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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 June 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 has 6,707,367 shares of common stock outstanding at August 8,
2007.
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1
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.............................. 10
3. Quantitative and Qualitative Disclosures About Market Risk....... 12
4T. Controls and Procedures.......................................... 12
PART II
OTHER INFORMATION
1A. Risk Factors..................................................... 13
2. Unregistered Sales of Equity Securities and Use of Proceeds...... 13
4. Submission of Matters to a Vote of Security Holders.............. 13
6. Exhibits......................................................... 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKENGINE NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
ASSETS 2007 2006
-------- --------
Current assets
Cash and cash equivalents $ 2,909 $ 2,764
Accounts receivable, net 562 1,354
Inventories, net 818 1,439
Other current assets 156 270
-------- --------
Total current assets 4,445 5,827
Loans to officers -- 444
Property, plant and equipment, net 872 970
Intangible assets, net 3,121 3,356
Other assets, net 148 49
-------- --------
Total assets $ 8,586 $ 10,646
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 263 $ 114
Notes payable - current portion 731 --
Accrued compensation and benefits 833 932
Deferred service revenues 401 522
Other accrued expenses 853 966
-------- --------
Total current liabilities 3,081 2,534
Long-term debt, less current portion 1,028 300
Other liabilities 679 664
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 15,032 14,938
Accumulated deficit (10,027) (6,876)
Accumulated other comprehensive loss (529) (529)
-------- --------
4,483 7,540
Less cost of 249,816 and 179,356 common
shares in treasury (685) (392)
-------- --------
Total stockholders' equity 3,798 7,148
-------- --------
Total liabilities and stockholders' equity $ 8,586 $ 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 Six Months
Ended June 30, Ended June 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenues:
Product $ 542 $ 1,159 $ 1,474 $ 4,221
Service 1,131 417 2,252 820
----------- ----------- ----------- -----------
1,673 1,576 3,726 5,041
Cost of revenues 745 1,381 1,428 2,777
----------- ----------- ----------- -----------
Gross margin 928 195 2,298 2,264
Other costs and expenses:
Research and development 1,247 1,535 2,629 3,048
Selling, general and administrative 1,282 1,291 2,771 2,688
Interest expense 94 -- 158 --
Other (income) expense, net (39) (74) (109) (180)
----------- ----------- ----------- -----------
2,584 2,752 5,449 5,556
----------- ----------- ----------- -----------
Pretax loss (1,656) (2,557) (3,151) (3,292)
Provision for income taxes -- 15 -- 30
----------- ----------- ----------- -----------
Net loss before cumulative effect of change in
accounting principle (1,656) (2,572) (3,151) (3,322)
Cumulative effect of change in accounting principle,
net of tax -- -- -- 36
----------- ----------- ----------- -----------
Net loss and comprehensive loss $ (1,656) $ (2,572) $ (3,151) $ (3,286)
=========== =========== =========== ===========
Loss per share - basic and diluted:
Net loss before cumulative effect of change in
accounting principle $ (0.25) $ (0.36) $ (0.47) $ (0.46)
Cumulative effect of change in accounting principle,
net of tax -- -- -- 0.01
----------- ----------- ----------- -----------
Net loss $ (0.25) $ (0.36) $ (0.47) $ (0.45)
=========== =========== =========== ===========
Weighted average number of basic and diluted shares outstanding 6,714,980 7,231,053 6,758,837 7,290,265
See Notes to the Consolidated Interim Financial Statements.
