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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 March 31, 2008
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: 0-03035
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, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer", and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-Accelerated filer [ ]
Smaller Reporting Company [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 6,855,236 shares of common stock outstanding at May 9, 2008.
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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............................................ 11
3. Quantitative and Qualitative Disclosures about Market Risk......... 13
4. Controls and Procedures............................................ 13
PART II
OTHER INFORMATION
1A. Risk Factors....................................................... 14
5. Other Information.................................................. 15
6. Exhibits........................................................... 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKENGINE NETWORKS, INC.
BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2008 2007
-------- --------
ASSETS (Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 254 $ 415
Accounts receivable, net 820 990
Note and interest receivable, net -- 392
Inventories, net 446 766
Other current assets 232 102
-------- --------
Total current assets 1,752 2,665
Property, plant and equipment, net 482 591
Other assets, net 106 123
-------- --------
Total assets $ 2,340 $ 3,379
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 259 $ 199
Notes payable 869 850
Accrued compensation and benefits 393 543
Deferred service revenues 504 368
Other accrued expenses 342 371
-------- --------
Total current liabilities 2,367 2,331
Notes payable, less current portion 744 893
Other liabilities 478 538
-------- --------
Total liabilities 3,589 3,762
-------- --------
Commitments and contingencies -- --
Stockholders' deficit
Common stock, par value $0.001 per share;
authorized 20,000,000 shares, issued 6,957,183 7 7
Additional paid-in capital 15,047 15,330
Accumulated deficit (15,409) (14,416)
Accumulated other comprehensive loss (615) (615)
-------- --------
(970) 306
Less cost of 101,947 and 251,947 common shares in treasury (279) (689)
-------- --------
Total stockholders' deficit (1,249) (383)
-------- --------
Total liabilities and stockholders' deficit $ 2,340 $ 3,379
======== ========
See notes to the interim financial statements.
3
THINKENGINE NETWORKS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands except share data)
Three Months
Ended March 31,
2008 2007
----------- -----------
Revenues
Product $ 644 $ 932
Service 1,125 1,121
----------- -----------
1,769 2,053
Cost of revenues
Product 629 462
Service 168 221
----------- -----------
797 683
----------- -----------
Gross margin 972 1,370
Other costs and expenses
Research and development 898 1,382
Sales and marketing 447 731
General and administrative 587 758
Interest expense 58 59
Other (income), net (25) (65)
----------- -----------
1,965 2,865
Net loss and comprehensive loss $ (993) $ (1,495)
=========== ===========
Loss per share - basic and diluted:
Net loss $ (0.15) $ (0.23)
=========== ===========
Weighted average number of basic and diluted shares outstanding 6,830,236 6,513,794
=========== ===========
See notes to the interim financial statements.
4
THINKENGINE NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Three Months Ended Mar. 31,
2008 2007
-------- --------
Operating Activities
Net loss $ (993) $ (1,495)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 109 210
Stock-based compensation expense 127 104
Amortization of deferred financing costs 17 9
Amortization of debt discounts 4 3
Gain on sale of property and equipment (23) --
Net (increase) decrease in:
Accounts receivable 170 153
Inventories 320 221
Other assets (130) 11
Net increase (decrease) in:
Accounts payable 60 268
Accrued compensation and benefits (210) (23)
Deferred service revenues 136 95
Other accrued expenses (29) (97)
-------- --------
Net cash used in operating activities (442) (541)
-------- --------
Investing Activities
Proceeds from recovery of note receivable 392 37
Proceeds from sales of property and equipment 23 --
Additions to property, plant and equipment -- (21)
-------- --------
Net cash provided by investing activities 415 16
-------- --------
Financing Activities
Payment for shares purchased for treasury -- (150)
Proceeds from shares issued pursuant to stock plans -- 31
Payment of principal amount of term loan (134) --
Proceeds from term loan -- 1,500
-------- --------
Net cash (used in) provided by financing activities (134) 1,381
-------- --------
Decrease (increase) in cash and cash equivalents (161) 856
Cash and cash equivalents - beginning of period 415 2,764
-------- --------
Cash and cash equivalents - end of period $ 254 $ 3,620
======== ========
Supplemental Disclosures of Cash Flow Information Cash paid during the period
for:
Interest $ 55 $ 29
======== ========
Income taxes, net $ 21 --
======== ========
Non-cash investing and financing activities:
Repayment of loans to officers and accumulated interest with common stock $ -- $ 431
======== ========
Cashless exercise of stock options $ -- $ 42
======== ========
Increase in deferred financing fees in connection with term loan financing $ -- $ 150
======== ========
Stock warrants issued in connection with term loan $ -- $ 49
======== ========
Reduction in paid-in capital in connection with issuance of treasury shares $ 410 $ --
======== ========
See notes to interim financial statements.
