UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2006
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
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 6,706,125 shares of Common Stock, $.20
par value per share outstanding at June 30, 2006.
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2006 2005
-------- ------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,725 $ 1,750
Marketable securities 3,571 6,370
Accounts receivable, net 1,563 3,565
Inventories 1,967 2,245
Other current assets 289 137
------- -------
TOTAL CURRENT ASSETS 9,115 14,067
LOANS TO OFFICERS 1,173 2,029
PROPERTY, PLANT AND EQUIPMENT, NET 1,188 1,208
OTHER ASSETS, NET 3,681 3,901
------- -------
$15,157 $21,205
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 266 $ 814
Notes payable 300 300
Accrued compensation and benefits 1,764 1,817
Deferred service revenue 971 2,976
Income taxes payable 486 405
Other accrued expenses 812 504
------- -------
TOTAL CURRENT LIABILITIES 4,599 6,816
NON-CURRENT LIABILITIES 329 374
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 per share,
authorized 20,000,000 shares;
issued 7,016,583 shares 1,403 1,403
Additional paid-in capital 15,156 15,498
Accumulated deficit (4,567) (1,281)
Accumulative other comprehensive loss (580) (580)
Unearned compensation (72) (156)
------- -------
11,340 14,884
Less cost of 310,458 and 111,142
common shares in treasury (1,111) (869)
------- -------
TOTAL STOCKHOLDERS' EQUITY 10,229 14,015
------- -------
$15,157 $21,205
======= =======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME(LOSS) (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
REVENUES
Sales $ 1,159 $ 717 $ 4,221 $ 2,178
Service 417 337 820 597
------- ------- ------- -------
1,576 1,054 5,041 2,775
COST OF REVENUES 1,465 701 2,944 1,371
------- ------- ------- -------
Gross profit 111 353 2,097 1,404
OTHER COSTS AND EXPENSES:
Research and development 1,451 791 2,881 1,509
Selling, general and
administrative 1,291 866 2,688 1,738
Other (income)expense, net (74) (78) (180) (134)
------- ------- ------- -------
Loss before income taxes (2,557) (1,226) (3,292) (1,709)
PROVISION FOR INCOME TAXES 15 15 30 30
------- ------- ------- -------
Loss from continuing
operations (2,572) (1,241) (3,322) (1,739)
Loss from discontinued
operations, net of tax (454) (711)
Cumulative effect of change in
accounting principle,
net of tax 36
------- ------- ------- -------
NET LOSS (2,572) (1,695) (3,286) (2,450)
Currency translation adjustment (46) (25)
------- ------- ------- -------
COMPREHENSIVE LOSS $(2,572) $(1,741) $(3,286) $(2,475)
======= ======= ======= =======
LOSS PER BASIC AND DILUTED SHARE:
Continuing operations $(0.36) $(0.22) $(0.47) $(0.31)
Discontinued operations (0.08) (0.13)
Cumulative effect of change
in accounting principle,
net of tax 0.01
------ ------ ------ ------
Net loss $(0.36) $(0.30) $(0.46) $(0.43)
====== ====== ====== ======
Weighted average number of
basic and diluted shares
outstanding: 7,058,257 5,653,173 7,104,496 5,643,571
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
----------------
2006 2005
NET CASH PROVIDED(USED) BY ---- ----
OPERATING ACTIVITIES $(2,689) $1,873
------- ------
INVESTING ACTIVITIES
Purchase of marketable securities (2,800) (5,529)
Sales of marketable securities 5,599 4,325
Repayment of officers' loans 887
Additions to property, plant and
equipment (234) (19)
------- ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES 3,452 (1,223)
------- ------
FINANCING ACTIVITIES
Repurchase of shares (788)
Shares issued pursuant to
employee stock plans 0 30
------- ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (788) 30
------- ------
CASH PROVIDED(USED) BY DISCONTINUED
OPERATIONS 0 0
------- ------
INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS (25) 680
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 1,750 2,222
------- ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,725 $2,902
======= ======
INCOME TAXES PAID $ 3 $ 2
====== ======
INTEREST PAID $ 0 $ 0
====== ======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
The accompanying unaudited condensed 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, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006. The
balance sheet at December 31, 2005 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, 2005.
