Item 1.
Condensed Consolidated Financial Statements
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
$
|
14,903,138
|
|
|
$
|
21,830,120
|
|
|
Accounts receivable, net
|
24,555,670
|
|
|
19,612,236
|
|
|
Other receivables
|
120,688
|
|
|
559,526
|
|
|
Prepaid expenses
|
2,619,917
|
|
|
2,394,872
|
|
|
Deferred income taxes
|
—
|
|
|
1,769,936
|
|
|
Income taxes receivable
|
1,817,567
|
|
|
1,592,562
|
|
|
Other
|
3,881,337
|
|
|
712,519
|
|
|
Total current assets
|
47,898,317
|
|
|
48,471,771
|
|
|
Non-current Assets
|
|
|
|
|
Leasehold Improvements and Equipment, net
|
3,687,195
|
|
|
4,332,865
|
|
|
Goodwill
|
214,967
|
|
|
—
|
|
|
Intangibles, net
|
2,497,500
|
|
|
—
|
|
|
Other Assets
|
3,107,532
|
|
|
2,056,931
|
|
|
Deferred Income Taxes
|
3,991,131
|
|
|
678,554
|
|
|
|
$
|
61,396,642
|
|
|
$
|
55,540,121
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Current portion of long-term debt
|
$
|
2,676,094
|
|
|
$
|
155,340
|
|
|
Accounts payable
|
1,014,918
|
|
|
993,558
|
|
|
Accrued compensation
|
26,138,153
|
|
|
23,660,070
|
|
|
Accrued business taxes
|
1,449,218
|
|
|
741,141
|
|
|
Accrued expenses
|
3,138,453
|
|
|
3,032,950
|
|
|
Deferred income taxes
|
267,444
|
|
|
—
|
|
|
Total current liabilities
|
34,684,280
|
|
|
28,583,059
|
|
|
Long-Term Liabilities
|
|
|
|
|
Long-term debt, less current maturities
|
2,950,431
|
|
|
470,109
|
|
|
Deferred rent, less current maturities
|
1,452,997
|
|
|
1,649,070
|
|
|
Total long-term liabilities
|
4,403,428
|
|
|
2,119,179
|
|
|
Stockholders’ Equity
|
|
|
|
|
Preferred stock: 1,000,000 shares authorized, no shares issued and outstanding
|
—
|
|
|
—
|
|
|
Common stock: $0.001 par value, 15,000,000 shares authorized, 7,409,247 shares issued; 6,983,561 and 7,110,360 shares outstanding at September 30, 2012 and December 31, 2011, respectively.
|
7,407
|
|
|
7,287
|
|
|
Additional paid-in capital
|
36,703,092
|
|
|
35,737,584
|
|
|
Accumulated deficit
|
(11,116,821
|
)
|
|
(9,026,290
|
)
|
|
Accumulated other comprehensive loss
|
(1,234,932
|
)
|
|
(881,997
|
)
|
|
Treasury stock, at cost 425,686 and 176,271 shares at September 30, 2012 and December 31, 2011, respectively.
|
(2,049,812
|
)
|
|
(998,701
|
)
|
|
|
22,308,934
|
|
|
24,837,883
|
|
|
|
$
|
61,396,642
|
|
|
$
|
55,540,121
|
|
See Notes to Condensed Consolidated Financial Statements.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Revenue
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
32,005,389
|
|
|
$
|
30,337,331
|
|
|
$
|
98,162,399
|
|
|
$
|
93,903,191
|
|
|
Reimbursable expenses
|
1,151,349
|
|
|
1,401,167
|
|
|
3,342,755
|
|
|
3,837,491
|
|
|
Total Revenue
|
33,156,738
|
|
|
31,738,498
|
|
|
101,505,154
|
|
|
97,740,682
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
27,287,050
|
|
|
23,026,941
|
|
|
80,651,587
|
|
|
71,933,882
|
|
|
General and administrative
|
6,620,084
|
|
|
7,123,679
|
|
|
20,430,564
|
|
|
19,694,325
|
|
|
Reimbursable expenses
|
1,263,675
|
|
|
1,490,133
|
|
|
3,608,776
|
|
|
4,002,965
|
|
|
Total operating expenses
|
35,170,809
|
|
|
31,640,753
|
|
|
104,690,927
|
|
|
95,631,172
|
|
|
Operating (Loss) Income
|
(2,014,071
|
)
|
|
97,745
|
|
|
(3,185,773
|
)
|
|
2,109,510
|
|
|
Interest (Expense) Income, net
|
(44,214
|
)
|
|
1,445
|
|
|
(123,840
|
)
|
|
(2,021
|
)
|
|
(Loss) Income Before Income Taxes
|
(2,058,285
|
)
|
|
99,190
|
|
|
(3,309,613
|
)
|
|
2,107,489
|
|
|
Income Tax Benefit (Expense)
|
857,920
|
|
|
(8,958
|
)
|
|
1,219,082
|
|
|
(758,269
|
)
|
|
Net (Loss) Income
|
$
|
(1,200,365
|
)
|
|
$
|
90,232
|
|
|
$
|
(2,090,531
|
)
|
|
$
|
1,349,220
|
|
|
Basic (loss) income per common share
|
$
|
(0.17
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.19
|
|
|
Diluted (loss) income per common share
|
$
|
(0.17
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.18
|
|
|
Basic weighted-average common shares
|
7,081,963
|
|
|
7,226,466
|
|
|
7,122,758
|
|
|
7,196,293
|
|
|
Diluted weighted-average common shares
|
7,081,963
|
|
|
7,498,137
|
|
|
7,122,758
|
|
|
7,467,964
|
|
See Notes to Condensed Consolidated Financial Statements.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Net income (loss)
|
$
|
(1,200,365
|
)
|
|
$
|
90,232
|
|
|
$
|
(2,090,531
|
)
|
|
$
|
1,349,220
|
|
|
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
22,799
|
|
|
(236,526
|
)
|
|
(352,935
|
)
|
|
(213,684
|
)
|
|
Other
|
—
|
|
|
25,798
|
|
|
—
|
|
|
77,395
|
|
|
Other Comprehensive Income (Loss)
|
22,799
|
|
|
(210,728
|
)
|
|
(352,935
|
)
|
|
(136,289
|
)
|
|
Comprehensive (loss)
|
$
|
(1,177,566
|
)
|
|
$
|
(120,496
|
)
|
|
$
|
(2,443,466
|
)
|
|
$
|
1,212,931
|
|
See Notes to Condensed Consolidated Financial Statements.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
Cash Flows From Operating Activities
|
|
|
|
|
Net income (loss)
|
$
|
(2,090,531
|
)
|
|
$
|
1,349,220
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
1,175,226
|
|
|
941,482
|
|
|
Loss on leasehold improvements and equipment disposal
|
1,019
|
|
|
37,430
|
|
|
Share-based compensation
|
590,630
|
|
|
1,563,005
|
|
|
Reorganization charge
|
882,088
|
|
|
—
|
|
|
Amortization of discount on seller note
|
130,470
|
|
|
—
|
|
|
Amortization of post combination compensation
|
4,575,540
|
|
|
—
|
|
|
Deferred income taxes
|
(1,275,197
|
)
|
|
405,161
|
|
|
Changes in operating assets and liabilities, net of effects of acquired business
|
|
|
|
|
Accounts receivable, net
|
(4,789,476
|
)
|
|
(1,788,191
|
)
|
|
Prepaid expenses
|
(336,064
|
)
|
|
(261,990
|
)
|
|
Income taxes receivable
|
(225,005
|
)
|
|
(1,172,649
|
)
|
|
Other assets and receivables
|
(3,826,416
|
)
|
|
(2,386,095
|
)
|
|
Accounts payable
|
18,180
|
|
|
(1,097,936
|
)
|
|
Accrued compensation
|
2,615,748
|
|
|
5,356,561
|
|
|
Accrued business taxes
|
722,983
|
|
|
(391,390
|
)
|
|
Accrued expenses
|
(199,749
|
)
|
|
(757,057
|
)
|
|
Deferred rent
|
(113,659
|
)
|
|
198,985
|
|
|
Net cash (used in) provided by operating activities
|
(2,144,213
|
)
|
|
1,996,536
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
Acquisition of a business
|
(3,046,563
|
)
|
|
—
|
|
|
Purchase of leasehold improvements and equipment
|
(177,903
|
)
|
|
(2,284,012
|
)
|
|
Net cash used in investing activities
|
(3,224,466
|
)
|
|
(2,284,012
|
)
|
|
Cash Flows From Financing Activities
|
|
|
|
|
Payments on long-term debt
|
(116,091
|
)
|
|
(143,779
|
)
|
|
Repurchase of common stock
|
(998,169
|
)
|
|
(436,061
|
)
|
|
Net cash used in financing activities
|
(1,114,260
|
)
|
|
(579,840
|
)
|
|
Net decrease in cash
|
(6,482,939
|
)
|
|
(867,316
|
)
|
|
Effect of foreign currency on cash
|
(444,043
|
)
|
|
(165,608
|
)
|
|
Cash:
|
|
|
|
|
Beginning
|
21,830,120
|
|
|
24,030,543
|
|
|
Ending
|
$
|
14,903,138
|
|
|
$
|
22,997,619
|
|
|
Supplemental Disclosure of Noncash Financing Activities
|
|
|
|
|
Treasury stock (9,395 shares) acquired in lieu of shareholder receivable
|
$
|
(52,942
|
)
|
|
$
|
—
|
|
|
Employee discount stock purchase award in lieu of cash compensation
|
$
|
375,000
|
|
|
$
|
—
|
|
|
Supplemental Disclosure of Noncash Investing Activities
|
|
|
|
|
Acquisition of Latin America business
|
|
|
|
|
Identifiable assets acquired
|
$
|
2,831,596
|
|
|
$
|
—
|
|
|
Goodwill
|
214,967
|
|
|
—
|
|
|
Post-compensation compensation
|
$
|
7,190,134
|
|
|
|
|
Aggregate purchase price per purchase agreement
|
$
|
10,236,697
|
|
|
$
|
—
|
|
|
Cash paid for compensation arrangement
|
(2,203,437
|
)
|
|
—
|
|
|
Note payable issued for post-combination compensation arrangement
|
(4,986,697
|
)
|
|
—
|
|
|
Cash Paid for Acquisition of a Business
|
3,046,563
|
|
|
—
|
|
See Notes to Condensed Consolidated Financial Statements.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
Description of Business -
CTPartners Executive Search Inc., along with its subsidiaries (collectively, “CTPartners” or the “Company”), is a retained executive search firm with global capabilities. The Company operates in North America, Europe and the Middle East (EMEA), Asia Pacific and Latin America.
As further disclosed in Note 2, effective January 2, 2012, the Company purchased its Latin America licensee.
On December 7, 2010, the Company conducted an initial public offering of its common stock and became subject to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”), and the relevant provisions of the Securities Acts of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company’s common stock trades on the NYSE MKT exchange under the symbol “CTP”.
Principles of Consolidation
-
The accompanying unaudited condensed consolidated financial statements include the accounts of CTPartners Executive Search Inc., together with its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, and with the instructions to Form 10-Q and the requirements of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.
The balance sheet at December 31, 2011, has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
The interim financial statements contained in this report should be read in conjunction with the audited consolidated financial statements and footnotes presented in the Company’s Form 10-K for the year ended December 31, 2011, filed with the SEC on March 22, 2012.
Goodwill
-
As a result of the acquisition of its Latin America licensee, the Company recorded initial goodwill of
$214,967
. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, if any. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is indicated. For this test, the fair value of the Company’s relevant reporting unit is determined using a combination of valuation techniques, including a discounted cash flow methodology. Since the goodwill from the Latin American acquisition was recorded as of January 2, 2012, annual impairment tests will commence in the fourth quarter of 2012. As of September 30, 2012, there were no indicators of impairment with respect to the Company’s goodwill.
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08,
Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment
(ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The guidance regarding the qualitative approach to goodwill impairment testing is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
Intangible Assets
-
Intangible assets primarily consist of customer relationships and developed technology and are recorded at their estimated fair value at the date of acquisition and are amortized using the straight-line method over their estimated useful lives of
10 years
. For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds fair value. The carrying amount of the intangible assets is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use of the asset. As of March 31, 2012, there were no indicators of impairment with respect to the Company’s intangible assets.
Other Comprehensive Income (Loss)
-
Other comprehensive loss primarily consists of foreign currency translation gains and losses, net of income tax effects.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The components of accumulated other comprehensive income (loss), net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
Foreign currency translation adjustment
|
$
|
(1,149,612
|
)
|
|
$
|
(796,677
|
)
|
|
Other
|
(85,320
|
)
|
|
(85,320
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(1,234,932
|
)
|
|
$
|
(881,997
|
)
|
Fair Value
-
The Company measures the fair values of its financial instruments in accordance with accounting guidance that defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance also discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
|
•
|
Level 2: Inputs other than quoted prices which are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
The inputs used in the fair value measurement should be from the highest level available. In instances where the measurement is based on inputs from different levels of the fair value hierarchy, the fair value measurement will fall within the lowest level input that is significant to the fair value measurement in its entirety.
Reclassifications
-
Certain items in the 2011 condensed consolidated financial statements have been reclassified to conform to the 2012 presentation.
Restatement -
The Company has restated its condensed consolidated financial statements as of September 30, 2012 to correct the accounting for the acquisition of CTPartners Latin America, completed on January 2, 2012.
On March 15, 2013, the Company concluded it should correct its accounting related to the Company's acquisition of CTPartners Latin America. The Company initially allocated the entire purchase price to the assets and liabilities acquired in the transaction, and goodwill. Upon further evaluation of the contracts associated with acquisition, the Company concluded that a portion of the purchase price should be accounted for as compensation expense for post-combination services. The purchase agreement provides that the selling shareholders are required to pay to the Company up to the aggregate
amount of
$7.2 million
if their employment terminates prior to the
36
-month anniversary of the closing of the transaction.
Financial Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”) states that a contingent
consideration arrangement in which the payments are automatically forfeited if employment terminates is compensation for
post-combination services, which must be recognized over the measurement period of the contingent payment. As a result of this provision, the Company restated its financial statements to account for the portion of purchase price contingent upon employment as compensation, recognized over the requisite service period using the graded-vesting amortization method.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables summarize the adjustments made to the previously reported balance sheets, statements of operations and statements of cash flow:
September 30, 2012
Selected balance sheet information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Assets
|
|
|
|
|
|
|
Current deferred income taxes
|
637,697
|
|
|
(637,697
|
)
|
|
—
|
|
|
Income taxes receivable
|
1,761,601
|
|
|
55,966
|
|
|
1,817,567
|
|
|
Other assets
|
1,702,508
|
|
|
2,178,829
|
|
|
3,881,337
|
|
|
Leasehold improvements and equipment, net
|
3,685,417
|
|
|
1,778
|
|
|
3,687,195
|
|
|
Goodwill
|
7,406,879
|
|
|
(7,191,912
|
)
|
|
214,967
|
|
|
Other assets
|
2,485,767
|
|
|
621,765
|
|
|
3,107,532
|
|
|
Long term deferred income taxes
|
1,466,962
|
|
|
2,524,169
|
|
|
3,991,131
|
|
|
Total assets
|
63,843,744
|
|
|
(2,447,102
|
)
|
|
61,396,642
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
Deferred income taxes
|
—
|
|
|
267,444
|
|
|
267,444
|
|
|
Accumulated deficit
|
(8,402,275
|
)
|
|
(2,714,546
|
)
|
|
(11,116,821
|
)
|
|
Total liabilities and stockholders' equity
|
63,843,744
|
|
|
(2,447,102
|
)
|
|
61,396,642
|
|
|
|
|
|
|
|
|
Selected statement of operations information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2012
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Compensation and benefits
|
25,761,870
|
|
|
1,525,180
|
|
|
27,287,050
|
|
|
General and administrative
|
6,682,084
|
|
|
(62,000
|
)
|
|
6,620,084
|
|
|
Income tax (expense) benefit
|
319,796
|
|
|
538,124
|
|
|
857,920
|
|
|
Net income
|
(275,309
|
)
|
|
925,056
|
|
|
(1,200,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2012
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Compensation and benefits
|
76,076,047
|
|
|
4,575,540
|
|
|
80,651,587
|
|
|
General and administrative
|
20,616,564
|
|
|
(186,000
|
)
|
|
20,430,564
|
|
|
Income tax (expense) benefit
|
(455,912
|
)
|
|
1,674,994
|
|
|
1,219,082
|
|
|
Net income
|
624,015
|
|
|
2,714,546
|
|
|
(2,090,531
|
)
|
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Selected statement of cash flows information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
Net income
|
624,015
|
|
|
(2,714,546
|
)
|
|
(2,090,531
|
)
|
|
Amortization of post combination compensation
|
—
|
|
|
4,575,540
|
|
|
4,575,540
|
|
|
Other assets and receivables
|
(1,436,979
|
)
|
|
(2,389,437
|
)
|
|
(3,826,416
|
)
|
|
Deferred income taxes
|
343,831
|
|
|
(1,619,028
|
)
|
|
(1,275,197
|
)
|
|
Income taxes receivable
|
(169,039
|
)
|
|
(55,966
|
)
|
|
(225,005
|
)
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
Acquisition of a business
|
(5,250,000
|
)
|
|
2,203,437
|
|
|
(3,046,563
|
)
|
|
Net decrease in cash
|
(6,482,939
|
)
|
|
—
|
|
|
(6,482,939
|
)
|
|
|
|
|
|
|
|
Selected condensed consolidated statements of comprehensive income informations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2012
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Net income
|
(275,309
|
)
|
|
(925,056
|
)
|
|
(1,200,365
|
)
|
|
Comprehensive income
|
(252,510
|
)
|
|
(925,056
|
)
|
|
(1,177,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2012
|
|
|
As Previously Reported
|
|
Effect of Restatement
|
|
As Restated
|
|
Net income
|
624,015
|
|
|
(2,714,546
|
)
|
|
(2,090,531
|
)
|
|
Comprehensive income
|
271,080
|
|
|
(2,714,546
|
)
|
|
(2,443,466
|
)
|
Note 2. Acquisition
Latin America
Effective January 2, 2012, the Company completed its acquisition of stock of the direct and indirect subsidiaries of CTPartners Latin America Inc., its independently-owned licensee that had been operating under the name of CTPartners in Latin America for the past five years. The Company’s Latin America offices are in Brazil, Chile, Colombia, Mexico, Panama, Peru, and Venezuela. The Company believes the acquisition further strengthens its brand in Latin America by making the Company a more attractive platform for our local, regional and global clients looking to invest in the region, and for attracting and retaining talented employees. The results of the Company’s Latin America offices have been included in the consolidated financial statements since that date.
The assets acquired were recorded at fair value. The aggregate purchase price in the agreement was
$10,236,697
which was paid in cash and the issuance of a non-interest bearing seller note for
$5,250,000
. The note has been discounted by the Company in the amount of
$263,303
to reflect fair value of the note. This amount is due in equal installments of
$2,625,000
each on January 2, 2013 and January 2, 2014 respectively. A portion of the total purchase price was contingent upon the continued employment of certain key employees. The purchase agreement provides that the selling shareholders are required to repay to the company up to the aggregate amount of
$7,190,134
if their employment terminates prior to the
36
-month anniversary of the closing of the transaction. Therefore, the contingent portion of the purchase price is accounted for as compensation for post-combination services, and recognized over three years using the graded vesting method. After accounting for a portion of the purchase price as post-combination compensation, the fair value of the consideration allocation to the assets and liabilities acquired was
$3,046,563
. Post-combination compensation expense of
$1,525,180
and
$4,575,540
is included in the results of operations for the three months and nine months ended September 30, 2012, respectively.
The Company also incurred acquisition related costs of
$420,100
, which were recorded as general and administrative expenses in the consolidated statements of operations during the fourth quarter of 2011 and during the first, second and third quarters of 2012, as incurred.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2. Acquisition (continued)
The following table summarizes fair value of the consideration paid and assets acquired at the acquisition date:
|
|
|
|
|
|
|
|
Consideration:
|
|
|
Cash
|
$
|
5,250,000
|
|
|
Seller note payable
|
4,986,697
|
|
|
Post-combination deferred compensation
|
(7,190,134
|
)
|
|
|
3,046,563
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
Leasehold improvements and equipment
|
$
|
131,596
|
|
|
Intangible assets
|
2,700,000
|
|
|
Total identifiable net assets acquired
|
2,831,596
|
|
|
Goodwill
|
214,967
|
|
|
|
$
|
3,046,563
|
|
Post-combination deferred compensation is included in Other Assets in the Company's consolidated balance sheet.
Goodwill of
$214,967
arising from the acquisition consists mainly of the synergies of an ongoing, retained executive search business which operates as a cooperative group in seven Latin American countries, a consistent brand message, and an experienced, assembled workforce. The goodwill relating to the Company’s Latin America reporting unit is fully deductible for United States federal income tax purposes.
The fair value of the identifiable intangible assets was measured based upon significant inputs that were not observable in the market, and therefore are classified as Level 3. The fair value was provided by an independent valuation firm; key assumptions included (a) management’s projections of future cash flows based upon past experience and future expectations and (b) a weighted-average discount rate of
18.9 percent
.
The fair value assigned to identifiable intangible assets and their useful lives at the acquisition date is as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Useful
Life
|
|
Customer relationships
|
$
|
2,480,000
|
|
|
10 years
|
|
Developed technology
|
220,000
|
|
|
10 years
|
|
|
$
|
2,700,000
|
|
|
|
The weighted-average useful life of total amortizable intangible assets acquired is
ten years
.
The total revenues and net income attributable to the acquisition, since the acquisition date, included in the consolidated statements of operations for the three and nine months ended September 30, 2012, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, 2012
|
|
Nine Months
Ended
September 30, 2012
|
|
Total Revenues
|
$
|
3,865,302
|
|
|
$
|
9,932,182
|
|
|
Net income
|
$
|
37,133
|
|
|
$
|
(590,567
|
)
|
The amounts of revenue and net income related to the acquisition that are included in the consolidated statements of operations and the pro forma financial information as if the acquisition had occurred on January 1, 2011, are presented in the following table. This pro forma information is presented for informational purposes only and is not necessarily indicative of what our actual results of operations would have been had the acquisitions occurred at such time.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2. Acquisition (continued)
Pro forma unaudited total revenues and net income of the combined entity had the acquisition date been January 1, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Total Revenues
|
$
|
33,156,738
|
|
|
$
|
34,487,031
|
|
|
$
|
101,505,154
|
|
|
$
|
106,538,457
|
|
|
Net Income (loss)
|
$
|
(275,309
|
)
|
|
$
|
368,774
|
|
|
$
|
715,023
|
|
|
$
|
2,069,956
|
|
The supplemental pro forma net income information for the nine months ended September 30, 2011, has been adjusted to exclude certain non-recurring expenses of
$920,000
relating to non-recurring management compensation. Pro forma net income for the three months ending September 30, 2011 and 2012 was adjusted to include
$854,101
, net of tax, and
$217,883
, net of tax, of post-combination compensation expense, respectively. Pro forma net income (loss) for the nine months ended September 30, 2011 was adjusted to include total acquisition-related costs of
$420,100
. Pro forma net income for the nine months ended September 30, 2012 excludes acquisition costs (before tax) of
$157,500
. Pro forma net income (loss) for the nine months ending September 30, 2011 and 2012 was adjusted to include
$2,562,540
, net of tax, and
$653,649
, net of tax, of post-combination compensation expense, respectively.
Note 3. Intangibles
The following is a summary of intangible assets at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
Lives
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Customer relationships
|
10 years
|
|
$
|
2,480,000
|
|
|
$
|
186,000
|
|
|
$
|
2,294,000
|
|
|
Developed technology
|
10 years
|
|
220,000
|
|
|
16,500
|
|
|
203,500
|
|
|
|
|
|
$
|
2,700,000
|
|
|
$
|
202,500
|
|
|
$
|
2,497,500
|
|
Total amortization expense of intangible assets for the three and nine months ended September 30, 2012 was
$67,500
and
$202,500
, respectively. Estimated aggregate future amortization expense for the following five years and thereafter is as follows:
|
|
|
|
|
|
|
|
Years ending December 31,
|
Estimated Aggregate
Future Amortization
Expense
|
|
2012
|
$
|
67,500
|
|
|
2013
|
270,000
|
|
|
2014
|
270,000
|
|
|
2015
|
270,000
|
|
|
2016
|
270,000
|
|
|
Thereafter
|
1,350,000
|
|
|
|
$
|
2,497,500
|
|
Note 4. Accounts Receivable
The Company extends unsecured credit to customers under normal trade agreements, which generally require payment upon invoice receipt. The allowance for doubtful accounts is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections. The Company also provides a reserve for billing adjustments based upon historical experience. The allowance for doubtful accounts and billing adjustments amounted to
$1,330,498
and
$1,143,840
at September 30, 2012, and December 31, 2011, respectively.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 5. Share Repurchase Program
On January 19, 2012, the Company’s Board of Directors authorized a second share repurchase program (“2012 Share Repurchase Program”) to acquire up to
$1 million
of the Company’s outstanding shares of common stock in open-market, privately negotiated transactions, and block trades. The 2012 Share Repurchase Program extends the previous share repurchase program which was authorized in August 2011 (“2011 Share Repurchase Program”). The Company repurchased a cumulative amount of
$998,701
under the 2011 Share Repurchase Program. As of September 30, 2012,
235,253
shares had been repurchased at a cost of
$998,169
, which is the cumulative amount used to repurchase shares under the 2012 Share Repurchase Program.
Note 6. Basic and Diluted Earnings Per Share
A reconciliation of the amounts used in the basic and diluted earnings per share computation is shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(1,200,365
|
)
|
|
$
|
90,232
|
|
|
$
|
(2,090,531
|
)
|
|
$
|
1,349,220
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
7,081,963
|
|
|
7,226,466
|
|
|
7,122,758
|
|
|
7,196,293
|
|
|
Effect of stock options and restricted stock
(1)
|
—
|
|
|
271,671
|
|
|
—
|
|
|
271,671
|
|
|
Diluted weighted-average common shares
|
7,081,963
|
|
|
7,498,137
|
|
|
7,122,758
|
|
|
7,467,964
|
|
|
Basic income (loss) per common share
|
$
|
(0.17
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.19
|
|
|
Diluted income (loss) per common share
|
$
|
(0.17
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.18
|
|
|
|
|
|
(1)
|
For the three months ended September 30, 2012,
96,698
potential common shares and
102,500
stock options are excluded as they are anti-dilutive to the net loss from continuing operations.
|
|
|
|
|
(2)
|
For the nine months ended September 30, 2012.
92,598
potential common shares and
102,500
stock options are excluded as they are anti-dilutive to the net loss from continuing operations.
|
Note 7. Leasehold Improvements and Equipment
The components of leasehold improvements and equipment as of September 30, 2012 and December 31, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
Leasehold improvements
|
$
|
3,267,575
|
|
|
$
|
3,133,511
|
|
|
Office furniture, fixtures, and equipment
|
2,714,484
|
|
|
2,627,058
|
|
|
Computer equipment and software
|
4,342,307
|
|
|
4,393,904
|
|
|
|
10,324,366
|
|
|
10,154,473
|
|
|
Accumulated depreciation and amortization
|
(6,637,171
|
)
|
|
(5,821,608
|
)
|
|
|
$
|
3,687,195
|
|
|
$
|
4,332,865
|
|
Depreciation and amortization expense relating to leasehold improvements and equipment for the three and nine months ended September 30, 2012, was
$314,277
and
$972,726
, respectively, and for the three and nine months ended September 30, 2011 was
$337,730
and
$941,482
, respectively.
Note 8. Line of Credit
The Company, under the terms of its revolving credit facility, may borrow an amount equal to the lesser of
$10 million
or the “Borrowing Base” (the Company’s eligible accounts receivable as defined in the revolving credit facility), with interest calculated at
325
basis points above the LIBOR rate as defined in the revolving credit agreement (the adjusted LIBOR rate), which was
0.221%
at September 30, 2012. The Company has
zero
outstanding balances under the revolving credit facility at September 30, 2012 and December 31, 2011. Additionally, the Company had issued letters of credit related to certain office lease agreements secured by the revolving credit facility of
$3,258,600
as of September 30, 2012 and December 31, 2011. Available borrowings under the revolving credit facility were
$10,000,000
at September 30, 2012.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 9. Share-Based Compensation
Restricted Shares
Share-based compensation is the result of the vesting and clawback provisions of share-based awards and options granted under the Company’s 2010 Equity Incentive Plan. Certain shares are subject to clawback provisions, which require the recipient to surrender a portion of the shares if their employment with the Company terminates before a specified date, typically
three years from date of grant
. At September 30, 2012, there were no shares subject to clawback provisions.
The purpose of the 2010 Equity Incentive Plan is to promote the interests of the Company and our stockholders by (i) attracting and retaining employees, non-employee directors and independent contractors, (ii) motivating such individuals to achieve long-term Company goals and to further align their interests with those of the Company’s stockholders by providing incentive compensation opportunities tied to the performance of the common stock of the Company and (iii) promoting increased ownership of our common stock by such individuals.
Subject to adjustment for changes in capitalization, the maximum aggregate number of shares of our common stock that may be delivered pursuant to awards granted under the 2010 Equity Incentive Plan is
1,000,000
.
A summary of the Company’s common stock subject to vesting provisions for the nine months ended September 30, 2012, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Common Stock
|
Common
Stock
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Total non-vested common stock at December 31, 2011
|
266,853
|
|
|
$
|
13.32
|
|
|
Granted
|
15,596
|
|
|
5.13
|
|
|
Vested
|
(122,616
|
)
|
|
12.98
|
|
|
Forfeited
|
(58,978
|
)
|
|
14.44
|
|
|
Total non-vested common stock at September 30, 2012
|
100,855
|
|
|
$
|
11.47
|
|
Total share-based compensation expense related to shares subject to vesting provision for the three and nine months ended September 30, 2012 was
$6,707
and
$522,842
, respectively, and for the three and nine months ended September 30, 2011, was
$464,839
and
$1,239,237
, respectively. As of September 30, 2012, there was
$733,084
of unrecognized compensation expense related to shares subject to vesting provisions granted under the 2010 Equity Incentive Plan. This expense is expected to be recognized over a weighted-average period of
1.2 years
.
Total share-based compensation expense subject to clawback provisions for the three and nine months ended September 30, 2012 was
$0
, and for the three and nine months ended September 30, 2011, was
$55,878
and
$323,768
, respectively.
Stock Options
In December 2011, the Company authorized and granted
102,500
non-qualified stock options to various employees under its 2010 Equity Incentive Plan. All options have an exercise price that is equal to the fair value of the Company’s common stock on the grant date. Options are subject to ratable vesting over a three-year period, and compensation expense is recognized on a straight-line basis over the vesting period.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 9. Share-based compensation (continued)
A summary of the Company’s non-qualified stock option activity for the three and nine months ended September 30, 2012, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Non-qualified
Stock
Options
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding on December 31, 2011
|
102,500
|
|
|
$
|
5.35
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding on September 30, 2012
|
102,500
|
|
|
$
|
5.35
|
|
|
2.2
|
|
|
$
|
—
|
|
|
Exercisable on September 30, 2012
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The aggregate intrinsic value is based upon the Company’s closing stock price of
$4.40
at September 30, 2012. The compensation expense related to the options was
$20,415
and
$60,435
for the three and nine months ended September 30, 2012, respectively. There were
no
options outstanding at September 30, 2011. As of September 30, 2012, there was
$174,580
of unrecognized compensation expense related to unvested non-qualified stock options, which is expected to be recognized over a weighted average period of
2.2 years
.
Employee Stock Purchase Program
The Company’s 2010 Equity Incentive Plan provides for the issuance of equity incentive awards, such as restricted stock and options, in order to retain qualified personnel. On March 21, 2012, the Compensation Committee of the Board of Directors approved the adoption of a stock purchase discount program that would allow selected employees, based on performance metrics defined by the Compensation Committee, to purchase up to
$100,000
of the Company’s stock in lieu of cash bonuses, at a 15% discount to the NYSE MKT trading price of those shares. Shares are subject to ratable vesting over a
three
-year period, and compensation expense relating to the discount is recognized on a straight-line basis over the vesting period. As of September 30, 2012,
no
shares were vested or issued. During the nine months ended September 30, 2012 the Company granted
73,406
restricted shares at
$5.11
per share, at a discount of
15%
, or
$0.90
per share. Compensation expense relating to the stock purchase discount program was
$5,514
and
$7,353
for the three and nine months ended September 30, 2012. As of September 30, 2012, there was
$58,824
of unrecognized compensation expense related to shares subject to vesting provisions granted under the stock purchase discount program. This expense is expected to be recognized over a weighted-average period of
2.7 years
.
Note 10. Enterprise Geographic Concentrations
The Company operates in four principal geographic regions: North America, EMEA, Asia Pacific and Latin America. There is no comparative data for Latin America for 2011 as these operations were operating under a licensing agreement with the Company.
Effective January 1, 2012, the Company separately reported its global operations support costs in its geographic disclosures in order to provide a more informative disclosure about each geographic region’s financial position and operational results. The Company has separately reported its global operations support costs for the three-month and nine-month periods ended September 30, 2011, to be comparative with the current period’s disclosure.
Also effective January 1, 2012, the Company has combined its European and Middle East geographic disclosures into a single EMEA (Europe, Middle East, and Africa) geographic region. The Company has also combined the European and Middle East geographic disclosures as of September 30, 2011, to be comparative with the current period’s disclosure.
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 10. Enterprise Geographic Concentrations (continued)
The revenue, operating income (loss), depreciation and amortization, and capital expenditures, by region, for the three and nine months ended September 30, 2012, and 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
North America
|
$
|
19,114,184
|
|
|
$
|
20,331,632
|
|
|
$
|
60,602,998
|
|
|
$
|
60,993,312
|
|
|
EMEA
|
7,012,486
|
|
|
8,021,700
|
|
|
20,441,877
|
|
|
24,863,280
|
|
|
Asia Pacific
|
2,013,417
|
|
|
1,983,999
|
|
|
7,185,342
|
|
|
8,046,599
|
|
|
Latin America
|
3,865,302
|
|
|
—
|
|
|
9,932,182
|
|
|
—
|
|
|
Net revenue before reimbursements
|
32,005,389
|
|
|
30,337,331
|
|
|
98,162,399
|
|
|
93,903,191
|
|
|
Reimbursements
|
1,151,349
|
|
|
1,401,167
|
|
|
3,342,755
|
|
|
3,837,491
|
|
|
Total
|
$
|
33,156,738
|
|
|
$
|
31,738,498
|
|
|
$
|
101,505,154
|
|
|
$
|
97,740,682
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
North America
|
$
|
2,308,294
|
|
|
$
|
2,697,722
|
|
|
$
|
9,585,639
|
|
|
$
|
9,053,327
|
|
|
EMEA
|
(468,448
|
)
|
|
(302,510
|
)
|
|
(1,444,435
|
)
|
|
1,245,260
|
|
|
Asia Pacific
|
(63,544
|
)
|
|
(377,348
|
)
|
|
767,579
|
|
|
10,203
|
|
|
Latin America
|
(599,051
|
)
|
|
—
|
|
|
(2,324,221
|
)
|
|
—
|
|
|
Global Operations Support
|
(3,191,322
|
)
|
|
(1,920,119
|
)
|
|
(9,770,335
|
)
|
|
(8,199,280
|
)
|
|
Total
|
$
|
(2,014,071
|
)
|
|
$
|
97,745
|
|
|
$
|
(3,185,773
|
)
|
|
$
|
2,109,510
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
North America
|
$
|
111,462
|
|
|
$
|
182,002
|
|
|
$
|
357,520
|
|
|
$
|
386,941
|
|
|
EMEA
|
71,066
|
|
|
93,389
|
|
|
215,221
|
|
|
265,504
|
|
|
Asia Pacific
|
41,386
|
|
|
60,279
|
|
|
124,786
|
|
|
120,536
|
|
|
Latin America
|
88,233
|
|
|
—
|
|
|
262,853
|
|
|
—
|
|
|
Global Operations Support
|
70,649
|
|
|
39,490
|
|
|
215,865
|
|
|
205,931
|
|
|
Total
|
$
|
382,796
|
|
|
$
|
375,160
|
|
|
$
|
1,176,245
|
|
|
$
|
941,482
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
North America
|
$
|
32,129
|
|
|
$
|
284,670
|
|
|
$
|
56,499
|
|
|
$
|
1,286,204
|
|
|
EMEA
|
—
|
|
|
2,156
|
|
|
10,961
|
|
|
171,120
|
|
|
Asia Pacific
|
—
|
|
|
257,313
|
|
|
3,583
|
|
|
383,801
|
|
|
Latin America
|
25,541
|
|
|
—
|
|
|
50,680
|
|
|
—
|
|
|
Global Operations Support
|
23,297
|
|
|
263,305
|
|
|
56,180
|
|
|
442,887
|
|
|
Total
|
$
|
80,967
|
|
|
$
|
807,444
|
|
|
$
|
177,903
|
|
|
$
|
2,284,012
|
|
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 10. Enterprise Geographic Concentrations (continued)
Identifiable assets by geographic concentrations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
Identifiable assets:
|
|
|
|
|
North America
|
$
|
20,014,315
|
|
|
$
|
38,049,259
|
|
|
EMEA
|
12,951,820
|
|
|
12,143,142
|
|
|
Asia Pacific
|
5,516,601
|
|
|
4,491,980
|
|
|
Latin America
|
19,161,549
|
|
|
—
|
|
|
Global Operations Support
|
853,890
|
|
|
855,740
|
|
|
Total
|
$
|
58,498,175
|
|
|
$
|
55,540,121
|
|
|
Goodwill and other intangible assets, net:
|
|
|
|
|
Latin America
|
$
|
2,898,467
|
|
|
$
|
—
|
|
|
Total
|
$
|
2,898,467
|
|
|
$
|
—
|
|
Note 11. Reorganization
In the third quarter of 2012, the Company’s management initiated a plan to reorganize its operations resulting in certain organizational changes in its Canadian and EMEA locations. The plan consists of a workforce reorganization, and elimination of redundant or unneeded positions, which will allow the Company to combine business operations in certain geographic locations and serve our clients more efficiently. During the third quarter of 2012, the Company recognized
$964,180
of reorganization related charges, included in compensation and benefits expense and general and administrative expenses.
The following table summarizes the major components of the reorganization charge:
|
|
|
|
|
|
|
|
|
Three and Nine Months
Ended September 30, 2012
|
|
Severance and other employee related costs
|
$
|
1,110,694
|
|
|
Foreign currency translation
|
$
|
(146,514
|
)
|
|
Total
|
$
|
964,180
|
|
Reorganization charges by geographic location were as follows:
|
|
|
|
|
|
|
|
|
Three and Nine Months
Ended September 30, 2012
|
|
North America
|
$
|
207,184
|
|
|
EMEA
|
$
|
756,996
|
|
|
Total
|
$
|
964,180
|
|
Changes in reorganization reserves related to the restructuring plan described above for the three months ended September 30, 2012, are as follows:
|
|
|
|
|
|
|
|
|
Severance and other
employee related costs
|
|
Balance at June 30, 2012
|
$
|
—
|
|
|
Reorganization charges
|
$
|
1,110,694
|
|
|
Cash payments
|
$
|
(228,606
|
)
|
|
Non-cash charges
|
$
|
(507,307
|
)
|
|
Balance at September 30, 2012
|
$
|
374,781
|
|
CTPARTNERS EXECUTIVE SEARCH INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 12. Subsequent Events
On October 10, 2012, the Company completed an acquisition of Cheverny CEO Search, S.A., a Paris, France based search firm focused on executive recruiting, for an aggregate purchase price of
$1,552,480
. The first payment of
$517,492
was made in cash on the acquisition date, and a non-interest bearing seller note was issued for the remainder. The note is payable in two installments of $
517,492
each on July 12, 2013 and July 12, 2014. Future payments can be reduced if certain performance metrics are not achieved. Total costs of
$45,550
relating to Cheverny CEO Search acquisition were expensed during the nine-month period ending September 30, 2012. The Company is currently in the process of determining the fair value of assets acquired.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this quarterly report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management’s beliefs and assumptions. Forward-looking statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our expectations regarding our revenues, expenses and operations and our ability to sustain profitability; our ability to recruit and retain qualified executive search consultants to staff our operations appropriately; our ability to expand our customer base and relationships, especially given the off-limit arrangements we are required to enter into with certain of our clients; declines in the global economy and our ability to execute successfully through business cycles; our anticipated cash needs; our anticipated growth strategies and sources of new revenues; unanticipated trends and challenges in our business and the markets in which we operate; social or political instability in markets where we operate; the impact of foreign currency exchange rate fluctuations; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; the mix of profit and loss by country; and our ability to estimate accurately for purposes of preparing our consolidated financial statements. For more information on the factors that could affect the outcome of forward-looking statements, see Risk Factors in Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2012. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading performance-driven executive search firm serving clients across the globe. Committed to a philosophy of partnering with our clients, we offer a proven record in C-Suite, senior executive, and board searches, as well as expertise serving private equity and venture capital firms. Our organizational structure is designed to provide high quality, industry-focused executive search services to our clients worldwide. Our executive search consultants are dedicated to specific industry verticals and are leading experts in their given sectors. We believe that industry specialization enables us to better understand our clients’ cultures, operations, business strategies and industries. Our six largest industry practice groups are financial services, professional services, life sciences, technology/media/telecom (“TMT”), retail/consumer and industrial.
We believe that a high level of communication and process transparency with our clients is very important to their level of satisfaction and to the ultimate success of our searches, and will continue to drive our earnings growth. We continue to evaluate acquisition opportunities that will allow us to strengthen our brand and expand into strategically significant markets. The reorganization of our operations will reduce costs and improve productivity, while positioning us well to take advantage of strengthening economic conditions.
On January 2, 2012, we acquired our Latin America licensee for
$10.2
million consisting of an initial cash payment of $5.25 million and a non-interest bearing seller note for $5.25 million which has been discounted by the Company in the amount of $263,303. For the three months ended September 30, 2012, Latin America operations contributed $3.9 million in revenue and
$0.6 million
in operating loss to our results, as compared to $160,000 of licensing fees included in the three months ended September 30, 2011. Management’s discussion and analysis includes the searches engaged to be performed by our Latin America offices and the resulting net revenues, expenses and cash flows for periods beginning January 1, 2012. For periods prior to January 1, 2012, we disclose the results of our then Latin America licensee separately.
Net revenue and operating income excluding Latin America for the three months ended September 30, 2012, decreased $2.2 million and $1.5 million, respectively, compared to the same period in 2011. During the third quarter of 2012, we initiated a plan to reorganize operations in our Canadian and EMEA locations, incurring a reorganization charge of $964,000. We expect that the reorganization will result in annualized cost savings of approximately $1.1 million.
For the three-month period ended September 30, 2012, we were engaged to perform 318 searches including 80 by our Latin America offices. For the three-month period ended September 30, 2011, we were engaged to perform 269 searches. Our then Latin American licensee was engaged to perform 60 searches during the three-month period ended September 30, 2011. For the three-month period ended September 30, 2012, we placed candidates in 112 U.S. searches and 93 non-U.S. searches, including 52 by our Latin America offices. For the three-month period ended September 30, 2011, we placed candidates in 114 U.S. searches and 112 non-U.S. searches. Our then Latin American licensee placed 65 candidates during the three-month period ended September 30, 2011.
For the nine-month period ended September 30, 2012, we were engaged to perform 1053 searches including 228 by our Latin America offices. For the nine-month period ended September 30, 2011, we were engaged to perform 856 searches. Our then Latin American licensee was engaged to perform 256 searches during the nine-month period ended September 30, 2011. For the nine-month period ended September 30, 2012, we placed candidates in 337 U.S. searches and 277 non-U.S. searches, including 149 by our Latin America offices. For the nine-month period ended September 30, 2011, we placed candidates in 362 U.S. searches and 284 non-U.S. searches. Our then Latin America licensee placed 209 candidates during the nine-month period ended September 30, 2011.
Relevant data is set forth below (this data excludes the operations of our associated offices in Latin America for 2011):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Increase/
Decrease
|
|
Percentage
Increase/
Decrease
|
|
Nine Months Ended
September 30,
|
|
Increase/
Decrease
|
|
Percentage
Increase/
Decrease
|
|
Performance Metrics
|
2012
|
|
2011
|
|
|
|
2012
|
|
2011
|
|
|
|
Number of new search assignments
|
318
|
|
|
269
|
|
|
49
|
|
|
18.2
|
%
|
|
1,053
|
|
|
856
|
|
|
197
|
|
|
23.0
|
%
|
|
Number of executive search consultants (as of period end)
|
102
|
|
|
94
|
|
|
8
|
|
|
8.5
|
%
|
|
102
|
|
|
94
|
|
|
8
|
|
|
8.5
|
%
|
|
Productivity, as measured by average annualized net revenue per executive search consultant
|
$
|
1,255,113
|
|
|
$
|
1,290,950
|
|
|
$
|
(35,837
|
)
|
|
(2.8
|
)%
|
|
$
|
1,283,169
|
|
|
$
|
1,331,960
|
|
|
$
|
(48,791
|
)
|
|
(3.7
|
)%
|
|
Average revenue per executive search
|
$
|
93,819
|
|
|
$
|
100,089
|
|
|
$
|
(6,270
|
)
|
|
(6.3
|
)%
|
|
$
|
92,244
|
|
|
$
|
104,793
|
|
|
$
|
(12,549
|
)
|
|
(12.0
|
)%
|
The decrease in average revenue per executive search is attributable to the inclusion of Latin America in the first three quarters of 2012. Excluding Latin America, average revenue per executive search would have been $113,640 and $107,841 in the three and nine months ended September 30, 2012, respectively.
Operating income decreased $2.1 million to an operating loss of
$2.0 million
for the three-month period ended September 30, 2012, compared to an operating profit of $98,000 in the three-month period ended September 30, 2011. Excluding the reorganization charge of $964,000 and the post-combination compensation charge of $1.5 million, operating income decreased to an operating loss of $551,000. The increase is primarily due to an increase in net revenues of $1.7 million, a decrease of $500,000 in general and administrative expense, offset by an increase in compensation and benefits expense of $4.3 million.
Operating income decreased $5.3 million to a loss of $3.2 million for the nine-month period ended September 30, 2012, compared to operating income of $2.1 million for the nine-month period ended September 30, 2011. Excluding the reorganization charge of $964,000 and the post-combination compensation charge of $4.6 million, operating income increased to $2.4 million. The increase is primarily due to an increase in net revenues of $4.3 million, offset by an increase in compensation and benefits expense of $8.7 million and an increase of $900,000 in general and administrative expense.
Reorganization
In the third quarter of 2012, the Company’s management implemented a plan to reorganize its operations resulting in certain organizational changes in its Canadian and EMEA locations. The plan consists of a workforce reorganization, and elimination of redundant or unneeded positions, which will allow us to combine business operations in certain geographic locations and serve our clients more efficiently. During the third quarter of 2012, the Company recognized $964,000 of reorganization related charges, which are included in compensation and benefits expense and general and administrative expenses.
Adjusted Performance Measure, Excluding Certain Non-Recurring Charges
Data presented below is a non-GAAP measure, and excludes certain non-recurring charges. Management utilizes this information to measure performance, and believes it more appropriately reflects the results of ongoing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Non-GAAP Measures to Net Income for the Three Months Ended
(Unaudited)
|
|
|
September 30, 2012
|
|
September 30, 2011
|
|
|
Results of Operations
|
|
Effect of Adjustment
|
|
Adjusted
Results of
Operations
(1)
|
|
Results of Operations
|
|
Effect of Adjustment
|
|
Adjusted
Results of
Operations
(1)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
32,005,389
|
|
|
|
|
32,005,389
|
|
|
30,337,331
|
|
|
|
|
30,337,331
|
|
|
Reimbursable expenses
|
1,151,349
|
|
|
|
|
1,151,349
|
|
|
1,401,167
|
|
|
|
|
1,401,167
|
|
|
Total revenue
|
33,156,738
|
|
|
—
|
|
|
33,156,738
|
|
|
31,738,498
|
|
|
—
|
|
|
31,738,498
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
27,287,050
|
|
|
2,635,874
|
|
|
24,651,176
|
|
|
23,026,941
|
|
|
|
|
23,026,941
|
|
|
General and administrative
|
6,620,084
|
|
|
(146,514
|
)
|
|
6,766,598
|
|
|
7,123,679
|
|
|
|
|
7,123,679
|
|
|
Reimbursable expenses
|
1,263,675
|
|
|
|
|
1,263,675
|
|
|
1,490,133
|
|
|
|
|
1,490,133
|
|
|
Total Operating Expenses
|
35,170,809
|
|
|
2,489,360
|
|
|
32,681,449
|
|
|
31,640,753
|
|
|
—
|
|
|
31,640,753
|
|
|
Operating (loss) income
|
(2,014,071
|
)
|
|
(2,489,360
|
)
|
|
475,289
|
|
|
97,745
|
|
|
—
|
|
|
97,745
|
|
|
Interest (expense) income, net
|
(44,214
|
)
|
|
|
|
(44,214
|
)
|
|
1,445
|
|
|
|
|
1,445
|
|
|
(Loss) income before income taxes
|
(2,058,285
|
)
|
|
(2,489,360
|
)
|
|
431,075
|
|
|
99,190
|
|
|
—
|
|
|
99,190
|
|
|
Income tax benefit (expense)
|
857,920
|
|
|
949,491
|
|
|
(91,571
|
)
|
|
(8,958
|
)
|
|
|
|
(8,958
|
)
|
|
Net (loss) income
|
(1,200,365
|
)
|
|
(1,539,869
|
)
|
|
339,504
|
|
|
90,232
|
|
|
—
|
|
|
90,232
|
|
|
Basic income per common share
|
(0.17
|
)
|
|
(0.22
|
)
|
|
0.05
|
|
|
0.01
|
|
|
—
|
|
|
0.01
|
|
|
Diluted income per common share
|
(0.17
|
)
|
|
(0.22
|
)
|
|
0.05
|
|
|
0.01
|
|
|
—
|
|
|
0.01
|
|
(1) Adjusted result is a non-GAAP financial measure that exclude reorganization charges of $964,180 (or $575,615, net of tax effect) and post-combination compensation charges of $1,525,180 ($964,254, net of tax effect). No reorganization or post-combination compensation charges were incurred during the three months ended September 30, 2011.