5
THINKENGINE NETWORKS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2008
(dollars in thousands except per share data)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of ThinkEngine Networks, Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in accordance with 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments to previously established loss
provisions) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2008 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending December 31, 2008. The balance sheet at December
31, 2007 has been derived from the audited financial statements at that date.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2007.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 2. GOING CONCERN/MANAGEMENT'S PLAN
As shown in the accompanying unaudited financial statements, the Company has
sustained a net loss for the three-month period ended March 31, 2008 of
approximately $1 million. The table below sets forth, in millions, the balances
of working capital (deficit), accumulated deficit and stockholders' deficit at
March 31, 2008 and December 31, 2007 respectively.
March 31, 2008 December 31, 2007
-------------- -----------------
Working capital (deficit) $ (0.6) $0.3
Accumulated deficit (15.4) (14.4)
Stockholder's deficit (1.2) (0.4)
Additionally, the Company has a cash balance of $0.3 million at March 31, 2008
and has limited available borrowings under its accounts receivable financing
agreement.
The report of our independent registered accounting firm as of and for the year
ended December 31, 2007 contains an explanatory paragraph raising substantial
doubt about the Company's ability to continue as a going concern. The unaudited
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company has taken a number of actions since 2006 to reduce operating
expenses, and to improve the salability of the VSR1000 product. The Company's
2008 operating plan reflects additional initiatives which the Company believes
can be successful, with the major objective being to increase the order volume
for the VSR1000. Short and long-term liquidity require either significant
improvement in operating results and/or the obtaining of additional capital.
There can be no assurance that the Company's plans to achieve adequate liquidity
will be successful. If the Company's operations deteriorate due to increased
competition, loss of a large customer or other adverse events, it may be
required to obtain additional sources of funds through asset sales, capital
market transactions or financing from third parties or a combination thereof.
The Company has not been able to obtain operating profitability from continuing
operations during the past seven years, 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 cost reductions and securing additional debt
financings in 2007 have been designed to improve operating results and
liquidity, and to better position the Company to compete under current market
conditions. However, the Company may in the future be required to seek new
sources of financing or future accommodations from its existing lenders or other
financial institutions, or it may seek equity infusions from private investors.
The Company's ability to fund its operations is heavily dependent on the growth
of its revenues over current levels to achieve profitable operations. The
Company may be required to further reduce operating costs in order to meet its
obligations. If the Company is unable to achieve profitable operations or secure
additional sources of capital, there would be substantial doubt about its
ability to
6
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.
NOTE 3. 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 sales, 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
March 31, December 31,
2008 2007
---- ----
Finished goods $ 320 $ 551
Raw materials 126 215
----- -----
$ 446 $ 766
===== =====
Included in the above amounts is the Company's reserve for slow-moving and
obsolete inventories totaling $3,737 and $3,387 at March 31, 2008 and December
31, 2007, respectively.
PROPERTY, PLANT AND EQUIPMENT
The decrease in the balance of $0.1 million at March 31, 2008 from December 31,
2007 is primarily due to depreciation expense for the quarter.
OTHER LIABILITIES
March 31, December 31,
2008 2007
---- ----
Defined benefit pension plan $ 425 $ 473
Officers' supplemental pension 209 196
----- -----
634 669
Less current portion included in accrued
compensation and benefits 156 131
----- -----
$ 478 $ 538
===== =====
NOTES PAYABLE
During 2005, as part of the consideration paid to Prism VentureWorks ("Prism")
for the acquisition of TE Networks, Inc., the Company issued $300 in
interest-free notes (the "Prism Notes") payable in full in April 2008. In April
2008, without penalty, Prism extended the payment due date from April 2008 until
March 2009.