Inventories (in thousands):
June 30, December 31,
2006 2005
------- -----------
Finished and in process $1,341 $1,571
Materials and purchased parts 626 674
------ ------
$1,967 $2,245
====== ======
Non-Current Liabilities (in thousands):
June 30, December 31,
2006 2005
------- -----------
Accrued supplemental pension plan $ 287 $ 313
Accrued deferred compensation 157 176
Accrued pension expense 770 775
------ ------
1,214 1,264
Less current portion included in
accrued compensation and benefits 885 890
------ ------
$ 329 $ 374
====== ======
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.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123(R) ("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).
Prior to January 1, 2006, the Company accounted for share-based compensation
to employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company also followed the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). The Company elected to adopt the modified prospective
transition method as provided by SFAS No. 123(R) and, accordingly, financial
statement amounts for the prior periods presented in this Form 10-Q have not
been restated to reflect the fair value method of expensing share-based
compensation.
The Company has recognized compensation expense for its restricted stock
grants. Upon adoption of SFAS 123(R), using the modified prospective method,
the Company recognized a benefit of $36,000 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 cumulative benefit, net of tax, increased both
basic and diluted earnings per share by $0.01 for the six-month period ended
June 30, 2006.
SFAS 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation expense over the
service period (generally the vesting period) in the consolidated financial
statements based on their fair values. For options with graded vesting, the
Company values the stock option grants and recognizes compensation expense
as if each vesting portion of the award was a separate award. Under the
modified prospective method, awards that were granted, modified, or settled
on or after January 1, 2006 are measured and accounted for in accordance
with SFAS 123R. Unvested equity-classified awards that were granted prior to
January 1, 2006 will continue to be accounted for in accordance with SFAS
123, except that compensation expense for all such awards is recognized in
the results of operations over the remaining vesting periods. The impact of
forfeitures that may occur prior to vesting is also estimated and considered
in the amount recognized.
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 options generally
expire in 10 years and vest over thirty months.
Restricted stock awards generally vest over four to six 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, 2005 705,000 $2.55 1,090,219 $3.95 158,750 $3.59
Granted 130,000 $2.97 2,500 $3.05
Exercised (65,868) $1.71
Forfeited/
expired (215,000) $2.55 (133,799) $5.51 (11,000) $12.34
------- --------- -------
Outstanding
at June 30, 2006 620,000 $2.64 890,552 $3.89 150,250 $2.94
======= ========= =======
Shares
available for
future grant 142,314 37,250
Weighted
average
remaining term 9.41 years 7.37 years 7.33 years
Intrinsic value:
Outstanding $0 $226,000 $35,000
Exercisable $0 $226,000 $35,000
In 2006, 37,706 shares of stock were used to exercise 65,868 options with
An intrinsic value of $82,000.
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.
On January 2, 2006, 395,000 common shares, which were granted in 2002,
vested. The total value of the restricted stock award, at the date of grant,
was $612,000 and was based on the market price of $1.55 per share.
