||
Adjustments to GAAP net loss | 233 | 490 | ||||||
Non-GAAP adjusted net loss | $ | (953 | ) | $ | (693 | ) | ||
Reconciliation of GAAP net loss per diluted common share to non-GAAP adjusted net loss per diluted common share: | ||||||||
GAAP net loss per diluted common share | $ | (0.17 | ) | $ | (0.17 | ) | ||
Depreciation and amortization | 0.03 | 0.06 | ||||||
Non-cash share based compensation expense | 0.00 | 0.01 | ||||||
Tax effect of applicable non-GAAP adjustments | 0.01 | 0.00 | ||||||
Adjustments to GAAP net loss per diluted common share | 0.04 | 0.07 | ||||||
Non-GAAP adjusted net loss per diluted common share | $ | (0.13 | ) | $ | (0.10 | ) | ||
Weighted average shares used in calculation of diluted net loss per common share | 7,094 | 7,073 |
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3.2 million and $3.7 million for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. For the thirteen weeks ended March 31, 2012, cash used in operating activities was the result of $0.9 million of negative cash flows due to the results of operations (after adding back non-cash items to our net loss) plus increases in net working capital other than cash of $2.3 million. During the thirteen weeks ended April 2, 2011, cash used in operating activities was primarily due to losses of $0.7 million after non-cash add backs plus increases in net working capital other than cash of $3.0 million.
Net cash used in investing activities was $49,000 and $316,000 for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. Investing activities for the thirteen weeks ended March 31, 2012 and April 2, 2011 related to the purchase of office equipment, software and computer equipment.
There was no cash provided or used by financing activities during the thirteen weeks ended March 31, 2012 while net cash provided by financing activities was $2.6 million for the thirteen weeks ended April 2, 2011. Financing activities during the thirteen weeks ended April 2, 2011 included $2.6 million in proceeds from line of credit borrowings. In addition, during the thirteen weeks ended April 2, 2011, $61,000 in cash was used to make payments on long term obligations.
At March 31, 2012, we had approximately $10.0 million in cash and cash equivalents ($2.1 million of which was denominated in pounds sterling) and $17.8 million in net working capital. We believe we have sufficient cash and cash equivalents to meet anticipated cash requirements, including anticipated capital expenditures for at least the next 12 months. Furthermore, based on an analysis of our investments classified as cash equivalents, we do not believe that we have any material risk related to the liquidity or valuation of these investments, nor do we believe that we have any counterparty credit risk related to these investments. Should our cash and cash equivalents prove insufficient, we may need to obtain new debt or equity financing to support our operations or complete acquisitions. In recent years, credit and capital markets have experienced unusual volatility and disruption. If we need to obtain new debt or equity financing to support our operations or complete acquisitions in the future, we may be unable to obtain debt or equity financing on reasonable terms. We have established a flexible model that provides a lower fixed cost structure than most consulting firms, enabling us to scale operating cost structures more quickly based on market conditions, although there is a lag in time required to scale the business appropriately if revenues are reduced. Our strong balance sheet has enabled us to make acquisitions and related investments in intellectual property and businesses we believe are enabling us to capitalize on the current transformation of the industry; however, if demand for our consulting services is reduced and we experience negative cash flow, we could experience liquidity challenges at some point in the future.
FINANCIAL COMMITMENTS
During fiscal year 2009, we entered into an agreement under which we had a commitment to purchase a minimum of $401,000 in computer software over a three year period. As of December 31, 2011, we had an obligation of $21,000 remaining under this commitment. As of March 31, 2012, we have completely satisfied our obligations under the original agreement. During the thirteen weeks ended March 31, 2012, this purchase agreement was renewed. Under the renewal, we have a commitment to purchase a minimum of $285,000 in computer software over a three year period. As of March 31, 2012, we have an obligation of $285,000 remaining under this commitment.
During fiscal year 2010, we entered into an agreement to purchase telecommunications equipment in the amount of $99,000 over a three year period. As of March 31, 2012, we have an obligation of $55,000 remaining under this commitment.
15 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis, and as needed.
A review and evaluation was performed by our management, including the person serving as our Chief Executive Officer and Chief Financial Officer (the “CEO and CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon this evaluation, the Company’s CEO and CFO has concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.