On January 16, 2007, the Company borrowed $1,500 under a term loan agreement
(the "Term Loan"). The Term 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 Term Loan is to be repaid in six interest-only
monthly installments followed by thirty monthly installments of principal and
interest. In connection with the Term 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 per share which was the
closing market price on January 16, 2007.
7
During 2007, the Company entered into a financing agreement (the "Financing
Agreement") in order to factor certain of the Company's accounts receivable.
Pursuant to the Financing Agreement, the lender may advance to the Company from
time to time up to $1.0 million, based upon the sum of 80% of the face value of
accounts receivable. 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. No receivables were factored under this Financing
Agreement as of December 31, 2007. 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. As of March 31, 2008, available
borrowings under the Financing Agreement totaled $0.7 million.
With respect to the Term Loan and the Financing Agreement, the Company pledged
as collateral substantially all of its non-intellectual property business
assets. The two lenders and the Company have entered into an Intercreditor
Agreement wherein the seniority and order of priority with respect to access to
the collateral in the case of default has been established.
NET LOSS PER SHARE
In computing the net loss 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.
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 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
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 January 1, 2008 400,000 $2.64 1,451,206 $2.34 101,750 $2.88
Granted -- -- --
Exercised -- -- --
Forfeited/expired (10,001) 2.70 (43,469) 1.59 --
------- --------- -------
Outstanding at March 31, 2008 389,999 2.64 1,407,737 2.36 101,750 2.88
======= ========= =======
Shares available for future grant 0 156,129 235,750
=== ======= =======
Weighted average remaining term 7.3 years 6.5 years 4.1 years
Exercisable at March 31, 2008 266,660 $2.64 782,531 $2.92 83,750 $3.05
======= ======= ======
Intrinsic value:
Outstanding $ 0 $ 0 $ 0
Exercisable $ 0 $ 0 $ 0
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.
8
The following table summarizes non-vested restricted stock activity:
Stock Plan Inducement
Shares Shares
------- -------
Unvested as of January 1, 2008 1,200 275,000
Granted 150,000 --
Vested -- --
Forfeited -- --
------- -------
Unvested as of March 31, 2008 151,200 275,000
======= =======
Shares available for future grant 263,600 0
======= =======
Average remaining term 9.9 years 8.5 years
The following table summarizes the components and classification of stock-based
compensation expense included in the Statements of Operations and Comprehensive
Loss:
Three Months Ended
March 31,
2008 2007
----- -----
Stock options $ 86 $ 96
Restricted stock 41 8
----- -----
Total stock-based compensation expense $ 127 $ 104
===== =====
Cost of revenues $ 7 $ 6
Research and development 27 41
General and administrative 93 57
----- -----
Total stock-based compensation expense $ 127 $ 104
===== =====
No tax benefits were attributed to the stock-based compensation expense because
a valuation allowance is maintained for substantially all net deferred tax
assets.
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.
In February 2008, the Company granted under its Restricted Stock Plan the right
to two key executives to receive 150,000 common shares. The grants vest over
four years, and are subject to immediate vesting in the event of change of
control of the Company. The total value of the rights at the date of grant was
$86 and was based on the market price of $0.57 per share on the date of grant.
Compensation expense recognized was $3 during the period ended March 31, 2008.
As of March 31, 2008, approximately $0.6 million of unrecognized stock
compensation expense related to unvested awards (net of estimated forfeitures)
is expected to be recognized over a period of 2.1 years.
PENSION PLAN
The Company's defined benefit pension plan is accounted for in accordance with
SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and
132(R)" ("SFAS 158"), 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
9
a material effect on the financial statements as all future benefit accruals
under the Company's defined benefit plan were curtailed in 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 Company expects funding
requirements of $133 in 2008 of which $47 was funded during the quarter ended
March 31, 2008.