In addition, the Company has a Restricted Stock Plan, the activity of which
is summarized as follows:
Weighted Average
Shares Grant Date Fair Value
Unvested as of
December 31, 2005 182,450 $2.58
Granted -
Vested (17,300) $5.99
Forfeited (28,700) $2.52
-------
Unvested as of
June 30, 2006 136,450 $2.16
=======
Shares available
for future grant 51,600
=======
The following table summarizes the pro forma effect of stock-based
compensation as if the fair value method of accounting for stock
compensation had been applied for the three-month and six-month periods
ended June 30, 2005 (in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ ----------------
Net loss, as reported $(1,695) $(2,450)
Add: Stock-based compensation
included therein 82 165
Deduct: Total stock-based compensation
under the fair value method (121) (266)
------- -------
Pro forma net loss $(1,734) $(2,551)
======= =======
Loss per share applicable to
common shareowners:
As reported: Basic and diluted $(0.30) $(0.43)
====== ======
Pro forma: Basic and diluted $(0.31) $(0.45)
====== ======
The following table summarizes the components and classification of
stock-based compensation expense included in the Statements of Operations (in
thousands):
Three Months Ended Six Months Ended
June 30 , June 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
Stock options $146 $ $390 $
Restricted stock 21 78 50 157
Other 0 4 0 8
---- ---- ---- ----
Total stock-based compensation $167 $ 82 $440 $165
==== ==== ==== ====
Cost of revenues $ 14 $ 7 $ 26 $ 14
Selling, general and
administrative 86 63 233 127
Research and development 67 12 181 24
---- ---- ---- ----
Total stock-based
compensation expense $167 $ 82 $440 $165
==== ==== ==== ====
As a result of adopting FAS 123(R), the Company's loss before income taxes
and loss from continuing operations for the three months and six months ended
June 30, 2006 is $146,000 and $390,000, respectively, larger than if it had
continued to account for share-based compensation under APB 25. Basic and
diluted loss per share from continuing operations for the three months and
six months ended June 30, 2006 would have been $(0.34) and $(0.41),
respectively, if the Company had not adopted FAS 123(R), compared to
reported basic and diluted loss from continuing operations per share of
$(0.36) and $(0.47), respectively.
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, 2006.
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 $1.10 and $1.26, respectively,
for the three-month and six-month periods ended June 30, 2006.
Three Months Six Months
Weight Average Fair Value $1.10 $1.26
Dividend yield 0.0% 0.0%
Weighted average volatility 54.6% 54.0%
Risk-free interest rate 4.9% 4.7%
Expected holding period
(in years) 2.5 2.96
No dividend yield was assumed because the Company has never paid a cash
dividend.
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 option, historical experience and estimates of
future exercise behavior patterns. An increase in this assumption 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 primarily based on historical annual forfeiture rates of
approximately 5%. Estimated forfeitures will be reassessed in subsequent
periods and may change based on new facts and circumstances. Prior to
January 1, 2006, actual forfeitures were accounted for as they occurred for
purposes of required pro forma stock compensation disclosures.
As of June 30, 2006, approximately $.4 million of unrecognized stock
compensation related to unvested awards (net of estimated forfeitures) is
expected to be recognized over a weighted-average period of 1.2 years.
In addition, for the purpose of the Statement of Cash Flows, the realization
of tax benefits in excess of amounts recognized for financial reporting
purposes will be recognized as a financing activity rather than an operating
activity as in the past.
Pension Plan
The Company has a defined benefit pension plan. No additional service cost
benefits were earned subsequent to June 30, 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 and
six months ended June 30 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
Interest cost on projected
benefit obligation $19 $22 $42 $45
Expected return on plan assets (18) (14) (33) (29)
Amortization of net loss 14 8 21 15
--- --- --- ---
Net periodic pension cost $15 $16 $30 $31
=== === === ===
In 2006, the Company applied to the Pension Benefit Guarantee Corporation
and the Internal Revenue Service for permission to terminate this plan.
As a result, the Company intends to contribute approximately $800,000 in
2006 to this plan and $1,870,000 in benefit payments are expected to be paid
in 2006. When the Company terminates the plan, it will recognize an expense
of approximately $709,000.