There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2012, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 10, 2012, Richard P. Nespola, the Company’s former chief executive officer and former chairman of the board and a current member of the Company’s Board of Directors, filed an action, Richard P. Nespola v. The Management Network Group, Inc., against the Company with the American Arbitration Association. In this action, Mr. Nespola claims that the Company breached his employment agreement and an implied covenant of good faith and fair dealing by: (i) improperly deciding not to renew his employment agreement, and (ii) subsequently deciding to terminate his employment for cause. Further, Mr. Nespola claims the Company defamed him by publishing to the Board of Directors of the Company allegedly false reasons for terminating his employment for cause. Mr. Nespola seeks in excess of $1.6 million in damages plus attorneys’ fees and costs. TMNG denies Mr. Nespola’s allegations, does not believe the action has any merit and intends to defend against it vigorously. This proceeding is at a preliminary stage and the Company is unable to reasonably estimate any possible loss or range of possible loss given the current status of the arbitration and given the inherent uncertainty in predicting any future judicial or arbitration decision or other resolution of the proceeding. The arbitration is currently stayed pending resolution of Richard P. Nespola v. The Management Network Group, Inc., and American Arbitration Association, a New York state court action filed by Mr. Nespola alleging that the American Arbitration Association improperly transferred the arbitration proceedings from New York to Overland Park, Kansas and requesting that the New York state court overturn the transfer and assign a New York arbitrator. The Company is currently opposing this action as well as it believes the American Arbitration Association decision was valid.
We have not been subject to any material new litigation since the filing on March 30, 2012 of our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 3.1 | Amended and Restated Bylaws, filed as Exhibit 3.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 26, 2012, are incorporated herein by reference as Exhibit 3.1. | |
Exhibit 10.1 | Executive Incentive Compensation Plans for Cambridge Strategic Management Group, Inc. Managing Director. | |
Exhibit 10.2 | The Management Network Group, Inc. 2012 Executive Incentive Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 28, 2012, is incorporated herein by reference as Exhibit 10.2. |
16 |
Exhibit 10.3 | Settlement Agreement dated January 25, 2012, by and among the Company, Norman H. Pessin, Sandra F. Pessin, MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC and Peter H. Woodward, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012, is incorporated herein by reference as Exhibit 10.3. | |
Exhibit 10.4 | Employment Agreement between The Management Network Group, Inc. and Donald E. Klumb dated February 3, 2012, filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012, is incorporated herein by reference as Exhibit 10.4. | |
Exhibit 10.5 | Employment Agreement between The Management Network Group, Inc. and Micky K. Woo dated January 25, 2012, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012, is incorporated herein by reference as Exhibit 10.5. | |
Exhibit 31 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32 | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
17 |
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.
The Management Network Group, Inc. | ||
(Registrant) | ||
Date: May 15, 2012 | By | /s/ Donald E. Klumb |
(Signature) | ||
Donald E. Klumb Chief Executive Officer (Principal executive officer), President, and Chief Financial Officer (Principal accounting officer) |
18 |
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
Exhibit 3.1 | Amended and Restated Bylaws, filed as Exhibit 3.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 26, 2012, are incorporated herein by reference as Exhibit 3.1. | |
Exhibit 10.1 | Executive Incentive Compensation Plans for Cambridge Strategic Management Group, Inc. Managing Director. | |
Exhibit 10.2 | The Management Network Group, Inc. 2012 Executive Incentive Compensation Plan, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 28, 2012, is incorporated herein by reference as Exhibit 10.2. | |
Exhibit 10.3 | Settlement Agreement dated January 25, 2012, by and among the Company, Norman H. Pessin, Sandra F. Pessin, MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC and Peter H. Woodward, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012, is incorporated herein by reference as Exhibit 10.3. | |
Exhibit 10.4 | Employment Agreement between The Management Network Group, Inc. and Donald E. Klumb dated February 3, 2012, filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012, is incorporated herein by reference as Exhibit 10.4. | |
Exhibit 10.5 | Employment Agreement between The Management Network Group, Inc. and Micky K. Woo dated January 25, 2012, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012, is incorporated herein by reference as Exhibit 10.5. | |
Exhibit 31 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32 | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
19 |
CSMG 2012 SVP/Managing Director Bonus Plan
This 2012 SVP/Managing Director Bonus Plan covers only the SVP/Managing Director of Cambridge Strategic Management Group, Inc. and Cambridge Adventis Ltd. (together “CSMG”) – i.e. Susan Simmons. The available bonus pool is calculated as follows:
1. | If the 2012 Direct Contribution Margin (DCM) for CSMG is equal to or greater than $2,000,000, the SVP/MD will be eligible to receive a bonus of $50,000. |
2. | The SVP/MD will be eligible to receive an additional bonus based upon the 2012 Unit Contribution Margin (UCM) for CSMG as the UCM thresholds in the table below are met. |
UCM Threshold | Additional Eligible Bonus | Cumulative Additional Eligible Bonus |
$1,000,000 | $50,000 | $50,000 |
$1,500,000 | $35,000 | $85,000 |
$2,000,000 | $65,000 | $150,000 |
Bonus will be paid under the SVP/Managing Director Bonus Plan within ninety days of calendar year end once all revenue and expense numbers have been finalized for the year.
Definitions
Controllable Selling General and Administrative (SG&A) – Includes non-billable salaries & benefits, sign on bonus and delivery bonus (a portion of these bonuses is allocated to SG&A based on professional staff non-billable time), non-billable travel and entertainment, non-billable consultant time, recruiting fees, bad debt expense, severance and Controllable G&A Expenses. See Appendix A for a list of Controllable G&A Expenses.
Cost of Services – The actual cost incurred to provide the services – including salaries, taxes and benefits, out of pocket expense, surcharges, Research & Information Fees, external consultant fees and agent fees and delivery and sign on bonuses (a portion of these bonuses is allocated to Cost of Service based on utilization of professional staff).
Direct Contribution Margin (DCM) – Total Revenue minus Cost of Services and minus Controllable Selling General and Administrative (SG&A) expenses.
Expense Revenue – GAAP revenues recognized within the period for reimbursed project expenses.
Fee Revenue – GAAP revenues for professional services performed working on client engagements within the period. Fee Revenue includes Expense Revenue (or charge) to the extent that Expense Revenues exceed or fall short of actual expenses booked against the project.
Non – Controllable SG&A expenses – Reference Appendix B for a listing of accounts included. Disputes regarding whether a cost is controllable or non-controllable will be addressed in a fair and appropriate manner. The final determination of what will be included will be made by the CFO.
CSMG, Inc. – 2012 SVP/MD Bonus Plan
Page 2 of 4
Research & Information Fees – includes charges for 3rd party paid research services including but not limited to IDC, Thompson Financial and other third party research and information services. These fees are assessed as a cost to the project at a rate of 3% of Fee Revenue.
Total Revenue – GAAP Fee Revenue for professional services performed working on client engagements plus Expense Revenue billed to and reimbursed by the client (including Research & Information Fees).
Unit Contribution Margin (UCM) – DCM minus Non-Controllable SG&A Expenses and minus VP Bonus.
VP Bonus – Any bonus paid under the CSMG 2012 Sales Bonus Plan.
CSMG, Inc. – 2012 SVP/MD Bonus Plan
Page 3 of 4
APPENDIX A: Controllable G&A Expenses - consist of the following P&L accounts
Description | |
Cellular Service | Photocopy |
Blackberry | Postage |
Bridge | Payroll Fees |
Legal – Services | Research & Data Fees |
Legal – Expenses | Surveys |
Consulting | Training |
External Consultants | Dues/Memberships |
Outside/Temp Help | Sales Support Presentation |
Commission – Agent | Proposal Support |
Facilitator Fees | Sales Training |
Advertising | Sales/Project Tracking System |
Marketing | Contributions |
Product Development | Memberships |
Direct Marketing | Computer Allowance |
Tradeshows | Meetings |
Newsletter | Meetings Expense |
Holiday Gifts, Cards, Etc. | Special Events – TMC's |
Gifts – Consult/Clients/Other | Client Events |
Brochure/Collateral | Auto Lease |
Auto Insurance | Car Allowance |
D&O Insurance | Courier |
Stationery | Cleaning |
Research & Data Fees | Storage Fees |
Office Supplies | Rental Equipment |
Computer Supplies | Repair & Maintenance |
Printing | Federal Express |
Stationery | Currency Gain/Loss |
Subscriptions | Misc. Exp |
APPENDIX B: Non-Controllable G&A Expenses - consists of the following P&L Accounts
CSMG, Inc. – 2012 SVP/MD Bonus Plan
Page 4 of 4
Description |
Website ISP/Net Circuit Local – Voice Long Distance Service Database Management Accounting Legal Settlement Bank Service Charges Credit Card Charges Credit inquiry fees Penalties and Fines Taxes – Personal Property Interest Expense – Miscellaneous Commercial Liab Ins Auto Insurance D&O Insurance Mark-Up Expense Clearing Extraordinary Items Gain & Loss On Disposal Repair & Maintenance – Contract Investor Relations Public Relations NASDAQ Fees Office Relocation General Taxes & Licenses Sales Use Tax Operating Taxes Rent Office Space Accretion Expense Electric Gas Water
|
CSMG 2012 Sales Bonus Plan
(also referred to as Incentive Compensation Agreement in some Employment Agreements)
Who is Eligible for the CSMG 2012 Sales Bonus Plan?
This 2012 Sales Bonus Plan covers only the Vice Presidents (VP’s) of Cambridge Strategic Management Group, Inc. and Cambridge Adventis Ltd. (together “CSMG”). This plan does not cover projects that are sold and delivered by employees of any other TMNG Global company, i.e. TMNG US, TMNG Europe or Cartesian.
In order to be eligible to participate in the 2012 Sales Bonus Plan, the VP must have high enough Potential VP Compensation to cover their Annual Base Salary. If the Potential VP Compensation for that VP is not high enough to cover the VP’s Annual Base Salary, that VP will not receive a sales bonus.
The bonus shall become earned in whole and shall become fully vested if the VP remains continuously employed until December 31, 2012 and qualifies for a bonus payment under the terms outlined herein.
The VP is not required to make any monetary payment as a condition to being eligible to participate and receive bonus compensation under the Plan. The sole consideration for participation shall be the services rendered to CSMG or for its benefit during the 2012 fiscal year.
VP Bonus Determinants and Calculations
The VP Earned Bonus is calculated as follows:
1. | Determine the VP’s Individual Contribution Margin % (ICM%). The ICM% is calculated from Individual Contribution Margin Reports (see attached CSMG 2012 Sales Bonus Plan – Proforma ICM Report Illustration tab for an example). While the ICM% calculation will be analyzed quarterly, ultimately it is an annual calculation that will determine the final amount earned under the Plan. |
2. | Each ICM % range (see attached CSMG 2012 Sales Bonus Plan - Bonus Calculator Matrix ICM tab) corresponds to a VP Bonus Percentage. |
3. | That VP Bonus Percentage is then multiplied by an individual VP’s Fee Revenue to calculate the Potential VP Compensation for that VP. |
4. | Each VP’s Annual Base Salary is then subtracted from their Potential VP Compensation. If for any VP, this calculation results in a negative number, that VP is not eligible to receive any pay-outs under this Plan. Only VP’s that have Potential VP Compensation in excess of their Annual Base Salary are eligible for bonus. |
Cross-Selling and Co-Selling Bonus Calculations
The VP’s of CSMG are able to earn bonus through Cross-Selling and Co-Selling. It is understood that the sale of a consulting project involves both a relationship and content delivery. Each sale may involve a different level of effort (i.e. lead, qualifying, proposal development and close). The CSMG VP has the opportunity to evaluate level of effort required and whether or not to pursue that opportunity given bonus sharing arrangements. We will not double count revenue for “cross selling”.
There are 3 possible scenarios for VP’s to participate in Cross-Selling and Co-Selling:
Scenario 1 – cross-selling – A non-strategy project is sold & delivered solely by a CSMG VP utilizing a combination of CSMG and non-CSMG professional staff. The CSMG VP gets credit for 100% of the project’s Fee Revenue and the CSMG Sales Bonus Plan applies.
Scenario 2 – cross-selling – A strategy project is sold solely or jointly by a non-CSMG company but delivered by CSMG. The CSMG VP responsible for delivering the project gets credit for 100% of the project’s Fee Revenue and the CSMG Sales Bonus Plan applies.
CSMG – 2012 Sales Bonus Plan
Page 2 of 5
Scenario 3 – co-selling – multiple CSMG VPs are involved in the sale of a strategy project. The project revenue is split among the VPs (as agreed to by the VPs) and the CSMG Bonus Plan applies. The revenue split must be identified on the project set-up sheet.
Treatment of Significant Events
The following situations are considered significant events and may result in a pro-rata calculation of CSMG’s VP’s Earned Bonus:
i) | If TMNG experiences a Change in Control, any bonus that has been earned but not paid under the CSMG 2012 Sales Bonus Plan as of the date of the Change in Control, shall be assumed by the acquiring or successor entity and settled in accordance with the terms and guidelines as set forth in this document. Notwithstanding the above, in the event of a Change in Control wherein CSMG continues in existence after such Change in Control and actively continues the conduct of its ongoing business, the CSMG 2012 Sales Bonus Plan shall be deemed to remain in effect through the end of 2012 and CSMG shall remain responsible for the settlement of any vested or future bonus payments in accordance with the terms and conditions outlined in this document; |
ii) | If TMNG sells CSMG, any bonus that has been earned but not yet paid under the CSMG 2012 Sales Bonus Plan as of the date of the sale, shall either be paid by CSMG or TMNG on the date of sale. Notwithstanding the above, in the event of a sale wherein CSMG continues in existence after such sale and actively continues the conduct of its ongoing business, the CSMG 2012 Sales Bonus Plan shall be deemed to remain in effect through the end of 2012 and CSMG shall remain responsible for the settlement of any vested or future bonus payments in accordance with the terms and conditions outlined in this document.; |
iii) | If TMNG shuts down CSMG and CSMG ceases to be an ongoing concern, any bonus that has been earned under the CSMG 2012 Sales Bonus Plan as of the date the business is terminated, shall be paid at the time of the termination. In order to allow a fair and reasonable amount of time to close the books and determine controllable expenses in order to calculate the payouts, the VP Bonus Compensation will be determined as of the last date that CSMG is considered a going concern, or not more than 30 days after the company ceases marketing efforts. |
When Bonus Will be Paid
When business projections warrant it, individual sales bonus will be paid on a quarterly basis within 60 days of the close of the quarter with the exception of the fourth quarter, which will be paid within ninety days of the fiscal year end. The first three quarterly payments are considered to be “recoverable payments”. Recoverable payments take into consideration a VP’s full Annual Base Salary, along with Fee Revenue to-date, pipeline, etc. Any recoverable payment may or may not be made at the discretion of TMNG’s CFO. The fourth quarter will be a true up for the year based upon final operating results for CSMG. If any quarterly bonus calculation produces negative results, management reserves the right to adjust payroll accordingly.
CSMG – 2012 Sales Bonus Plan
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Definitions
Annual Base Salary – the gross wages paid to the US VP on a regular bi-weekly basis multiplied by twenty-six or to the UK VP on a regular monthly basis times twelve. STD and LTD gross ups are not included in Annual Base Salary.
Bonus % - Bonus % is determined by the ICM%. See the Bonus Calculator Matrix ICM tab in the CSMG 2012 Sales Bonus file for the Bonus % assigned to each ICM%.
Change in Control – a Change in Control shall be deemed to occur upon the occurrence of any of the following events: (i) the sale, lease or conveyance or other disposition of at least fifty percent (50%) of TMNG’s assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (ii) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of TMNG, except if such Person is (a) a subsidiary of TMNG, (b) an employee stock ownership plan for employees of TMNG or (c) a company formed to hold TMNG’s common equity securities, provided that, at the time such company became such holding company, substantially all the stockholders of TMNG comprise such holding company’s stockholders and hold at least a majority of the voting power of such holding company; or (iii) a merger (in which TMNG is not the surviving operating entity), consolidation, liquidation or dissolution of TMNG or winding up of the business of TMNG.
Co-Selling – occurs when two or more business development VPs are involved in the sale of a project. In the case of a co-sale, project revenue may be split among multiple VPs. Any co-sales should be designated as such on the project set-up sheet and a list of VPs and the percent of revenue they will receive credit for should be included.
Cost of Service – The actual cost incurred to provide the services – including salaries, taxes, benefits, out of pocket expenses, surcharges, external consultant fees and agent fees.
Cross Selling – occurs when a strategy project is sold by a non-CSMG employee or when CSMG sells a non-strategy project that is delivered by a non-CSMG business unit.
Earned Bonus - that VP’s Fee Revenue multiplied by that VP’s Bonus % minus that VP’s Annual Base Salary.
Fee Revenue – GAAP revenues for professional services performed working on client engagements.
Gross Margin – Total Revenue minus Cost of Service and minus Cross Selling Expense.