The components of net periodic benefit cost of the plan for the three-month
periods ended March 31 are as follows:
Three Months Ended
March 31,
---------
2008 2007
---- ----
Interest cost on projected benefit obligation $ 19 $ 22
Expected return on plan assets (9) (19)
Service cost 5 --
Amortization of net loss 10 12
---- ----
Net periodic pension cost $ 25 $ 15
==== ====
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157) which provides a consistent definition of fair value which focuses on
exit price and prioritizes, within a measurement of fair value, the use of
market-based inputs over entity-specific inputs. SFAS No. 157 requires expanded
disclosures about fair value measurements and establishes a three-level
hierarchy for fair value measurements based on the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The standard also
requires that a company use its own nonperformance risk when measuring
liabilities carried at fair value, including derivatives. In February 2008, the
FASB approved a FASB Staff Position (FSP) that permits companies to partially
defer the effective date of SFAS No. 157 for one year for nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis. SFAS No. 157 is effective for
financial assets and financial liabilities and for nonfinancial assets and
nonfinancial liabilities that are remeasured at least annually for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The adoption of SFAS No. 157 with respect to
financial assets and liabilities in the first quarter of 2008 did not have a
significant effect on the Company's results of operations or financial position.
In addition, the Company is evaluating the impact SFAS No. 157 for measuring
nonfinancial assets and liabilities on future results of operations and
financial position.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities -- including an Amendment of SFAS No.
115" (SFAS No. 159), which permits an entity to measure certain financial assets
and financial liabilities at fair value that are not currently required to be
measured at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The
fair value option may be elected on an instrument-by-instrument basis, with few
exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair
value option to available-for-sale and held-to-maturity securities. The
Statement also establishes presentation and disclosure requirements to help
financial statement users understand the effect of the election. SFAS No. 159 is
effective as of the beginning of the first fiscal year beginning after November
15, 2007. The adoption fo SFAS No. 159 in the first quarter of 2008 did not have
an impact on the Company's financial condition or results of operations as a
result of implementing SFAS No. 159.
10
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: our ability to
continue operations; 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 raise funds since the Company was
delisted from 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, 2007 as filed with the Securities
and Exchange Commission on March 19, 2008.
Results of Operations
---------------------
Total revenue was $1.8 million in the first quarter of 2008 versus $2.1 million
in the first quarter of 2007. Product revenue for the first quarter of 2008
decreased $0.3 million versus 2007 primarily due to lower order volume. There
was no change in the level of service revenues.
Gross margin was 55% in the quarter ended March 31, 2008 versus 67% in the first
quarter of 2007. The decrease is due to lower order volume and an increase of
$0.3 million in the provision for excess inventory in the quarter ended March
31, 2008, versus the quarter ended March 31, 2007.
Research and development expenses decreased $0.5 million for the three-month
period ended March 31, 2008 compared to 2007 primarily due to lower personnel
costs and the absence of $0.1 million in amortization costs versus 2007.
Sales and marketing expenses decreased $0.3 million for the three-month period
ended March 31, 2008 compared to 2007, due to lower personnel related costs and
marketing program costs.
General and administrative expenses decreased $0.2 million for the three-month
period ended March 31, 2008 compared to 2007, due to lower personnel costs and
outside services expenses.
Interest expense reflects interest incurred on the term loan which the Company
borrowed in January 2007.
No tax benefits were provided for losses incurred in 2008 or 2007 since the
Company cannot determine that the realization of the net deferred tax asset is
more likely than not.
Liquidity and Sources of Capital
--------------------------------
Operations used net cash of $0.4 million in the first quarter of 2008, and $0.5
million in the first quarter of 2007. The cash used by operations in 2008 and
2007 is primarily attributable to the losses from continuing operations.
Investing activities in the first quarter of 2008 provided $0.4 million,
primarily due to the recovery of Notes Receivable from the Company's former UK
subsidiary, Dacon Electronics, plc. Financing activities in the first quarter of
2007 generated $1.4 million which is primarily due to the receipt of $1.5
million from the proceeds of the term loan. Cash used by financing activities of
$0.1 million in the first quarter of 2008 is primarily due to the payment of
principal under the term loan agreement.
11
Working capital (deficit) was $(0.6) million at March 31, 2008 and $0.3 million
at December 31, 2007. The ratio of current assets to current liabilities was
0.7:1 at March 31, 2008 and 1.1:1 at December 31, 2007. The decrease in working
capital was primarily due to the net losses incurred during the quarter ended
March 31, 2008.
The Company's contractual obligations at March 31, 2008 are as follows (amounts
in thousands):
Payments due by period
-------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
Term loans $1,803 $1,006 $797 $ -- $ --
Operating leases 333 253 80 -- --
Purchase commitments 60 58 2 -- --
------ ------ ---- ----- -----
$2,196 $1,317 $879 $ 0 $ 0
------ ------ ---- ----- -----
Term loan payments include principal, interest and financing fee. Payments made
under operating leases are treated as rent expense. Purchase commitments are
primarily inventory related.
In 2008, the Company anticipates making capital expenditures of less than $0.1
million.
The financial statements of the Company have been prepared on a "going concern"
basis, which assumes the realization of assets and the liquidation of
liabilities in the ordinary course of business. However, such realization of
assets and liquidation of liabilities are subject to a significant number of
uncertainties. There are a number of factors that have negatively impacted the
Company's liquidity, and may impact the Company's ability to function as a going
concern. The Company has sustained net losses of approximately $7.5 million and
$5.6 million for the years ended December 31, 2007 and 2006, respectively, and a
net loss of $1.0 million for the quarter ended March 31, 2008. The Company has
an accumulated deficit of approximately $15.4 million, a stockholders' deficit
of approximately $1.2 million and negative working capital at March 31, 2008.
Additionally, the Company had a cash balance of $0.3 million at March 31, 2008
and has limited available borrowings under its accounts receivable financing
agreement. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company has taken a number of actions since 2006 to reduce operating
expenses, and to improve the salability of the VSR1000 product. The Company's
2008 operating plan reflects additional initiatives which the Company believes
can be successful, with the major objective being to increase the order volume
for the VSR1000. Short and long-term liquidity require either significant
improvement in operating results and/or the obtaining of additional capital.
There can be no assurance that the Company's plans to achieve adequate liquidity
will be successful. If the Company's operations deteriorate due to increased
competition, loss of a large customer or other adverse events, it may be
required to obtain additional sources of funds through asset sales, capital
market transactions or financing from third parties or a combination thereof.
The Company has not been able to obtain operating profitability from continuing
operations during the past seven years, 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 cost reductions and securing additional debt
financings in 2007 have been designed to improve operating results and
liquidity, and to better position the Company to compete under current market
conditions. However, the Company may in the future be required to seek new
sources of financing or future accommodations from its existing lenders or other
financial institutions, or it may seek equity infusions from private investors.
The Company's ability to fund its operations is heavily dependent on the growth
of its revenues over current levels to achieve profitable operations. The
Company may be required to further reduce operating costs in order to meet its
obligations. If the Company is unable to achieve profitable operations or secure
additional sources of capital, there would be substantial doubt about its
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.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under regulation S-K for "smaller reporting companies."
ITEM 4. 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 March 31, 2008. 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 March 31, 2008.
During the three-month period ended March 31, 2008, the Company made no changes
to its internal controls over financial reporting.
13
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a detailed description of additional risk factors associated with the
Company, please refer to its Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 as filed with the Securities and Exchange Commission on
March 19, 2008.
THE COMPANY HAS A HISTORY OF OPERATING LOSSES, AND IF THE COMPANY CONTINUES TO
INCUR OPERATING LOSSES, IT MAY BE UNABLE TO CONTINUE OPERATIONS.
The Company had a net loss of approximately $1.0 million for the three months
ended March 31, 2008. The Company had an accumulated deficit of approximately
$15.4 million, a net stockholders' deficit of approximately $1.2 million, and a
working capital deficit of approximately $0.6 million as of March 31, 2008. The
Company has incurred losses in each of its seven most recent fiscal years, and
the Company may never be profitable. If the Company continues to incur operating
losses and fails to become a profitable company, it may be unable to continue
its operations. The extent of the Company's future losses and the timing of its
potential profitability are highly uncertain. The Company's future growth and
profitability depends solely on its ability to successfully market the VSR1000
product. The Company must continue to enhance the features and functionality of
its products to meet customer requirements and competitive demands. In addition,
the failure of future product enhancements to operate as expected could delay or
prevent future sales of its products. If future customers do not adopt, purchase
and successfully deploy the Company's products and its planned product
enhancements, the Company's revenues could be adversely impacted.
Our auditors have substantial doubt about the Company's ability to continue as a
going concern, and if the Company is unable to generate increased business
volume or obtain additional financing, the Company may be required to cease or
curtail its operations.
