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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-8496
THINKENGINE NETWORKS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 20-8058881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Nickerson Road, Marlborough, MA 01752
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 508-624-7600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The Registrant had 6,705,236 shares of common stock outstanding at November 6,
2007.
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TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
1. Financial Statements............................................. 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 12
3. Quantitative and Qualitative Disclosures about Market Risk....... 14
4T. Controls and Procedures.......................................... 14
PART II
OTHER INFORMATION
1A. Risk Factors..................................................... 15
6. Exhibits......................................................... 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKENGINE NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS Sept. 30, December 31,
2007 2006
-------- --------
Current assets
Cash and cash equivalents $ 1,618 $ 2,764
Accounts receivable, net 533 1,354
Inventories, net 890 1,439
Other current assets 111 270
-------- --------
Total current assets 3,152 5,827
Loans to officers -- 444
Property, plant and equipment, net 699 970
Intangible assets, net 3,004 3,356
Other assets, net 135 49
-------- --------
Total assets $ 6,990 $ 10,646
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 403 $ 114
Notes payable - current portion 833 --
Accrued compensation and benefits 762 932
Deferred service revenues 435 522
Other accrued expenses 569 966
-------- --------
Total current liabilities 3,002 2,534
Long-term debt, less current portion 889 300
Other liabilities 554 664
Commitments and contingencies -- --
Stockholders' equity
Common stock, par value $.001 per share;
authorized 20,000,000 shares, issued 6,957,183 7 7
Additional paid-in capital 15,185 14,938
Accumulated deficit (11,396) (6,876)
Accumulated other comprehensive loss (564) (529)
-------- --------
3,232 7,540
Less cost of 250,996 and 179,356 common shares in treasury (687) (392)
-------- --------
Total stockholders' equity 2,545 7,148
-------- --------
Total liabilities and stockholders' equity $ 6,990 $ 10,646
======== ========
See Notes to the Consolidated Interim Financial Statements.
3
THINKENGINE NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands except per share data)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenues
Product $ 700 $ 1,455 $ 2,174 $ 5,676
Service 1,099 444 3,352 1,264
----------- ----------- ----------- -----------
1,799 1,899 5,526 6,940
Cost of revenues 757 866 2,185 3,643
----------- ----------- ----------- -----------
Gross margin 1,042 1,033 3,341 3,297
Other costs and expenses
Research and development 1,259 1,031 3,887 4,079
Selling, general and administrative 1,237 1,481 4,010 4,169
Interest expense 68 -- 226 --
Other (income), net (24) (101) (133) (281)
----------- ----------- ----------- -----------
2,540 2,411 7,990 7,967
----------- ----------- ----------- -----------
Pretax loss (1,498) (1,378) (4,649) (4,670)
Provision for (benefit from) income taxes (129) 15 (129) 45
----------- ----------- ----------- -----------
Net loss before cumulative effect of change in accounting principle (1,369) (1,393) (4,520) (4,715)
Cumulative effect of change in accounting principle, net of tax -- -- -- 36
----------- ----------- ----------- -----------
Net loss (1,369) (1,393) (4,520) (4,679)
Pension liability adjustment 129 -- 129 --
----------- ----------- ----------- -----------
Comprehensive loss $ (1,498) $ (1,393) $ (4,649) $ (4,679)
=========== =========== =========== ===========
Loss per share - basic and diluted:
Net loss before cumulative effect of change in
accounting $ (0.20) $ (0.20) $ (0.67) $ (0.66)
principle
Cumulative effect of change in accounting principle, net of tax -- -- -- .01
----------- ----------- ----------- -----------
Net loss $ (0.20) $ (0.20) $ (0.67) $ (0.65)
=========== =========== =========== ===========
Weighted average number of basic and diluted shares outstanding 6,706,384 7,015,523 6,741,353 7,189,017
See Notes to the Consolidated Interim Financial Statements.
4
THINKENGINE NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Nine Months Ended Sept. 30,
2007 2006
---------- ----------
Operating Activities
Net loss before cumulative effect of change in accounting principle $ (4,520) $ (4,715)
Adjustments to reconcile loss from operations to net
cash used by operating activities:
Deferred income taxes (129) --
Depreciation and amortization 931 1,226
Amortization of deferred financing costs 35 --
Amortization of debt discount 12 --
Loss on disposition of assets -- 56
Cumulative effect of change in accounting principle -- (36)
Stock-based compensation and warrant expense 479 646
Net (increase) decrease in:
Accounts receivable 821 2,348
Inventories 549 311
Other assets 181 (102)
Net increase (decrease) in:
Accounts payable 289 (458)
Accrued compensation and benefits (430) (946)
Deferred service revenues (87) (2,153)
Other accrued liabilities (397) 550
---------- ----------
Net cash used by operating activities
(2,266) (3,273)
---------- ----------
Investing Activities
Purchases of marketable securities -- (4,753)
Sale of marketable securities -- 7,967
Repayment of officer's loans -- 124
Additions to property, plant and equipment (211) (239)
---------- ----------
Net cash provided (used) by investing activities (211) 3,099
---------- ----------
Financing Activities
Payment for shares purchased for treasury (157) (452)
Proceeds from shares issued pursuant to stock plans 31 1
Payment of principal amount of term loan (43) --
Proceeds from term loan 1,500 --
---------- ----------
Net cash provided (used) by financing activities 1,331 (451)
---------- ----------
Decrease in cash and cash equivalents (1,146) (625)
Cash and cash equivalents - beginning of year 2,764 1,750
---------- ----------
Cash and cash equivalents - end of period $ 1,618 $ 1,125
========== ==========
5
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 130 $ 2
========== ==========
Income taxes, net $ 19 $ 0
========== ==========
Non-cash activity:
Repayment of loans to officers and accumulated
interest with common stock $ 465 $ 1,472
========== ==========
Cashless exercise of stock options in satisfaction of
loans due from officers $ 46 $ 0
========== ==========
Increase in deferred financing fees and other liabilities
in connection with term loan financing $ 150 $ 0
========== ==========
Stock warrants issued in connection with term loan and
financing agreements $ 59 $ 0
========== ==========
See Notes to Consolidated Interim Financial Statements.
6
THINKENGINE NETWORKS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2007
(dollars in thousands except per share data)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q
and Rule 10-01 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 statements. 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 three-month and nine-month periods ended September 30, 2007 are
not necessarily indicative of the results that may be expected for any other
interim period or for the year ending December 31, 2007. The balance sheet at
December 31, 2006 has been derived from the audited consolidated financial
statements at that date. For further information, refer to the consolidated
financial statements and footnotes thereto and the quarterly financial data
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
The results of operations for the three and nine months ended September 30, 2007
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2007.
NOTE 2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
decisions regarding accounting policies and judgments regarding their
application. Materially different amounts could be reported under different
circumstances and conditions.
REVENUE
The Company generally recognizes product revenue, net of sales discounts and
allowances, when persuasive evidence of an arrangement exists, shipment or
delivery (dependent upon the terms of the sale) has occurred, all significant
contractual obligations have been satisfied, the amount is fixed or determinable
and collection is considered probable. Sales of services and system support are
deferred and recognized ratably over the contract period.
INVENTORIES
Sept. 30, December 31,
2007 2006
------ ------
Finished goods $ 644 $ 579
Raw materials 246 860
------ ------
$ 890 $1,439
====== ======
Netted in the above amounts is the Company's reserve for slow-moving and
obsolete inventories totaling $3,360 and $3,337 at September 30, 2007 and
December 31, 2006, respectively.
OTHER LIABILITIES
Sept. 30, December 31,
2007 2006
------ ------
Accrued supplemental pension plan $ 211 $ 254
Deferred compensation 110 139
Accrued pension expense 425 634
Financing fee payable 150 --
------ ------
896 1,027
Less current portion 342 363
------ ------
$ 554 $ 664
====== ======
7
BORROWINGS
On January 16, 2007, the Company borrowed $1,500 under a term loan agreement.
The loan bears interest at the rate of 13% per annum, matures on February 10,
2010 and requires an additional $150 payment to the lender on the maturity date.
The loan is to be repaid in six interest-only monthly installments followed by
thirty monthly installments of principal and interest. The Company pledged as
collateral substantially all of its non-intellectual property business, except
pledged receivables under its accounts receivable financing agreement. In
connection with the loan agreement, the Company issued a ten-year common stock
warrant to the lender to purchase 35,000 shares of the Company's common stock at
an exercise price of $3.47 which was the closing market price on January 16,
2007. The fair value of the warrant is estimated to be $49, based on the
assumption that it will be exercised at the termination of the loan and thus
have an estimated life of three years.
On September 28, 2007, the Company entered into a accounts receivable financing
agreement. Pursuant to the financing agreement, the lender may advance the
Company from time to time up to $1.0 million, based upon the sum of 80% of the
face value of accounts receivable purchased by the lender from the Company from
time to time at the lender's sole discretion. The sale of such accounts
receivable is with full recourse against the Company. Advances under the
financing agreement bear interest at a rate of 1.65% per month, subject to
adjustment depending on changes in the commercial prime rate. The financing
agreement has a term of one year (with an evergreen annual renewal provision
unless either party provides notice of termination) and contains certain
customary non-financial covenants but does not contain any financial covenants.
Pursuant to the financing agreement, the Company pledged as collateral to the
lender substantially all its non-intellectual property business assets. In
connection with the financing agreement, the Company issued a five-year common
stock warrant to the lender to purchase 21,276 shares of the Company's common
stock at an exercise price of $1.88 per share which was the closing market price
on September 28, 2007. The fair value of the warrant is estimated to be $10,
based on the assumption that it will be exercised at the termination of the
agreement and thus have an estimated life of one year. No receivables were
financed as of September 30, 2007.
INCOME PER SHARE
In computing basic earnings per share, the dilutive effect of stock options and
warrants are excluded, whereas for diluted earnings per share they are included.
For all periods presented, options and warrants were anti-dilutive and therefore
were not included in the determination of net loss per share.
COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances involving
non-owner sources.
STOCK-BASED COMPENSATION
Share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as an expense over the employee's
requisite service period (generally the vesting period of the equity grant).
The Company has recognized compensation expense for its restricted stock grants.
In the first quarter of 2006, upon adoption of SFAS 123(R), using the modified
prospective method, the Company recognized a benefit of $36 as a cumulative
effect of a change in accounting principle resulting from the requirement to
estimate forfeitures of the Company's restricted stock grants at the date of
grant instead of recognizing them as incurred. The estimated forfeiture rate was
applied to the previously recorded compensation expense of the Company's
unvested restricted stock in determining the cumulative effect of a change in
accounting principle.
The Company has stock-based compensation plans under which directors, officers
and other eligible employees receive stock options and other equity-based
awards. The plans provide for the grant of stock options and restricted stock
awards. Stock options are granted with an exercise price equal to the market
value of a share of common stock on the date of grant. Stock option grants
generally expire in 10 years, and generally vest over a period ranging from two
to four years. Restricted stock awards generally vest over four years.
8
The following table summarizes stock option activity:
Inducement 1990 Stock Directors'
Options Option Plan Option Plan
------- ----------- -----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at December 31, 2006 566,666 $2.62 973,133 $3.62 166,750 $2.84
Granted -- 349,000 $2.76 20,500 $2.17
Exercised -- (58,166) $1.97 (35,000) $1.95
Forfeited/expired (95,001) $2.55 (217,595) $4.42 (35,500) $2.27
------- --------- -------
Outstanding at September 30, 2007 471,665 $2.63 1,046,372 $3.26 116,750 $3.01
======= ========= =======
Shares available for future grant 0 459,328 197,750
======= ========= =======
Weighted average remaining term 7.0 years 5.9 years 3.9 years
Exercisable at September 30, 2007 309,992 $2.62 506,479 $3.76 95,250 $3.19
======= ========= =======
Intrinsic value:
Outstanding $ 0 $ 38 $ 3
Exercisable $ 0 $ 38 $ 3
The intrinsic value for stock options is calculated based on the exercise price
of the underlying awards and the market price of the Company's common stock as
of the reporting date.
The following table summarizes non-vested restricted stock activity:
Stock Plan Inducement
Shares Shares
------ -------
Unvested as of December 31, 2006 22,500 275,000
Granted -- --
Vested (1,100) --
Forfeited (18,400) --
------- -------
Unvested as of September 30, 2007 3,000 275,000
======= =======
Shares available for future grant 413,600 0
======= =======
9
The following table summarizes the components and classification of stock-based
compensation expense included in the Statement of Operations:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2007 2006 2007 2006
---- ---- ---- ----
Stock options $ 103 $ 183 $ 369 $ 574
Restricted stock 35 22 100 72
----- ----- ----- -----
Total stock-based compensation expense $ 138 $ 205 $ 469 $ 646
===== ===== ===== =====
Cost of revenues $ 13 $ 15 $ 37 $ 41
Research and development (5) 156 32 390
Selling, general and administrative 130 34 400 215
----- ----- ----- -----
Total stock-based compensation expense $ 138 $ 205 $ 469 $ 646
===== ===== ===== =====
No tax benefits were attributed to the stock-based compensation expense because
a valuation allowance is maintained for substantially all net deferred tax
assets. The Company elected to adopt the alternative method of calculating the
historical pool of windfall tax benefits as permitted by FASB Staff Position FAS
123(R)-3, as amended "Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards." This is a simplified method to determine
the pool of windfall tax benefits that is used in determining the tax effects of
stock compensation in the results of operations and cash flow reporting for
awards that were outstanding as of the adoption of SFAS 123(R).
The Company estimates the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock
options include the exercise price of the award, the expected option term, the
expected volatility of the Company's stock over the option's expected term, the
risk-free interest rate over the option's expected term, and the Company's
expected annual dividend yield. The Company believes that the valuation
technique and the approach utilized to develop the underlying assumptions are
appropriate in calculating the fair values of the Company's stock options
granted during the nine months ended September 30, 2007. Estimates of fair value
are not intended to predict actual future events or the value ultimately
realized by persons who receive stock option awards. The following table
summarizes the assumptions used to compute the weighted average fair value of
stock option grants of $0 and $446, respectively, for the three-month and
nine-month periods ended September 30, 2007.
Three Months Nine Months
------------ -----------
Dividend yield 0.0% 0.0%
Weighted average volatility 43.3% 41.1%
Risk-free interest rate 4.9% 4.2%
Expected holding period (in years) 4.0 4.0
No dividend yield was assumed because the Company has never paid a cash
dividend, and has no plans at this time to pay any dividends in the future. The
weighted average volatility for the current period was developed using
historical volatility. The risk-free interest rate was developed using the U.S.
Treasury yield for periods equal to the expected life of the options on the
grant date. An increase in the risk-free interest rate will increase stock
compensation expense. The expected holding period was developed after
considering vesting schedules, life of the options, historical experience and
estimates of future exercise behavior patterns. An increase in the expected
holding period would increase stock compensation expense.
SFAS 123R requires the recognition of stock-based compensation for the number of
awards that are ultimately expected to vest. As a result, for most awards,
recognized stock compensation was reduced for estimated forfeitures prior to
vesting based on estimated annual forfeiture rates of approximately 15%.
Estimated forfeitures will be reassessed in subsequent periods and may change
based on new facts and circumstances.
As of September 30, 2007, approximately $0.9 million of unrecognized stock
compensation expense related to unvested awards (net of estimated forfeitures)
is expected to be recognized over a period of 3.7 years.
10
PENSION PLAN
The Company's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time. The Company had funding
requirements of $229 in 2007 of which $94 was funded during the quarter ended
September 30, 2007, and $229 during the nine months ended September 30, 2007.
The components of net periodic benefit cost of the plan for the three-month and
nine-month periods ended September 30 are as follows:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2007 2006 2007 2006
---- ---- ---- ----
Interest cost on projected benefit
obligation $ 18 $ 19 $ 62 $ 61
Expected return on plan assets (18) (18) (59) (51)
Amortization of net loss 10 14 32 35
---- ---- ---- ----
Net periodic pension cost $ 10 $ 15 $ 35 $ 45
==== ===== ==== ====
INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109, or
FIN 48, on January 1, 2007. The interpretation contains a two step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50%
likely of being realized upon ultimate settlement. The adoption of this
statement by the Company did not have any material impact on its financial
statements.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
tax examinations for years before 2005. State jurisdictions that remain subject
to examination range from years before 2000 to 2006. The Company does not
believe there will be any material changes in its unrecognized tax positions
over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits. Additionally, no
interest expense was recognized year-to-date. The Company's effective tax rate
differs from the federal statutory rate primarily due to non-deductible expenses
and is offset somewhat by state tax credits.
As a result of the Company's continued review of its tax positions during the
period ended September 30, 2007, the Company reversed a tax liability previously
booked in relation to the defined benefit pension plan.
RELATED PARTY TRANSACTIONS
In February 2007, a former officer repaid loans and accumulated interest of
$431. Repayment consisted of 140,813 shares of the Company's common stock,
valued at the closing market price at the date of the repayment of the loans. In
May 2007, another former officer repaid loans and accumulated interest of $34.
Repayment consisted of 15,159 shares of the Company's common stock, valued at
the closing market price at the date of the repayment of the loans.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157 ("SFAS No. 157"), "Fair Value Measurements", which is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years, with early adoption permitted.
SFAS No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability and
establishes a fair value hierarchy that prioritizes the
11
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The Company has not yet determined the effect, if any, that the
implementation of SFAS No. 157 will have on the financial position or results of
operations of the Company.
In February 2007, the FASB issued Statement of Financial Accounting Standard No.
159 (SFAS No. 159), "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115" which is
effective for fiscal years beginning after November 15, 2007. SFAS 159 provides
entities the option to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 is expected to
expand the use of fair value measurement, which is consistent with the long-term
measurement objectives for accounting for financial instruments. The Company is
currently evaluating the potential impact of this statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Factors That May Affect Future Results
--------------------------------------
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include management's
expectations for future operations, financial position and operating results, as
well as statements regarding the strategy, plans and objectives of the Company.
Our actual experience may differ materially from that discussed in the
forward-looking statements. Factors that might cause such a difference or
otherwise affect our future results of operations include: limited customers and
products; developments with our primary customers' business, networks and
multi-vendor relationships; development of our direct sales capabilities and
channel relationships; restructuring effects; risks associated with competition
and competitive pricing pressures; our ability to stabilize revenues and manage
costs; our ability to obtain component parts; our reliance on contract
manufacturers and our ability to forecast manufacturing requirements; customer
purchasing patterns and commitments; potential liability for defects or errors
in our products; the size, timing and recognition of revenue from customers; our
ability to develop new products and product enhancements; market acceptance of
new product offerings and enhancements to our products and our ability to
predict and respond to market developments; failure to keep pace with the
rapidly changing requirements of our customers; our ability to attract and
retain key personnel; risks associated with international sales and operations;
our ability to identify, analyze and consummate strategic alternatives; the
sufficiency of our intellectual property rights; our ability to obtain
additional financing; inability to maintain the continued listing of our common
stock on the American Stock Exchange; any failure to comply with the internal
control requirements of Sarbanes-Oxley; as well as risks of a downturn in
economic conditions generally, and in the telecommunications and cable broadband
industries specifically. For a more detailed description of the risk factors
associated with the Company, please refer to its Annual Report on Form 10-K for
the fiscal year ended December 31, 2006 as filed with the Securities and
Exchange Commission on March 27, 2007.
Results of Operations
---------------------
Total revenue was $1.8 million in the third quarter of 2007 versus $1.9 million
in the third quarter of 2006. Product revenue for the third quarter of 2007
decreased $0.8 million versus 2006 primarily due to the lower level of orders.
Total revenue was $5.5 million for the nine-month period ended September 30,
2007 versus $6.9 million in 2006. Product revenue for the nine months ended
September 30, 2007 decreased $3.5 million primarily due to lower orders, and the
fact that 2006 revenue included $1.9 million related to shipments made to one
customer in August 2005 that was not recognized as revenue until the first
quarter of 2006.
Service revenue increased $0.7 million and $2.1 million during the three and
nine months ended September 30, 2007, respectively, due to increased sales of
spare parts, an increase in maintenance contract related revenues, and the
recognition in the second quarter of 2007 of $0.2 million for a custom
development project which was completed in 2006.
Gross margin was 58% in the quarter ended September 30, 2007 versus 54% in the
third quarter of 2006, and was 60% for the nine-month period ended September 30,
2007 versus 48% for the corresponding period in 2006. The 2007 increase was
primarily due to lower personnel costs in 2007 than in 2006, and the fact that
there were $0.4 million in contract cancellation fees in the second quarter of
2006.
Research and development expenses increased $0.2 million for the three-month
period ended September 30, 2007 compared to 2006 primarily due to charges for
the development of the European Union compliant version of the VSR1000. The
level of year-to-date spending was $0.2 million lower in 2007, with lower
personnel costs in 2007 being partially offset by the product development
expenses.
12
Selling, general and administrative expenses decreased $0.2 million for the
three-month period ended September 30, 2007 compared to 2006, and by $0.2
million for the nine-month period ended September 30, 2007 versus the
corresponding period in 2006, primarily due to lower personnel costs.
Interest expense reflects interest incurred on the term loan which the Company
borrowed in January 2007. Other income decreased due to lower interest income
earned as a result of lower balances available for investment in 2007 versus
2006.
No tax benefits were provided for losses incurred in 2007 or 2006 since the
Company cannot determine that the realization of the net deferred tax asset is
more likely than not. During the period ended September 30, 2007, the Company
reversed a tax liability previously booked in relation to the defined benefit
pension plan.
Liquidity and Sources of Capital
--------------------------------
Net cash used by operations for the nine months ended September 30, 2007 was
$2.3 million versus $3.3 million used in the comparable period of 2006. Cash
used by investing activities in 2007 versus 2006 reflects the absence of any net
proceeds from the sale of marketable securities. The decrease in cash and
investments from the prior year is primarily attributable to the continued
losses. Cash provided by financing activities of $1.3 million in 2007 is
attributable to the Company borrowing $1.5 million under a term loan agreement.
Working capital and the ratio of current assets to current liabilities were $0.1
million and 1.05:1 at September 30, 2007 compared to $3.3 million and 2.30:1 at
December 31, 2006. The decrease in working capital is primarily due to the net
losses incurred over the last nine months, partially offset by the proceeds from
the $1.5 million term loan which the Company borrowed in January 2007.
The Company does not anticipate making any significant capital expenditures
during the remainder of 2007.
On September 28, 2007, the Company entered into a financing agreement under
which the Company may borrow up to $1 million against its eligible trade
receivables. Management believes that with the funds available under this
agreement, the Company should have sufficient funds to meet the Company's cash
requirements for the immediate future. We have not been able to obtain operating
profitability during the past five years from continuing operations and may not
be able to be profitable on a quarterly or annual basis in the future.
Management's initiatives over the last two years, including the cost reductions
and securing additional debt financings in 2007 have been designed to improve
operating results and liquidity and better position ThinkEngine Networks to
compete under current market conditions. However, we may in the future be
required to seek new sources of financing or future accommodations from our
existing lender or other financial institutions, or we may seek equity infusions
from private investors. Our ability to fund our operations is heavily dependent
on the growth of our revenues over current levels to achieve profitable
operations. We may be required to further reduce operating costs in order to
meet our obligations. If we are unable to achieve profitable operations or
secure additional sources of capital, there would be substantial doubt about our
long term ability to fund future operations. No assurance can be given that
management's initiatives will be successful or that any such additional sources
of financing, lender accommodations or equity infusions will be available. The
Company cannot provide assurances that these additional sources of funds will be
available or, if available, what the terms would be.