Acquisition
On November 18, 2005, the Company acquired ThinkEngine Networks, Inc. The
following are unaudited pro forma results for the three-month and six-month
periods ended June 30, 2005 as if the acquisition had taken place at the
beginning of the period (amounts in thousands):
Three Months Six Months
------------ ----------
Revenues $ 1,648 $ 3,582
======= =======
Loss from continuing operations $(1,856) $(3,367)
======= =======
Net loss $(2,310) $(4,078)
======= =======
Loss per share:
Loss from continuing operations $(.27) $(.50)
===== =====
Net loss $(.34) $(.60)
===== =====
Reclassifications
Certain prior period amounts have been reclassified to conform to the
presentation for discontinued operations required by Statement of Financial
Accounting Standards ("SFAS") No. 144 resulting from the discontinued
operations of the Company's former UK subsidiary (see below).
Discontinued Operations
On December 22, 2005, the Company sold its UK subsidiary, Dacon Electronics,
Plc ("Dacon") in an arms length transaction to a company owned by its former
Vice President of European Operations. As a result, the Company has
reclassified the revenues and expenses related to Dacon's operations as
discontinued operations in its Consolidated Statement of Operations and
Comprehensive Income.
Summary results for discontinued operations for the three-month and
six-month periods ended June 30, 2005 are as follows (in thousands).
Three Months Six Months
------------ ----------
Revenue $ 581 $1,589
Operating costs and expenses 1,035 2,300
------ ------
Operating loss $ (454) $ (711)
====== ======
Loss from discontinued operations $ (454) $ (711)
====== ======
Related Party Transaction
During the six-month period ended June 30, 2006, former officers of the
Company repaid loans and accumulated interest, aggregating approximately
$788,000 using 242,790 shares of the Company's common stock.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
The following information, including, without limitation, the Quantitative
and Qualitative Disclosures About Market Risk that are not historical facts,
may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements generally are characterized by the use of terms such
as "believe", "expect" "will" and "may". Although the Company believes that
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, variability of
sales volume from quarter to quarter, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers and
third party suppliers, intellectual property rights, risks in product and
technology development and other risk factors detailed in this Quarterly
Report on Form 10-Q, the Company's Form 10-K for the year ended December 31,
2005 and in the Company's other Securities and Exchange Commission filings.
Results of Operations
The Company reported losses from continuing operations of $2.6 million,
$(0.36) per basic and diluted share, and $3.3 million, $(0.47) per basic
and diluted share, for the three-month and six-month periods ended June 30,
2006, respectively, versus losses of $1.2 million and $1.7 million,
respectively, in the prior year periods. Included in the results from
operations for the three months and six months ended June 30, 2006 was $.1
million and $.4 million, respectively, of expense related to the expensing
of stock options. Net loss was $2.6 million and $3.3 million for the three
and six-month periods ended June 30, 2006 versus $1.7 million and $2.5
million, respectively, in the prior year periods.
In response to a continuing shift in the wireline segment of the
telecommunications market resulting in increasing emphasis on capital
investment in next generation services and build-out of the fiber optic
infrastructure and a decreasing amount of available capital investment
funding for the legacy wireline operations, impacting the demand for the
Company's CX Media Servers, the Company has reduced and reassigned
personnel. Reflecting the increased demand for next generation voice
services and conferencing solutions, additional resources are being added to
sales, marketing and R&D efforts supporting the VSR1000 product, including
personnel reassigned from supporting the CX Media Server products.
As a result of the reduction in personnel, the Company recorded a charge of
approximately $.3 million in the quarter ended June 30, 2006 and will
generate future annual savings resulting from these actions of
approximately $2 million.
Consolidated revenues for the quarter ended June 30, 2006 increased $.5
million, or 50%, from the prior year period. Revenues increased $.4 million
due to the inclusion of ThinkEngine Networks, Inc. ("ThinkEngine") acquired
in November of 2005. Consolidated revenues of $5 million for the six months
ended June 30, 2006 increased $2.3 million (82%) from the prior year period.
Revenues increased due to increased product sales of $1.9 million of
equipment shipped to a telecommunication service provider in 2005 and
recognized as a sale in the current year and $.9 million due to the
inclusion of ThinkEngine, offset, in part, by lower sales of $.7 million to
a world-wide telecommunication system integrator.