In their report prepared in conjunction with the Company's December 31, 2007
financial statements, the Company's auditors included an explanatory paragraph
stating that, because the Company has incurred recurring net losses, has an
accumulated deficit and has minimal working capital as of December 31, 2007,
there is substantial doubt about the Company's ability to continue as a going
concern.
THE COMPANY HAS A HISTORY OF LOSSES, AND SUCH LOSSES MAY CONTINUE IN THE FUTURE
IF THE COMPANY IS UNABLE TO SECURE SUFFICIENT BUSINESS TO COVER ITS OVERHEAD AND
OPERATING EXPENSES.
The Company has not been profitable since fiscal year 2000, and will continue to
generate losses, and potentially require additional external funding, until
sales of its VSR1000 products can be increased to sufficient levels for the
Company to generate a profit and positive cash flow, of which there can be no
assurance that such levels can be attained.
THE COMPANY MAY BE UNABLE TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS
OPERATIONS.
As of March 31, 2008, the Company had $0.3 million in cash available to fund its
operations, and had a working capital deficit of $0.6 million. The Company will
need to raise additional capital or obtain additional debt financing in order to
be able to fund its operations. The Company may not get funding when it needs it
or on favorable terms. In addition, the amount of capital that a firm such as
the Company is able to raise often depends on variables that are beyond its
control, such as the share price of its stock and its trading volume. As a
result, the Company may not be able to secure financing on terms attractive to
it, or at all. If the Company is able to consummate a financing arrangement, the
amount raised may not be sufficient to meet its future needs and may be highly
dilutive. If the Company cannot raise adequate funds to satisfy its capital
requirements, it may have to scale-back or eliminate operations.
THE COMPANY WAS DELISTED FROM THE AMERICAN STOCK EXCHANGE, WHICH COULD REDUCE
OUR ABILITY TO RAISE FUNDS.
On March 18, 2008, the American Stock Exchange ("AMEX") delisted the Company's
common stock from the AMEX by filing a delisting application with the Securities
and Exchange Commission. Trading of our common stock will be limited to the OTC
Bulletin Board. Inclusion of our common stock on the OTC Bulletin Board could
adversely affect the liquidity and price of our common stock and make it more
difficult for us to raise additional capital on favorable terms, if at all. In
addition, this de-listing by the AMEX may negatively impact our reputation and,
as a consequence, our business. Furthermore, the OTC Bulletin Board is viewed by
most investors
14
as a less desirable, and less liquid, marketplace. As a result, an investor may
find it more difficult to purchase, dispose of or obtain accurate quotations as
to the value of ThinkEngine common stock.
ThinkEngine common stock may in the future become subject to Rules 15g-1 through
15g-9 under the Exchange Act, which imposes certain sales practice requirements
on broker-dealers who sell "penny stock" to persons other than established
customers and "accredited investors" (as defined in Rule 501(c) of the
Securities Act). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. This rule
would adversely affect the ability of broker-dealers to sell our common stock
and purchasers of our common stock to sell their shares of our common stock.
Penny stock includes any non-NASDAQ equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. The regulations
require that prior to any non-exempt buy/sell transaction in a penny stock, a
disclosure schedule proscribed by the SEC relating to the penny stock market
must be delivered by a broker-dealer to the purchaser of such penny stock. This
disclosure must include the amount of commissions payable to both the
broker-dealer and the registered representative and current price quotations for
our common stock. The regulations also require that monthly statements be sent
to holders of penny stock that disclose recent price information for the penny
stock and information of the limited market for penny stocks. If we were to
become subject to these requirements, they would adversely affect the market
liquidity of our common stock.
ITEM 5. OTHER INFORMATION
On March 18, 2008, the American Stock Exchange ("AMEX") delisted the Company's
common stock from the AMEX by filing a delisting application with the Securities
and Exchange Commission. On March 19, 2008, the Company's common stock began to
trade on the Pink Sheets under the ticker symbol THNK. On April 10, 2008, the
Company's common stock commenced trading on the OTC Bulletin Board under the
symbol THNK.
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: May 13, 2008 By: /s/ John E. Steinkrauss
-----------------------------
John E. Steinkrauss
Vice President, Treasurer
and Chief Financial Officer
(duly authorized officer and
Principal Financial and
Accounting Officer)