4
THINKENGINE NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six Months Ended June 30,
2007 2006
-------- --------
Operating Activities
Net loss $ (3,151) $ (3,286)
Adjustments to reconcile loss from operations to net
cash used by operating activities:
Depreciation and amortization 542 262
Amortization of deferred financing costs 23 --
Amortization of debt discount 8 --
Loss on disposition of assets -- 56
Cumulative effect of change in accounting principle -- (36)
Stock-based compensation 332 440
Net (increase) decrease in:
Accounts receivable 792 2,002
Inventories 621 278
Other assets 134 (152)
Net increase (decrease) in:
Accounts payable 149 (548)
Accrued compensation and benefits and other liabilities (234) (53)
Deferred service revenues (121) (2,005)
Other accrued expenses (113) 353
-------- --------
Net cash used by operating activities (1,018) (2,689)
-------- --------
Investing Activities
Purchases of marketable securities -- (2,800)
Sale of marketable securities -- 5,599
Repayment of officer's loans -- 887
Additions to property, plant and equipment
--------
(211) (234)
Net cash provided (used) by investing activities (211) 3,452
-------- --------
Financing Activities
Payment for shares purchased for treasury (157) (788)
Proceeds from shares issued pursuant to stock plans 31 --
Proceeds from term loan 1,500 --
-------- --------
Net cash provided (used) by financing activities 1,374 (788)
-------- --------
Increase (decrease) in cash and cash equivalents 145 (25)
Cash and cash equivalents - beginning of year 2,764 1,750
-------- --------
Cash and cash equivalents - end of period $ 2,909 $ 1,725
======== ========
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Interest $ 77 $ --
======== ========
Income taxes, net $ 16 $ 2
======== ========
Non-cash activity:
Repayment of loans to officers and accumulated interest with common stock $ 465 $ 788
======== ========
Cashless exercise of stock options in satisfaction of loans due from officers $ 46 $ 38
======== ========
Increase in deferred financing fees and other liabilities
in connection with term loan financing fee $ 150 $ --
======== ========
Debt discount - stock warrants issued in connection with term loan $ 49 $ --
======== ========
See Notes to Consolidated Interim Financial Statements.
5
THINKENGINE NETWORKS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 six-month periods ended June 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.
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
critical 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
June 30, December 31,
2007 2006
------ ------
Finished goods $ 318 $ 579
Raw materials 500 860
------ ------
$ 818 $1,439
====== ======
Netted in the above amounts is the Company's reserve for slow-moving and
obsolete inventories totaling $3,419 and $3,337 at June 30, 2007 and December
31, 2006, respectively.
NON-CURRENT LIABILITIES
June 30, December 31,
2007 2006
------ ------
Accrued supplemental pension plan $ 229 $ 254
Accrued deferred compensation 123 139
Accrued pension expense 571 634
Financing fee payable 150 --
------ ------
1,073 1,027
Less current portion 394 363
------ ------
$ 679 $ 664
====== ======
6
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 assets. 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 warrants is estimated to be $49, based on the
assumption that they will be exercised at the termination of the loan and thus
have an estimated life of three years.
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 herein, options and warrants were anti-dilutive and
therefore were not included in the determination of net loss per share.
STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R)
"Share-Based Payment", which establishes accounting for equity instruments
exchanged for employee services. Under the provisions of SFAS No. 123(R),
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. Restricted stock awards generally vest over four years.
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 2,500 $3.00
Exercised -- (58,166) $1.97 (35,000) $1.95
Forfeited/expired (90,000) $2.55 (161,261) $4.98 --
------- -------- -------
Outstanding at June 30, 2007 476,666 $2.62 1,102,706 $3.24 134,250 $3.08
======= ========= =======
Shares available for future grant 0 402,994 168,250
======= ========= =======
Weighted average remaining term 7.7 years 6.4 years 2.4 years
Intrinsic value:
Outstanding $0 $72 $12
Exercisable $0 $71 $11
7
The intrinsic value for stock options is calculated based on the exercise price
of the underlying awards and the market price of our 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 (17,200) --
------- -------
Unvested as of June 30, 2007 4,200 275,000
======= =======
Shares available for future grant 380,400 0
======= =======
The following table summarizes the components and classification of stock-based
compensation expense included in the Statement of Operations:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2007 2006 2007 2006
------ ------ ------ ------
Stock options $ 191 $ 146 $ 265 $ 390
Restricted stock 36 21 66 50
------ ------ ------ ------
Total stock-based compensation expense $ 227 $ 167 $ 331 $ 440
====== ====== ====== ======
Cost of revenues $ 12 $ 14 $ 24 $ 26
Research and development (23) 67 37 181
Selling, general and administrative 238 86 270 233
------ ------ ------ ------
Total stock-based compensation expense $ 227 $ 167 $ 331 $ 440
====== ====== ====== ======
No tax benefits were attributed to the stock-based compensation expense because
a valuation allowance is maintained for substantially all net deferred tax
assets. We elected to adopt the alternative method of calculating the historical
pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS
123(R)-3, "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 six months ended June 30, 2007. Estimates of fair value are
not intended to predict actual future events or the value ultimately realized by
persons who receive equity awards. The following table summarizes the
assumptions used to compute the weighted average fair value of stock option
grants of $1.02 and $1.27, respectively, for the three-month and six-month
periods ended June 30, 2007.