The gross margin percentage was approximately 7% in the quarter ended June
30, 2006 versus 33% in the prior year. Included in cost of revenues for the
three and six months ended June 30, 2006 are contract cancellation fees of
$.4 million, amortization of intangibles of $.1 million and $.2 million,
respectively, and provision for obsolescence of $.1 million in both periods.
There were no similar charges in the prior year periods.
Research and development expense increased $.7 million (83%) and $1.4
million (91%), respectively, for the three-month and six-month periods ended
June 30, 2006 as compared to the prior year's periods primarily due to the
inclusion of ThinkEngine ($.6 million and $1.1 million, respectively), the
expensing of stock options ($.1 million and $.2 million, respectively) and
severance costs ($.2 million in both periods).
Selling, general and administrative expense increased $.4 million (49%) and
$1 million (54%) for the three and six-month periods ended June 30, 2006,
respectively, primarily due to the inclusion of ThinkEngine ($.2 million and
$.5 million, respectively), the expensing of stock options ($.1 million and
$.2 million, respectively) and severance expense ($.1 million in both periods).
Other (income) expense, for the six months ended June 30, 2006, increased due
to higher interest earned on cash balances and marketable securities,
reflecting higher interest rates, offset, in part, by lower balances.
No tax benefit was provided for the losses incurred in 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, 2006 was $2.6
million versus cash provided by operations of $1.9 million in the comparable
period of 2005; this variance from the prior year is primarily attributable
to increased loss from continuing operations and the decrease in accounts
receivable of $3.1 million in the 2005 period versus a $2 million decrease
in the 2006 period. The cash provided by investing activities of $2.6
million in 2006 reflects net sales of marketable securities.
Working capital and the ratio of current assets to current liabilities was
$4.5 million and 2.0:1 at June 30, 2006 compared to $7.2 million and 2.1:1
at December 31, 2005.
During the remainder of 2006, the Company anticipates contributing $.8
million to its defined benefit pension plan and purchasing $.1 million of
equipment. Management believes that the cash flow from operations, its cash
and cash equivalents and marketable securities will be sufficient to meet
these needs in 2006. However, to meet its longer-term capital needs, the
Company may in the future be required to seek new sources of debt or equity
financing or may seek to sell certain Company assets. The Company may also
be required to further reduce operating costs in order to meet its
obligations. The Company's ability to fund its operations is heavily
dependent on the growth of its revenues over current levels to achieve
profitable operations. No assurance can be given that management's
initiatives will be successful or that any such additional sources of
financing will be available on acceptable terms or at all.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use derivative financial instruments. The Company has
Marketable Securities, which are exposed to changes in interest rates. Due
to the term of these securities and/or their variable rate provisions, a
change in interest rates would not have a material impact on their value.
Item 4. CONTROLS AND PROCEDURES
Cognitronics Corporation's management, including the Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and
procedures are effective as of the end of the period covered by this report
in ensuring that all material information required to be disclosed in this
quarterly report and all information required to be disclosed by the Company
under the Securities Exchange Act of 1934 has been made known to them in a
timely fashion. During the three months ended June 30, 2006, there were no
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company, on April 3, 2006, granted to an employee inducement options
to purchase 35,000 shares of the Company's Common Stock at an exercise
price of $3.05, and, on June 12, 2006, granted to an employee inducement
options to purchase 40,000 shares of the Company's Common Stock at an
exercise price of $2.81. The options become exercisable over a 30-month
period in three installments (the soonest being 6 months from date of
grant) and expire 10 years from date of grant. The issuance of inducement
options was not registered under the Securities Act in reliance
on the exceptions set forth in Section 4(2) of the Securities Act.
In May of 2006, the Company accepted 32,869 shares of its Common Stock
(valued at $2.95 a share) in repayment of loans to officers of $97,000.
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.
SIGNATURE
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.
COGNITRONICS CORPORATION
Registrant
Date: August 14, 2006 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer