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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 20-8058881
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Nickerson Road, Marlborough, MA 01752
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(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 7,114,892 shares of common stock outstanding at October 28,
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
4. Controls and Procedures..................................................................................... 14
PART II
OTHER INFORMATION
1A. Risk Factors................................................................................................ 15
6. Exhibits.................................................................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKENGINE NETWORKS, INC.
BALANCE SHEETS
(dollars in thousands)
Sept. 30, Dec. 31,
2008 2007
------------ ------------
ASSETS (unaudited) (audited)
Current assets
Cash and cash equivalents $ 150 $ 415
Accounts receivable, net 431 990
Note and interest receivable, net -- 392
Inventories, net 329 766
Other current assets 138 102
------------ ------------
Total current assets 1,048 2,665
Property, plant and equipment, net 265 591
Other assets, net 42 123
------------ ------------
Total assets $ 1,355 $ 3,379
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 155 $ 199
Notes payable 844 850
Accrued compensation and benefits 314 543
Other accrued expenses 477 371
Deferred services revenue 621 368
------------ ------------
Total current liabilities 2,411 2,331
Notes payable, less current portion 571 893
Other liabilities 367 538
------------ ------------
Total liabilities 3,349 3,762
Commitments and contingencies
Stockholders' deficit
Common stock, par value $0.001 per share;
authorized 20,000,000 shares, issued 7,114,892 at
September 30, 2008 and 6,957,183 at December 31, 2007
7 7
Additional paid-in capital 14,821 15,330
Accumulated deficit (16,207) (14,416)
Accumulated other comprehensive loss (615) (615)
------------ ------------
(1,994) 306
Less cost of 0 and 251,947 common shares in treasury -- (689)
------------ ------------
Total stockholders' deficit (1,994) (383)
------------ ------------
Total liabilities and stockholders' deficit $ 1,355 $ 3,379
============ ============
See notes to the interim financial statements.
3
THINKENGINE NETWORKS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(dollars in thousands except per share data)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
----------------------------- -----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenues:
Product $ 93 $ 700 $ 1,445 $ 2,174
Service 904 1,099 2,963 3,352
------------ ------------ ------------ ------------
997 1,799 4,408 5,526
Cost of revenues:
Product 153 523 1,122 1,447
Service 143 234 486 738
------------ ------------ ------------ ------------
296 757 1,608 2,185
------------ ------------ ------------ ------------
Gross margin 701 1,042 2,800 3,341
Other costs and expenses:
Research and development 459 1,259 1,882 3,887
Sales and marketing 172 616 871 1,964
General and administrative 646 621 1,693 2,046
Interest expense 49 68 172 226
Other (income), net (1) (24) (27) (133)
------------ ------------ ------------ ------------
1,325 2,540 4,591 7,990
------------ ------------ ------------ ------------
Pretax loss (624) (1,498) (1,791) (4,649)
Benefit from income taxes -- (129) -- (129)
------------ ------------ ------------ ------------
Net loss (624) (1,369) (1,791) (4,520)
Pension liability adjustment -- 129 -- 129
------------ ------------ ------------ ------------
Comprehensive loss $ (624) $ (1,498) $ (1,791) $ (4,649)
============ ============ ============ ============
Net loss per share - basic and diluted: $ (0.09) $ (0.20) $ (0.26) $ (0.67)
============ ============ ============ ============
Weighted average number of basic and diluted shares outstanding 6,985,064 6,706,384 6,890,179 6,741,353
============ ============ ============ ============
See notes to the interim financial statements.
4
THINKENGINE NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended Sept. 30,
-----------------------------
2008 2007
------------ ------------
Operating Activities:
Net loss $ (1,791) $ (4,520)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization expense 326 931
Stock-based compensation expense 180 479
Amortization of deferred financing costs 42 35
Amortization of debt discounts 23 12
Gain on sale of property and equipment (23) --
Deferred income taxes -- (129)
Net decrease in:
Accounts receivable 559 784
Inventories 437 549
Other assets 3 181
Net increase (decrease) in:
Accounts payable (44) 289
Accrued compensation and benefits (400) (430)
Deferred service revenues 253 (87)
Other accrued expenses 106 (397)
------------ ------------
Net cash used in operating activities (329) (2,303)
------------ ------------
Investing Activities:
Proceeds from recovery of note receivable 392 37
Proceeds from sales of property and equipment 23 --
Additions to property, plant and equipment -- (211)
------------ ------------
Net cash provided by (used in) investing activities 415 (174)
------------ ------------
Financing Activities:
Payment for shares purchased for treasury -- (157)
Proceeds from shares issued pursuant to stock plans -- 31
Payment of principal amount of term loan (341) (43)
Payment of renewal fee in connection with financing agreement (10) --
Proceeds from term loan -- 1,500
------------ ------------
Net cash (used in) provided by financing activities (351) 1,331
------------ ------------
Decrease in cash and cash equivalents (265) (1,146)
Cash and cash equivalents - beginning of period 415 2,764
------------ ------------
Cash and cash equivalents - end of period $ 150 $ 1,618
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 113 $ 130
============ ============
Income taxes, net $ 26 $ 19
============ ============
Non-cash investing and financing activities:
Reduction in paid-in capital in connection with issuance of
treasury shares $ 689 $ --
============ ============
Repayment of loans to officers and accumulated interest with
common stock $ -- $ 465
============ ============
Cashless exercise of stock options $ -- $ 46
============ ============
Increase in deferred financing fees in connection with term
loan financing $ -- $ 150
============ ============
Stock warrants issued in connection with term loan $ -- $ 59
============ ============
See notes to interim financial statements.
5
THINKENGINE NETWORKS, INC.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 and nine-month periods ended September 30,
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 as filed with the Securities and Exchange
Commission on March 19, 2008.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 2. GOING CONCERN/MANAGEMENT'S PLAN
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 approximately $1.8 million for the nine months ended September 30,
2008. The Company has an accumulated deficit of approximately $16.2 million, a
stockholders' deficit of approximately $2.0 million and a working capital
deficit of $1.4 million at September 30, 2008. Additionally, the Company had a
cash balance of $0.2 million at September 30, 2008 and has limited available
borrowings under its accounts receivable financing agreement. The above factors
raise substantial doubt about the Company's ability to continue as a going
concern.
The report of the Company's independent registered public 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 to reduce operating expenses, and to
improve the salability of the VSR1000 product. The Company's major objective is
to increase the order volume of the VSR1000. Short and long-term liquidity needs
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
continue to deteriorate due to increased competition, loss of a large customer
or other adverse events, it will be required to obtain additional sources of
funds through asset sales, capital market transactions, financing from third
parties or a combination thereof. The Company has not been able to attain
operating profitability from continuing operations since fiscal year 2000, 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,
securing debt financing and restructuring existing debt agreements 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 additional
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 in order 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 continue
operations. No assurances 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.
6
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
Sept. 30, Dec. 31,
2008 2007
---------- ----------
Finished goods .......................... $ 159 $ 551
Raw materials ........................... 170 215
---------- ----------
$ 329 $ 766
========== ==========
Included in the above amounts is the Company's reserve for slow-moving and
obsolete inventory totaling $2,788 and $3,387 at September 30, 2008 and December
31, 2007, respectively.
PROPERTY, PLANT AND EQUIPMENT
The decrease of $0.3 million in the balance from December 31, 2007 is primarily
due to depreciation expense.
OTHER LIABILITIES
Sept. 30, Dec. 31,
2008 2007
---------- ----------
Defined benefit pension plan ............ $ 420 $ 473
Officers' supplemental pension .......... 157 196
---------- ----------
577 669
Less current portion included in
accrued compensation and benefits.. 210 131
---------- ----------
$ 367 $ 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 to
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.
Effective June 3, 2008, the Company entered into a Payment Modification
Agreement (the "Modification Agreement") for the Term Loan. Pursuant to the
Modification Agreement, payments under the Term Loan have been restructured. In
lieu of monthly payments of $58 pursuant to the existing Term Loan Agreement,
the Company will pay: (i) eight consecutive monthly payments of principal and
interest in the amount of $40 commencing on June 10, 2008 and ending on January
10, 2009, (ii) seven consecutive monthly payments of principal and interest in
the amount of $58 commencing on February 10, 2009 and ending on August 10, 2009,
(iii) six monthly payments of principal and interest of $88 commencing on
September 10, 2009 and ending on February 10, 2010, and (iv) the final payment
of $150 remains due as scheduled on February 10, 2010. The lender also agreed to
release the negative pledge with respect to certain specified intellectual
property of the Company. This payment modification is accounted for as a
7
troubled debt restructuring under SFAS No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings. There was no impact on the carrying
amount of the loan as a result of the payment modification.
In September 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 eligible 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 have been
factored under this Financing Agreement to-date. 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. On September 28, 2008
the Company paid $10 to the lender to renew the agreement which was recorded as
a debt discount and immediately charged to interest expense. As of September 30,
2008, available borrowings under the Financing Agreement totaled approximately
$0.3 million, and there were no borrowings outstanding.
With respect to the Term Loan and the Financing Agreement, the Company pledged
as collateral 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 basic net income (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 one
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 1,401,478 $ 2.32 101,750 $ 2.88
Granted -- -- 12,000 0.06
Exercised -- -- --
Forfeited/expired (216,667) 2.62 (751,326) 2.73 (50,500) 3.12
--------- --------- ---------
Outstanding at September 30, 2008 183,333 2.65 650,152 1.85 63,250 2.15
========= ========= =========
Shares available for future grant 0 913,714 274,250
========= ========= =========
Weighted average remaining term 6.2 years 7.3 years 4.9 years
Exercisable at September 30, 2008 183,333 $ 2.65 393,171 $ 1.87 51,250 $ 2.64
========= ========= =========
Intrinsic value:
Outstanding $ 0 $ 0 $ 0
Exercisable $ 0 $ 0 $ 0
8
The intrinsic value for stock options is calculated based on the exercise price
of the underlying awards and the market price of the Company's common stock as
of the reporting date.
The following table summarizes non-vested restricted stock activity:
Stock Plan Inducement
Shares Shares
--------- ---------
Unvested as of January 1, 2008 1,200 275,000
Granted 410,000 --
Vested -- --
Forfeited (400) --
--------- ---------
Unvested as of September 30, 2008 410,800 275,000
========= =========
Shares available for future grant 4,000 0
========= =========
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 Nine Months Ended
Sept. 30, Sept. 30,
---------------------- ----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Stock options $ 8 $ 103 $ 48 $ 379
Restricted stock 45 35 132 100
--------- --------- --------- ---------
Total stock-based compensation expense $ 53 $ 138 $ 180 $ 479
========= ========= ========= =========
Cost of revenues $ (8) $ 13 $ 2 $ 37
Research and development (4) (5) (17) 32
Selling, general and administrative 65 130 195 410
--------- --------- --------- ---------
Total stock-based compensation expense $ 53 $ 138 $ 180 $ 479
========= ========= ========= =========
Stock-based compensation expense for the three-month and nine-month periods
ended September 30, 2008 reflect credits resulting from the impact of
forfeitures of unvested option grants. This was due to the reduction in staffing
levels which occurred primarily during the second quarter.
No tax benefits were attributed to stock-based compensation expense because a
valuation allowance is maintained for substantially all net deferred tax assets.
The Company recognizes 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 employees 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 based on
the market price of $0.57 per share on the date of grant.
In August 2008, the Company granted under its Restricted Stock Plan the right to
four key employees to receive 260,000 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 $16 based on
the market price of $0.06 per share on the date of grant.
As of September 30, 2008, approximately $0.4 million of unrecognized stock
compensation expense related to unvested awards (net of estimated forfeitures)
is expected to be recognized over a period of 1.9 years.
9
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 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, as revised, plus such additional amounts as the
Company may determine to be appropriate from time to time. The Company expects
funding requirements of $161 in 2008 of which $29 was funded during the quarter
ended September 30, 2008, and $133 during the nine months ended September 30,
2008.
The components of net periodic benefit cost of the plan are as follows:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
---------------------- ----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Interest cost on projected benefit obligation $ 19 $ 18 $ 57 $ 62
Expected return on plan assets (1) (18) (19) (59)
Service cost 1 -- 11 --
Amortization of net loss 10 10 30 32
--------- --------- --------- ---------
Net periodic pension cost $ 29 $ 10 $ 79 $ 35
========= ========= ========= =========
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In March 2008, the FASB issued SFAS No. 162, "Disclosures about Derivative
Instruments and Hedging Activities" (SFAS 162), which changes the disclosure
requirements for derivative instruments and hedging activities. SFAS 161
requires enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" and its related interpretations, and (c) how derivative instruments
and related hedged items affect an entity's financial position, financial
performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company has not yet determined the effect, if any, that SFAS 162
will have on its financial statements.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
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 or financial assets and liabilities in the nine-month period ended
September 30, 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.
10
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 of SFAS No. 159 in the nine-month period ended September
30, 2008 did not have an impact on the Company's financial condition or results
of operations as a result of implementing SFAS No. 159.
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 grow 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; the sufficiency of our
intellectual property rights; our ability to raise funds since the Company was
delisted from the American Stock Exchange; our ability to replay loans secured
by the Company's assets; 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 and our subsequent Form 10-Q filings.
Results of Operations
---------------------
Total revenue was $1.0 million in the third quarter of 2008 versus $1.8 million
in the third quarter of 2007. Product revenue for the third quarter of 2008
decreased $0.6 million versus 2007 primarily due to lower order volume. Service
revenue decreased by $0.2 million for the three months ended September 30, 2008
as compared to the third quarter of 2007 due to lower order volume.
Total revenue was $4.4 million for the first nine months of 2008 versus $5.5
million in 2007. Product revenue for the first nine months of 2008 decreased
$0.7 million versus 2007 primarily due to lower order volume. Service revenue
decreased by $0.4 million during the nine month period ended September 30, 2008
as compared to the same period in 2007 due to lower order volume and due to the
inclusion in the second quarter of 2007 of $0.2 million of revenue from a
non-recurring professional services project.
Gross margin was 70% in the quarter ended September 30, 2008 versus 58% in the
quarter ended September 30, 2007, primarily due to changes in the composition of
product revenues, and lower personnel and facility expenses. Gross margin was
64% for the nine month period ended September 30, 2008 versus 60% for the
nine-month period ended September 30, 2007, primarily due to changes in the
composition of product revenues, and lower personnel and facility expenses.
Research and development expense decreased $0.8 million (64%) and $2.0 million
(52%) for the three and nine month periods ended September 30, 2008 versus the
corresponding periods in 2007, primarily due to reduced personnel costs and
lower product development expenses.
Sales and marketing expenses decreased by $0.4 million (72%) for the three-month
period ended September 30, 2008 compared to 2007, and decreased by $1.1 million
(56%) for the nine-month period ended September 30, 2008 versus the
corresponding period in 2007 due to lower personnel and marketing expenses.
11
General and administrative expenses were unchanged for the three-month period
ended September 30, 2008 compared to 2007, and decreased $0.4 million (17%) for
the nine-month period ended September 30, 2008 compared to 2007, primarily due
to lower personnel related expenses.
Interest expense reflects interest incurred on the term loan which the Company
borrowed in January 2007.
No tax benefits were provided for operating 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 $0.3 million in the first nine months of 2008, and
$2.3 million in the first nine months of 2007. The cash used by operations in
2008 and 2007 is primarily attributable to the losses from operations. Investing
activities in the first nine months of 2008 provided $0.4 million, primarily due
to the recovery of notes receivable from the sale of the Company's former UK
subsidiary, Dacon Electronics, plc. Cash used by financing activities of $0.3
million in the first nine months of 2008 is due to the payment of principal
under a term loan agreement. Financing activities in the first nine months of
2007 generated $1.3 million, which was primarily due to the receipt of $1.5
million from the proceeds of a term loan.
Working capital (deficit) was $(1.4) million at September 30, 2008 and $0.3
million at December 31, 2007. The ratio of current assets to current liabilities
was 0.4:1 at September 30, 2008 and 1.1:1 at December 31, 2007. The decrease in
working capital was primarily due to the net losses incurred during the nine
month period ended September 30, 2008.
The Company's contractual obligations at September 30, 2008 are as follows
(amounts in thousands):
Less than More than
Payments due by period: Total 1 Year 1-3 Years 3 Years
--------- --------- --------- ---------
Officer's supplemental pension plan $ 138 $ 51 $ 87 $ --
Term loans 1,548 960 588 --
Operating leases 300 291 9 --
Purchase commitments 264 264 -- --
--------- --------- --------- ---------
$ 2,250 $ 1,566 $ 684 $ --
========= ========= ========= =========
Term loan payments include principal, interest and financing fee. Payments made
under operating leases are treated as rent expense. Purchase commitments consist
of inventory purchases and consulting contracts. The Company does not anticipate
making any capital expenditures during the remainder of 2008.
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 approximately $1.8 million for the nine months ended September 30,
2008. The Company has an accumulated deficit of approximately $16.2 million, a
stockholders' deficit of approximately $2.0 million and a working capital
deficit of $1.4 million at September 30, 2008. Additionally, the Company had a
cash balance of $0.2 million at September 30, 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 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 will seek to implement with
the major objective being to increase the order volume for the VSR1000. Short
and long-term liquidity needs 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 continue to deteriorate due to increased
competition, loss of a large customer or other adverse events, it will be
required to obtain additional sources of funds through asset sales, capital
market transactions, financing from third parties or a combination thereof. The
Company has not been able to attain operating profitability from continuing
operations since 2000, 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, securing debt financing, and restructuring existing
debt agreements have been designed to improve operating
12
results and liquidity, and to better position the Company to compete under
current market conditions. During the nine-month period ended September 30,
2008, the Company restructured its Term Loan whereby short-term payments of
principal were reduced to improve the Company's short-term liquidity. However,
the Company may, in the future, be required to seek new sources of financing or
additional 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 in order 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 continue 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.
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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 September 30, 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 September 30, 2008.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
three-month period ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
14
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 $0.6 million for the three months
ended September 30, 2008, and a net loss of approximately $1.8 million for the
nine month period ended September 30, 2008. As of September 30, 2008, the
Company had an accumulated deficit of approximately $16.2 million, a net
stockholders' deficit of approximately $2.0 million, and a working capital
deficit of approximately $1.4 million. 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 any potential profitability are
highly uncertain. The Company's future growth and profitability depend 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. If future customers do not
purchase and successfully deploy the Company's products, the Company's revenues
will be adversely impacted.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN.
The report of the Company's independent registered public accounting firm
prepared in conjunction with the Company's December 31, 2007 financial
statements 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 September 30, 2008, the Company had $0.2 million in cash available to fund
its operations, and had a working capital deficit of $1.4 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 the Company's common stock is limited to the
OTC Bulletin Board. Inclusion of our common stock on the OTC Bulletin Board
could adversely affect the liquidity and price of the Company's common stock,
and make it more difficult for it to raise additional capital on favorable
terms, if at all. In addition, this de-listing by the AMEX may negatively impact
the Company's reputation and, as a consequence, its business. Furthermore, the
15
OTC Bulletin Board is viewed by most investors 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 the
Company's common stock.
The Company's 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.
16
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: October 28, 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)
17