Three Months Six Months
------------ ----------
Dividend yield 0.0% 0.0%
Weighted average volatility 41.1% 40.3%
Risk-free interest rate 4.8% 4.8%
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.
8
This 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 will 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 June 30, 2007, approximately $1.1 million of unrecognized stock
compensation related to unvested awards (net of estimated forfeitures) is
expected to be recognized over a period of 3.5 years.
PENSION PLAN
The Company's defined benefit pension plan is reported in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 158 "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of SFAS No.'s 87, 88, 106 and 132(R)", issued in September 2006. This
statement requires balance sheet recognition of the over-funded or under-funded
status of pension and postretirement benefit plans. Under SFAS 158, actuarial
gains and losses, prior service costs or credits, and any remaining transition
assets or obligations that have not been recognized under previous accounting
standards must be recognized in accumulated other comprehensive loss, net of tax
effects, until they are amortized as a component of net periodic benefit cost.
In addition, the measurement date, the date at which plan assets and the benefit
obligation are measured, is required to be the Company's fiscal year end. The
Company adopted the recognition and measurement provisions of SFAS 158 effective
December 31, 2006. The adoption of SFAS 158 did not have a material effect on
the consolidated financial statements since all future benefit accruals under
the Company's defined benefit plan were curtailed as of 1994.
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 components of net periodic benefit cost of the plan for the three-month and
six-month periods ended June 30 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---- ---- ---- ----
Interest cost on projected benefit
obligation $ 22 $ 19 $ 44 $ 42
Expected return on plan assets (22) (18) (41) (33)
Amortization of net loss 10 14 22 21
---- ---- ---- ----
Net periodic pension cost $ 10 $ 15 $ 25 $ 30
==== ==== ==== ====
The Company expects funding requirements of $229 in 2007 of which $47 was funded
during the quarter ended June 30, 2007, and $135 during the six months ended
June 30, 2007.
INCOME TAXES
We 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. We did not have any unrecognized tax benefits and
there was no effect on our financial condition or results of operations as a
result of implementing FIN 48.
We file income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. We are no longer subject to U.S. federal tax examinations for
years before 2005. State jurisdiction returns that remain subject to examination
range from 2000 to 2004. We do not believe there will be any material changes in
our unrecognized tax positions over the next 12 months.
Our policy is that we 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, we did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor
9
was any interest expense recognized during the quarter. Our effective tax rate
differs from the federal statutory rate primarily due to non-deductible expenses
and is offset somewhat by state tax credits.
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, a 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 June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" (SFAS
No. 109). 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 provisions are effective for the Company beginning in the first
quarter of fiscal 2007. The adoption of this statement by the Company did not
have any material impact on its financial statements.
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 permits
entities to choose 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.
10
Results of Operations
---------------------
Total revenue was $1.7 million in the second quarter of 2007 versus $1.6 million
in the second quarter of 2006. Product revenue for the second quarter of 2007
decreased $0.6 million versus 2006 primarily due to lower shipments of the
CX4000 product. Total revenue was $3.7 million in 2007 versus $5.0 million in
2006 for the six-month period ended June 30. Product revenue for the six months
ended June 30, 2007 decreased $2.7 million primarily due to the fact that 2006
included $1.9 million related to shipments made to one customer in August 2005
that were not recognized as revenue until the first quarter of 2006, and also
due to lower shipments of the CX4000 product.
Service revenue increased $0.7 million and $1.4 million, for the three and six
months ended June 30, 2007, due to increased sales of spare parts, an increase
in maintenance related revenues, and the recognition in the second quarter of
2007 of $0.2 million for a custom development project.
Gross margin was 55% in the quarter ended June 30, 2007 versus 12% in second
quarter of the prior year, and was 62% for the six-month period ended June 30,
2007 versus 45% for the corresponding six-month period in 2006. The 2007
increase was primarily due to lower personnel costs in 2007 than in 2006, and
the incurrence of $0.4 million of contract cancellation fees in the second
quarter of 2006.
Research and development expense decreased $0.3 million (19%) and $0.4 million
(14%) for the three and six month periods ended June 30, 2007 versus the
corresponding periods in 2006, primarily due to severance costs of $0.2 million
included in the three and six-month periods ended June 30, 2006, and also due to
lower personnel costs.
Selling, general and administrative expenses decreased slightly for the
three-month period ended June 30, 2007 compared to 2006, and increased by $0.1
million (3%) for the six-month period ended June 30, 2007 versus the
corresponding period in 2006.
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.
Liquidity and Sources of Capital
--------------------------------
Net cash used by operations for the six months ended June 30, 2007 was $1.1
million versus $2.7 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 Company's
continued losses. Cash provided by financing activities of $1.5 million in 2007
is due to the Company borrowing $1.5 million under a term loan agreement.
Working capital and the ratio of current assets to current liabilities were $1.4
million and 1.4:1 at June 30, 2007 compared to $3.3 million and 2.3:1 at
December 31, 2006. The decrease in working capital is primarily due to the net
losses incurred over the last six months, partially offset by the proceeds from
the $1.5 million term loan which the Company borrowed in January 2007.
During the remainder of 2007, the Company anticipates making capital
expenditures of less than $0.1 million. The Company borrowed $1.5 million in
January 2007 under a three-year term loan agreement. Management believes that
with the funds provided by this loan the Company should have sufficient funds to
meet the Company's cash requirements for the remainder of 2007. 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 financing 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.
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Contractual Obligations
-----------------------
At June 30, 2007, the Company's contractual obligations were as follows:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
---------------- --------- ---------
Operating Leases $ 307 $ 291 $ 0
Purchase Commitments $ 673 $ 108 $ 97
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivatives and has no financial instruments subject to
fluctuations in market rates.
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 June 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 June 30, 2007.
During the quarterly period covered by this Form 10-Q, the Company made changes
to its internal controls, designed to centralize its financial reporting in
light of recent 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 May 22, 2007 the Company received notice from the American Stock Exchange
("AMEX" or "Exchange") indicating that 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, in that the Company, as of March 31, 2007, had
Stockholders' Equity of less than $6,000,000 and also had sustained losses from
continuing operations and/or net losses in its five most recent fiscal years.
In accordance with AMEX rules, the Company submitted for review by the Exchange
a plan to demonstrate the Company's ability to regain compliance by November 21,
2008. The plan is presently being reviewed by the Exchange, and the Company's
listing has been continued during the review period. If the plan is not accepted
or the Company is unable to meet the objectives of the plan, then the Company
will be subject to immediate delisting procedures as set forth in the AMEX
Company Guide.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 24, 2007, the Company accepted 15,159 shares of its common stock (valued
at $2.24 a share) in repayment of loans to a former officer of $34,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2007 annual meeting of stockholders of the Company, held on May 10, 2007,
two proposals were voted upon and approved by the Company's stockholders. A
brief discussion of each proposal voted upon at the annual meeting, and the
number of votes cast for or against is set forth below. There were no broker
non-votes with respect to these proposals.
1) A vote was taken for the election of five directors of the Company to hold
office until their respective successors shall have been duly elected. The
aggregate numbers of shares of common stock voted in person or by proxy were as
follows:
Nominee For Withheld Abstain
------- --- -------- -------
Robert C. Fleming 6,070,389 126,857 365,927
Michael G. Mitchell 6,070,389 126,857 365,927
Robert H. Scott 6,084,889 112,357 365,927
William J. Stuart 6,070,389 126,857 365,927
John E. Sweeney 6,084,834 112,412 365,927
2) A vote was taken to ratify the selection of Carlin, Charron & Rosen, LLP, an
independent registered public accounting firm, as independent auditors for the
Company for the year ending December 31, 2007. The aggregate numbers of shares
of Common Stock voted in person or by proxy were as follows:
For Against Abstain
--- ------- -------
6,150,233 39,010 373,930
The foregoing proposals are described more fully in the Company's proxy
statement filed with the Securities and Exchange Commission on April 5, 2007
pursuant to Section 14 (a) of the Securities Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
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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: August 9, 2007 By /s/ John E. Steinkrauss
---------------------------
John E. Steinkrauss
Vice President, Treasurer
and Chief Financial Officer
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