Contractual Obligations
-----------------------
At September 30, 2007, the Company's contractual obligations were as follows:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
---------------- --------- ---------
Term loan $ 706 $1,150 $ 0
Operating leases $ 306 $ 195 $ 0
Purchase commitments $ 174 $ 8 $ 0
Term loan payments include principal, interest and financing fee. Payments made
under operating leases are treated as rent expense. Purchase commitments are
primarily in relation to purchasing inventory from an outsource manufacturer of
certain of the Company's products, or purchases from components vendors.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivatives subject to fluctuations in market rates.
Currently, the Company has no outstanding balances that are subject to
fluctuations in market rates. The base rate on advances under the recent
financing agreement fluctuates with the commercial prime rate.
ITEM 4T. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based on the definition of "disclosure controls
and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. The Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of September 30, 2007. Based
upon the foregoing, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of September 30, 2007.
During the period covered by this Form 10-Q, the Company made changes to its
internal controls, designed to centralize its financial reporting in light of
changes made to the organizational structure of the Company as reported in Form
10-K for the year-ended December 31, 2006. There were no other changes in the
Company's internal control over financial reporting that have materially
affected, or reasonably likely to materially affect the Company's internal
controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a detailed description of the risk factors associated with the Company,
please refer to its Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 as filed with the Securities and Exchange Commission on March
27, 2007.
THE COMPANY'S COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE.
On August 20, 2007, ThinkEngine Networks, Inc. (the "Company") received a
written notice from the American Stock Exchange (the "Exchange" or "AMEX")
indicating that the Exchange has reviewed and accepted the Company's plan to
regain listing qualification compliance. With the acceptance of the plan, the
Company will be able to continue its listing during the plan period pursuant to
an extension granted until November 22, 2008. Pursuant to the letter, the
Exchange also advised the Company that it has triggered an additional deficiency
with respect to Section 1003(a)(ii) of the AMEX Company Guide as more fully
described in the next paragraph.
The Company is below certain of the Exchange's continued listing standards, as
set forth in Section 1003 (a) (iii) of the AMEX Company Guide, because as of
March 31, 2007 the Company had Stockholders' Equity of less than $6,000,000 and
had sustained losses from continuing operations and/or net losses in its five
most recent fiscal years; and, as set forth in Section 1003 (a) (ii) of the AMEX
Company Guide, because, as of June 30, 2007, the Company had Stockholders'
Equity of less than $4,000,000 and had sustained losses from continuing
operations and/or net losses in three out of its four most recent fiscal years.
During the interim period until November 22, 2008, the Company must continue to
provide the AMEX staff with updates regarding initiatives set forth in its plan
of compliance. The Company will be subject to periodic review by the AMEX staff
during the interim period. If the Company is not in compliance with the
continued listing standards on November 28, 2008 or the Company does not make
progress consistent with the plan during the interim period, then the AMEX may
initiate immediate delisting proceedings. If the Company's common stock is
de-listed from the AMEX, the trading market for the Company's shares may be
adversely affected.
If ThinkEngine's common stock were to be de-listed by the American Stock
Exchange, we might be unable to list our common stock with another stock
exchange. In that event, trading of our common stock might be limited to the OTC
Bulletin Board or similar quotation system. Inclusion of our common stock on the
OTC Bulletin Board or similar quotation system could adversely affect the
liquidity and price of our common stock and make it more difficult for
ThinkEngine Networks to raise additional capital on favorable terms, if at all.
In addition, de-listing by the American Stock Exchange might negatively impact
ThinkEngine's reputation and, as a consequence, its business.
15
ITEM 6. EXHIBITS
Index to Exhibits
Exhibit
31.1 Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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.
ThinkEngine Networks, Inc.
(Registrant)
Date: November 13, 2007 By: /s/ John E. Steinkrauss
---------------------------
John E. Steinkrauss
Vice President, Treasurer
and Chief Financial Officer
16