Individual Contribution Margin (ICM) – The Gross Margin for that VP’s projects minus the Non-Billable VP Salaries & Benefits for that VP, minus the T&E – VP Non-billable for that VP and minus Research & Information Fees.
Individual Contribution Margin % (ICM%) – Individual Contribution Margin divided by Fee Revenue.
Non-Billable VP Salaries & Benefits – the non-billable portion of VP salaries, taxes & benefits.
Potential VP Compensation – the VP’s Fee Revenue multiplied by that VP’s Bonus Percentage.
Research & Information Fees – includes charges for 3rd party paid research services including but not limited to IDC, Thompson Financial and other third party research and information services. These fees are assessed as a cost to the project at a rate of 3% of Fee Revenue.
CSMG – 2012 Sales Bonus Plan
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T&E – VP Non-billable – includes the VP’s non-billable airfare, hotel, meals, entertainment, rental car, transportation, parking and any other applicable non-billable travel expenses.
Total Revenue –GAAP revenue for professional services performed working on client engagements plus expenses billed to and reimbursed by the client (including Research & Information Fees).
CSMG – 2012 Sales Bonus Plan
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BONUS CALCULATOR MATRIX | |||
Based Upon individual Contribution Margin (ICM) % | |||
ICM | VP BONUS Factor % | ||
30% | 0.00% | ||
31% | 12.25% | ||
32% | 12.50% | ||
33% | 12.75% | ||
34% | 13.00% | ||
35% | 13.25% | ||
36% | 13.50% | ||
37% | 13.75% | ||
38% | 14.00% | ||
39% | 14.25% | ||
40% | 14.50% | ||
41% | 14.75% | ||
42% | 15.00% | ||
43% | 15.25% | ||
44% | 15.50% | ||
45% | 15.75% | ||
46% | 16.00% | ||
47% | 16.25% | ||
48% | 16.50% | ||
49% | 16.75% | ||
51% | 17.00% | ||
52% | 17.25% | ||
53% | 17.50% | ||
54% | 17.75% | ||
55% | 18.00% | ||
56% | 18.25% | ||
57% | 18.50% | ||
58% | 18.75% | ||
59% | 19.00% | ||
60% | 19.25% | ||
61% | 19.50% | ||
62% | 19.75% | ||
63% | 20.00% | ||
64% | 20.25% | ||
65% | 20.50% | ||
66% | 20.75% | ||
67% | 21.00% | ||
68% | 21.25% | ||
69% | 21.50% | ||
70% | 21.75% |
EXHIBIT 31
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Klumb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Management Network Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 15, 2012
By: | /s/ DONALD E. KLUMB | |
CHIEF EXECUTIVE OFFICER, PRESIDENT, AND CHIEF FINANCIAL OFFICER |
EXHIBIT 32
CERTIFICATIONS FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Klumb, Chief Executive Officer, President and Chief Financial Officer of The Management Network Group, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. The Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended March 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 15, 2012
By: | /s/ DONALD E. KLUMB | |
CHIEF EXECUTIVE OFFICER, PRESIDENT, AND CHIEF FINANCIAL OFFICER |
Income Taxes
|
3 Months Ended |
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Mar. 31, 2012
|
|
Income Tax Disclosure [Abstract] | |
Income Tax Disclosure [Text Block] | 5. Income Taxes
In both thirteen week periods ended March 31, 2012 and April 2, 2011, the Company recorded an income tax provision of $30,000. The tax provisions for both thirteen week periods ended March 31, 2012 and April 2, 2011 are due to deferred taxes recognized on intangible assets amortized for income tax purposes but not for financial reporting purposes. The Company has reserved all of its domestic and international net deferred tax assets with a valuation allowance as of March 31, 2012 and December 31, 2011 in accordance with the provisions of FASB ASC 740, "Income Taxes," which requires an estimation of the recoverability of the recorded income tax asset balances. As of March 31, 2012, the Company has recorded $34.5 million of valuation allowances attributable to its net deferred tax assets.
The Company analyzes its uncertain tax positions pursuant to the provisions of FASB ASC 740 “Income Taxes.” There was no material activity related to the liability for uncertain tax positions during the thirteen weeks ended March 31, 2012 and April 2, 2011, and the Company has determined it does not have any material uncertain tax positions to reserve for at March 31, 2012.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. As of March 31, 2012, the Company has no income tax examinations in process. |