Use of non-GAAP measures: The tables above contain selected financial information calculated other than in accordance with U.S. Generally Acceptable Accounting Principles (“GAAP”). We define adjusted results of operations as follows:
|
|
|
|
•
|
Adjusted operating income is defined as operating income adjusted to exclude reorganization and post-combination compensation charges, net.
|
|
|
|
|
•
|
Adjusted net income is defined as net income adjusted to exclude reorganization and post-combination compensation charges, net of tax effect.
|
|
|
|
|
•
|
Adjusted basic and diluted earnings per share are calculated by adjusting the numerator by the amount of the reorganization and post-combination compensation charges, net of tax effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Non-GAAP Measures to Net Income for the Nine Months Ended
(Unaudited)
|
|
|
September 30, 2012
|
|
September 30, 2011
|
|
|
Results of Operations
|
|
Effect of Adjustment
|
|
Adjusted
Results of
Operations
(1)
|
|
Results of Operations
|
|
Effect of Adjustment
|
|
Adjusted
Results of
Operations
(1)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
98,162,399
|
|
|
—
|
|
|
98,162,399
|
|
|
93,903,191
|
|
|
—
|
|
|
93,903,191
|
|
|
Reimbursable expenses
|
3,342,755
|
|
|
—
|
|
|
3,342,755
|
|
|
3,837,491
|
|
|
—
|
|
|
3,837,491
|
|
|
Total revenue
|
101,505,154
|
|
|
—
|
|
|
101,505,154
|
|
|
97,740,682
|
|
|
—
|
|
|
97,740,682
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
80,651,587
|
|
|
5,686,234
|
|
|
74,965,353
|
|
|
71,933,882
|
|
|
—
|
|
|
71,933,882
|
|
|
General and administrative
|
20,430,564
|
|
|
(146,514
|
)
|
|
20,577,078
|
|
|
19,694,325
|
|
|
—
|
|
|
19,694,325
|
|
|
Reimbursable expenses
|
3,608,776
|
|
|
—
|
|
|
3,608,776
|
|
|
4,002,965
|
|
|
—
|
|
|
4,002,965
|
|
|
Total Operating Expenses
|
104,690,927
|
|
|
5,539,720
|
|
|
99,151,207
|
|
|
95,631,172
|
|
|
—
|
|
|
95,631,172
|
|
|
Operating (loss) income
|
(3,185,773
|
)
|
|
(5,539,720
|
)
|
|
2,353,947
|
|
|
2,109,510
|
|
|
—
|
|
|
2,109,510
|
|
|
Interest (expense) income, net
|
(123,840
|
)
|
|
—
|
|
|
(123,840
|
)
|
|
(2,021
|
)
|
|
—
|
|
|
(2,021
|
)
|
|
(Loss) income before income taxes
|
(3,309,613
|
)
|
|
(5,539,720
|
)
|
|
2,230,107
|
|
|
2,107,489
|
|
|
—
|
|
|
2,107,489
|
|
|
Income tax benefit (expense)
|
1,219,082
|
|
|
2,134,534
|
|
|
(915,452
|
)
|
|
(758,269
|
)
|
|
—
|
|
|
(758,269
|
)
|
|
Net (loss) income
|
(2,090,531
|
)
|
|
(3,405,186
|
)
|
|
1,314,655
|
|
|
1,349,220
|
|
|
—
|
|
|
1,349,220
|
|
|
Basic income per common share
|
(0.29
|
)
|
|
(0.48
|
)
|
|
0.19
|
|
|
0.19
|
|
|
—
|
|
|
0.19
|
|
|
Diluted income per common share
|
(0.29
|
)
|
|
(0.48
|
)
|
|
0.19
|
|
|
0.18
|
|
|
—
|
|
|
0.18
|
|
(1) Adjusted result is a non-GAAP financial measure that exclude reorganization charges of 964,180 (or $575,615, net of tax effect) and post-combination compensation charges of $4,575,540 ($2,289,571, net of tax effect). No reorganization or post-combination compensation charges were incurred during the nine months ended September 30, 2011.
Use of non-GAAP measures: The tables above contain selected financial information calculated other than in accordance with U.S. Generally Acceptable Accounting Principles (“GAAP”). We define adjusted results of operations as follows:
|
|
|
|
•
|
Adjusted operating income is defined as operating income adjusted to exclude reorganization and post-combination compensation charges, net.
|
|
|
|
|
•
|
Adjusted net income is defined as net income adjusted to exclude reorganization and post-combination compensation charges, net of tax effect.
|
|
|
|
|
•
|
Adjusted basic and diluted earnings per share are calculated by adjusting the numerator by the amount of the reorganization and post-combination compensation charges, net of tax effect.
|
Results of Operations
The following table summarizes, for the periods indicated, our results of operations as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Net revenue
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Reimbursable expenses
|
3.6
|
|
|
4.6
|
|
|
3.4
|
|
|
4.1
|
|
|
Total revenue
|
103.6
|
|
|
104.6
|
|
|
103.4
|
|
|
104.1
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
85.2
|
|
|
75.9
|
|
|
82.1
|
|
|
76.6
|
|
|
General and administrative
|
20.7
|
|
|
23.5
|
|
|
20.8
|
|
|
21.0
|
|
|
Reimbursable expenses
|
4.0
|
|
|
4.9
|
|
|
3.7
|
|
|
4.3
|
|
|
Total operating expenses
|
109.9
|
|
|
104.3
|
|
|
106.6
|
|
|
101.9
|
|
|
Operating income (loss)
|
(6.3
|
)
|
|
0.3
|
|
|
(3.2
|
)
|
|
2.2
|
|
|
Net interest expense
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
Income (loss) before income taxes
|
(6.4
|
)
|
|
0.3
|
|
|
(3.3
|
)
|
|
2.2
|
|
|
Income tax expense
|
2.7
|
|
|
—
|
|
|
1.2
|
|
|
(0.8
|
)
|
|
Net income (loss)
|
(3.7
|
)%
|
|
0.3
|
%
|
|
(2.1
|
)%
|
|
1.4
|
%
|
Three-Month Period Ended September 30, 2012 Compared to Three-Month Period Ended September 30, 2011
Net Revenue.
Net revenue increased $1.7 million, or 5.5%, to $32.0 million for the three-month period ended September 30, 2012 compared to $30.3 million for the three-month period ended September 30, 2011. The increase in net revenue was the result of the inclusion of our Latin America operations which contributed $3.9 million in net revenue for the three-month period ended September 30, 2012, offset by a reduction of $2.2 million in net revenue for all other locations, driven primarily by softer conditions in the North American professional services and TMT markets, and in the EMEA financial services and TMT markets. License fees from our Latin America licensee of $160,000 were included in net revenue for the three-month period ended September 30, 2011.
Compensation and Benefits Expenses.
Compensation and employee benefits expense increased $4.3 million, or 18.5%, to $27.3 million for the three-month period ended September 30, 2012, from $23.0 million for the three-month period ended September 30, 2011. As a percentage of net revenue, compensation and benefits increased to 85.2%. Excluding the reorganization charge of $1.1 million and the post-combination compensation charge of $1.5 million, compensation and benefits expense increased to 77.0% of net revenue for the three-month period ended September 30, 2012, compared to 75.9% for the three-month period ended September 30, 2011.
The $4.3 million increase in compensation and benefits expense is comprised of an increase of $2.3 million from our Latin America operation, a $1.5 million post-combination compensation charge and a $400,000 increase from all other locations. The $2.3 million increase from Latin America was comprised of a $1.4 million increase in consultant compensation and benefits expense which was the direct result of the $3.9 million increase in net revenues generated by our 16 Latin America search consultants, and a $900,000 increase in non-consultant compensation and benefits expense due to the addition of 68 support staff from the Latin America acquisition.
The $400,000 increase in compensation and benefits expense from all other locations consisted of a decrease in consultant compensation, benefits and payroll taxes of $1.0 million, offset by an increase of $1.1 million related to our reorganization and a decrease in talent acquisition costs of $1.0 million. The $1.0 million decrease in consultant compensation and benefits expense from continuing operations was a direct result of the $2.2 million decrease in net revenues in our non-Latin America locations. Additionally, there was a $1.4 million increase in non-consultant compensation and benefits expense primarily due to an increase in accrued discretionary bonuses of $1.1 million and a $200,000 increase in support staff salaries and search-completion bonuses.
General and Administrative Expenses.
General and administrative expenses decreased to $6.6 million, or 20.7% of net revenue for the three-month period ended September 30, 2012, from $7.1 million, or 23.5% of net revenue for the three-month period ended September 30, 2011. After the reorganization related foreign currency credit of $150,000, the decrease in general and administrative expenses was primarily due to a $100,000 decrease in consulting expenses, a $100,000 decrease in professional fees, a $100,000 decrease in our IT infrastructure expense, a $400,000 decrease in foreign currency expense, as a result of positive rate fluctuations in Singapore and France, and a $250,000 decrease in bad debt expense due to increased collections, offset by the inclusion of $700,000 of operating expenses from our Latin America offices.
Operating Income.
For the three-month period ended September 30, 2012, we reported an operating loss of $2.0 million, which includes a post-combination compensation charge of $1.5 million and a $964,000 reorganization charge, compared to operating income of $100,000 for the three-month period ended September 30, 2011, Without the effect of the post-combination compensation charge or the reorganization charge, operating income increased to $475,000. Operating results include an increase in net revenues of $1.7 million, and a reduction in general and administrative expenses of $500,000 offset by an increase in compensation and benefits expense of $4.3 million. The net revenues and operating loss attributable to Latin America and included in the consolidated statement of operations for the three months ended September 30, 2012, were $3.9 million and $599,000, respectively. Excluding the post-combination compensation expense charge, Latin America contributed $800,000 of operating income.
Net Interest Expense.
Net interest expense increased to $44,000 for the three-month period ended September 30, 2012, compared to $1,000 interest income for the three-month period ended September 30, 2011. The increase in net interest expense is principally due to a $47,000 increase in imputed interest expense related to the seller note for the Latin America acquisition.
Income Before Taxes and Income Tax Expense.
For the three-month period ended September 30, 2012, we reported a loss before taxes of $2.1 million and recorded an income tax benefit of $900,000, compared to income before income taxes of $99,000 and income tax expense of $9,000 for the three-month period ended September 30, 2011. Included in our results is a restructuring charge of $576,000, net of tax, and a post-combination compensation charge of $964,000, net of tax. Our effective income tax benefit rate for the third quarter was 38.1%.
Nine-Month Period Ended September 30, 2012 Compared to Nine-Month Period Ended September 30, 2011
Net Revenue.
Net revenue increased $4.3 million, or 4.5%, to $98.2 million for the nine-month period ended September 30, 2012, compared to $93.9 million for the nine-month period ended September 30, 2011. The increase in net revenue was the result of the inclusion of our Latin American operations which contributed $9.9 million in net revenue for the nine-month period ended September 30, 2012, offset by a reduction of $5.6 million in net revenue for all other locations, primarily due to softer market conditions in North America and EMEA, in particular, in the professional services industry. License fees from our Latin America licensee of $450,000 were included in net revenue for the nine -month period ended September 30, 2011.
Compensation and Benefits Expenses.
Compensation and employee benefits expense increased $8.7 million, or 12.1%, to $80.7 million for the nine-month period ended September 30, 2012, from $72.0 million for the nine-month period ended September 30, 2011. As a percentage of net revenue, compensation and benefits increased to 82.1%. Excluding the reorganization charge of $1.1 million and the post-combination compensation charge of $4.7 million, compensation and benefits expense decreased to 76.4% of net revenue for the nine-month period ended September 30,2012, compared to 76.6% for the nine-month period ended September 30, 2011.
The $8.7 million increase in compensation and benefits expense is comprised of an increase of $6.0 million from our Latin America operation, a post-combination compensation charge of $4.6 million, offset by a $1.9 million decrease from all other locations due to lower consultant headcount and lower revenues. The $6.0 million increase from Latin America was comprised of a $3.8 million increase in consultant compensation and benefits expense which was the direct result of the $9.9 million increase in net revenues generated by our 16 Latin America search consultants, and a $2.2 million increase in non-consultant compensation and benefits expense due to the addition of 68 support staff from the Latin America acquisition.
The $1.9 million decrease in compensation and benefits expense from all other locations consisted of a decrease in consultant compensation, benefits and payroll taxes of $2.8 million, offset by an increase of $1.1 million related to our reorganization, and a decrease in talent acquisition costs of $1.7 million. The $1.9 million decrease in consultant compensation and benefits expense was a direct result of the $5.7 million decrease in net revenues in our non-Latin America locations. Additionally, there was a $1.6 million increase in non-consultant compensation and benefits expense primarily due to an increase in accrued discretionary bonus of $1.0 million and a $500,000 increase in support staff salaries and search-completion bonuses.
General and Administrative Expenses.
General and administrative expenses increased to $20.4 million, or 21.0% of net revenue for the nine-month period ended September 30, 2012, from $19.7 million, or 20.8% of net revenue for the nine-month period ended September 30, 2011. The increase was offset by the $150,000 reorganization credit. After the reorganization credit, the increase in general and administrative expenses was primarily the result of the inclusion of $1.8 million of operating expenses from our Latin America offices and an increase of $300,000 in professional fees, offset by a reduction of $400,000 in foreign currency expense, as a result of positive rate fluctuations in Singapore and France, a reduction of $200,000 in internal recruiting costs, a reduction of $100,000 in bad debt expense, a reduction of $150,000 in business development, and a reduction of $200,000 in other costs.
Operating Income.
Operating income decreased $5.3 million to an operating loss of $3.3 million for the nine-month period ended September 30, 2012, compared to operating income of $2.1 million for the nine-month period ended September 30, 2011. The decrease primarily reflects an increase in net revenues of $4.3 million offset by an increase in compensation and benefits expense of $8.7 million, an increase of $1.1 million in general and administrative expenses, and a reorganization charge of $964,000. The net revenues and operating loss attributable to the Latin America acquisition since the acquisition date, included in the consolidated statement of operations for the nine months ended September 30, 2012, were $
9.9 million
and $
2.3 million
, respectively. Excluding the post-combination compensation expense charge, Latin America contributed $2.1 million of operating income.
Net Interest Expense.
Net interest expense increased to $120,000 for the nine-month period ended September 30, 2012, compared to $2,000 net interest expense for the nine-month period ended September 30, 2011. The increase in net interest expense is principally due to a $144,000 increase in imputed interest expense related to the seller note for the Latin America acquisition.
Income Before Taxes and Income Tax Expense.
For the nine-month period ended September 30, 2012, we reported a loss before income tax of
3.3 million
and recorded an income tax benefit of $
1.2 million
, compared to income before tax of $2.1 million and income tax expense of $750,000 for the nine month period ended September 30, 2011. Included in our results is a restructuring charge of $576,000, net of tax, and a post-combination compensation charge of $2.8 million, net of tax. Our effective income tax rate for the nine-month period ended September 30, 2012, was 38.5% compared to 36.0% for the nine-months ended September 30, 2011.
Liquidity and Capital Resources
General.
Our primary sources of liquidity are cash, cash flow from operations and borrowing availability under our revolving credit facility. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our existing cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future.
The following table summarizes our cash flow for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
Net cash provided by operating activities
|
$
|
(2,144,213
|
)
|
|
$
|
1,996,536
|
|
|
Net cash used in investing activities
|
(3,224,466
|
)
|
|
(2,284,012
|
)
|
|
Net cash used in financing activities
|
(1,114,260
|
)
|
|
(579,840
|
)
|
|
Net decrease in cash
|
$
|
(6,482,939
|
)
|
|
$
|
(867,316
|
)
|
Cash.
Cash at September 30, 2012, was $
14.9 million
, as compared to $
21.8 million
at December 31, 2011. The decrease in cash principally reflects a decrease in cash provided operating activities of $4.1 million, an increase of cash used in investing activities of $0.9 million, $3.0 million of which was related to the purchase of our Latin America licensee, offset by a decrease of capital expenditures of $2.1 million, and a $500,000 increase in cash used in financing activities.
Cash Flow from Operating Activities.
Cash used in operating activities was $
2.1 million
in the nine-month period ended September 30, 2012, compared to cash provided by operating activities of $
2.0 million
in the nine-month period ended September 30, 2011. The $4.1 million decrease in cash provided by operating activities is primarily due to (i) a decrease in net income of $3.4 million, (ii) a decrease in accounts receivable of $3.0 million due to more favorable collections, (iii) a decrease in accrued compensation of $2.7 million, which was principally due to a decrease in our non-Latin America revenue, which directly impacts accrued consultant compensation, (iv) a $1.0 million decrease in share-based compensation offset by (v) a net post-combination compensation charge of $2.4 million, (vi) an increase in accounts payable and other accrued expenses of $1.6 million, (vii) an increase in other assets and other receivables of $0.9 million, (viii) a reorganization charge of $0.9 million and, (iv) an increase in taxes deferred and receivable of $0.7 million.
Cash from Investing Activities.
For the nine-month period ended September 30, 2012, cash used in investing activities was $3.2 million compared to $2.3 million for the nine-month period ended September 30, 2011. The increase was due to the $3.0 million used in the acquisition of our Latin America licensee, offset by a decrease of $2.1 million in capital expenditures.
Cash from Financing Activities.
For the nine-month period ended September 30, 2012, cash used in financing activities was $1.1 million consisting of $116,000 of payments made on long-term debt and $1.0 million used to repurchase shares. Cash used in financing activities for the nine-month period ended September 30, 2011, was $600,000 consisting of payments made on long-term debt of $144,000 and $436,000 used to repurchase shares.
Off-Balance Sheet Arrangements.
We do not have off-balance sheet arrangements, special purpose entities, trading activities or non-exchange traded contracts.
Recently Adopted Financial Accounting Standards
On January 1, 2012, we adopted the Financial Accounting Standards Board’s guidance to increase the prominence of other comprehensive income within the financial statements. The guidance requires entities to present the components of net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to only present other comprehensive income within the statement of stockholders’ equity has been eliminated. We have presented the components of net income and other comprehensive income in two separate, but consecutive, statements of net income and other comprehensive income.
On January 1, 2012, the Financial Accounting Standards Board Accounting Standards Update No. 2011-08,
Testing Goodwill for Impairment
, became effective. This standard gives an entity the option of performing a qualitative assessment to determine whether it is necessary to perform step 1 of the annual goodwill impairment test. An entity is required to perform step 1, only if it concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some, or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to step 1 of the impairment test. We perform our impairment test during the fourth quarter of each year.