NEWS** Saturday, August 29 2015 9:22 PM, EST THINSPACE TECHNOLOGY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations . Edgar Online "Glimpses"
We presently do not have any available credit, bank financing or other external sources of liquidity. We will need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, we may incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Overview
Thinspace Technology, Inc. is a hardware and software cloud computing company specifically focused on desktop virtualization. Our solutions deliver and manage centralized desktop computing from a pool of shared computing resources ('the Cloud') to the end users. This allows our customers secure access to centrally managed Desktops or Software Applications and to work and collaborate from anywhere, accessing enterprise apps and data on any of the latest devices, as easily as they would in their own office- simply and securely.
Our cloud computing solutions help IT and service providers build both private and public clouds, leveraging virtualization and networking technologies to deliver high-performance, elastic and cost-effective services for mobile workstyles.
Our products have been designed to suit the needs of all sizes of organizations from 5 to 50,000+ users. Customers have found our products to be easier to use, faster to implement and cheaper to maintain than other similar software, which is important to small and medium sized companies and governmental offices as well as large enterprise organizations that are looking to reduce their IT infrastructure costs. We market and license our products directly to systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.
Our operating subsidiaries are Thinspace Technology Ltd ("Thinspace UK "), organized and operating in the United Kingdom , and Thinspace Technology Ltd. ("Thinspace US"), a Nevada corporation formed on August 24, 2010 and operating in the states of Florida and Texas .
In this report, the terms the "Company", "we", "us", and "our" refer to Thinspace Technology, Inc. , a Delaware corporation, and its operating subsidiaries, Thinspace UK and Thinspace US, unless the context otherwise requires.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Use of Estimates - The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Going Concern - The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding our recurring losses or accumulated deficit
Revenue Recognition - We recognize revenue in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605 "Revenue Recognition". Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title has transferred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenue is not recognized on product sales transacted on a test or pilot basis. Instead, receipts from these types of transactions offset marketing expenses.
Deferred Revenue - Deferred revenue related to support and maintenance is recorded in a manner consistent with the Company's revenue recognition policy. The Company typically enters into one-year upgrade and maintenance contracts with its customers. The upgrade and maintenance contracts are generally paid in advance but can be billed monthly or quarterly. The Company defers such payment and recognizes revenue ratably over the contract period.
Fair Value of Financial Instruments - Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management's estimates, reasonably approximate their book value. The fair value of the Company's derivative instruments is determined using option pricing models.
13 Results of Operations
Three Months ended June 30, 2015 as compared to the Three Months ended June 30, 2014
Revenues:
Revenue was $332,693 for the three months ended June 30, 2015 compared to revenue of $2,593,997 for the three months ended June 30, 2014 . Overall, our revenues decreased 87% for the 2015 period as compared to the 2014 period. The decrease is primarily attributable to the delivery of a large order during the 2014 period (representing approximately 80% of 2014 revenue).
Cost of goods sold:
Cost of goods sold as a percent of revenue was 26% and 67% for the three months ended June 30, 2015 and 2014, respectively. Cost of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.
Operating expense:
Operating expense decreased 55% for the three months ended June 30, 2015 , compared to the three months ended June 30, 2014 . Our costs have decreased as we have curtailed expenses for consulting, compensation and other costs. Included in our operating expenses for the three months of 2015 and 2014 is $94,784 and $873,466 , respectively, of non-cash expense for stock based compensation. The balance of our other operating expenses includes salaries, consulting, marketing and general overhead expenses.
We expect that our operating expenses will ultimately increase as our business grows and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.
Other income (expense):
We had expense from the change in the fair value of our derivative liabilities of $28,814,582 during the three months ended June 30, 2015 compared with income of $22,862,151 during the three months ended June 30, 2014 . The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.
We reported gain from the conversion of debt of $22,657 during the three months ended June 30, 2015 , with no comparable item for the three months ended June 30, 2014 . The gain on debt conversion resulted from the issuance of shares of common stock to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount of the gain or loss.
We reported interest expense of $1,828,444 during the three months ended June 30, 2015 as compared with interest expense of $1,686,014 during the three months ended June 30, 2014 . Interest expense consists primarily of derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt, aggregating $1,124,641 and $1,211,969 for the three months ended June 30, 2015 and 2014, respectively,and the expense associated with the price resets of certain of our derivative instruments, aggregating $313,286 for the three months ended June 30, 2015 . The balance of the expense relates to the amortization of debt discount and interest accrued on debt.
Six Months ended June 30, 2015 as compared to the Six Months ended June 30, 2014
Revenues:
Revenue was $1,122,999 for the six months ended June 30, 2015 compared to revenue of $3,378,605 for the six months ended June 30, 2014 . Overall, our revenues decreased 67% for the 2015 period as compared to the 2014 period. The decrease is primarily attributable to the delivery of a large order during the 2014 period (representing approximately 61% of 2014 revenue).
Cost of goods sold:
Cost of goods sold as a percent of revenue was 40% for the six months ended June 30, 2015 and 55% for the six months ended June 30, 2014 . Cost of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.
Operating expense:
Operating expense decreased 41% for the six months ended June 30, 2015 , compared to the six months ended June 30, 2014 . Our costs have decreased as we have curtailed expenses for consulting, compensation and other costs. Included in our operating expenses for the first six months of 2015 and 2014 is $196,893 and $1,185,966 , respectively, of non-cash expense for stock based compensation. The balance of our other operating expenses includes salaries, consulting, marketing and general overhead expenses.
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We expect that our operating expenses will ultimately increase as our business grows and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.
Other income (expense):
We had expense from the change in the fair value of our derivative liabilities of $27,643,262 during the six months ended June 30, 2015 , compared with income of $1,109,207 during the six months ended June 30, 2014 . The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.
We reported gain from the conversion of debt of $22,657 and $155,129 during the six months ended June 30, 2015 and 2014, respectively. The gain on debt conversion resulted from the issuance of shares of common stock to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount of the gain or loss.
We reported interest expense of $2,681,350 during the six months ended June 30, 2015 as compared with interest expense of $5,470,899 during the six months ended June 30, 2014 . Interest expense consists primarily of derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt, aggregating $1,718,050 and $3,906,884 for the three months ended June 30, 2015 and 2014, respectively, and the expense associated with the price resets of certain of our derivative instruments, aggregating $313,286 and $1,033,365 , respectively. The balance of the expense relates to the amortization of debt discount and interest accrued on debt.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of June 30, 2015 we had approximately $94,000 in cash and cash equivalents and a working capital deficit of $44,258,324 (resulting primarily from derivative liabilities aggregating $41,710,904 ), as compared to cash and cash equivalents of approximately $136,000 and a working capital deficit of $14,661,201 at December 31, 2014 . Our recent sources of operating capital have been debt financings. We received proceeds from convertible and other notes aggregating $1,286,000 during the six months ended June 30, 2015 .
Net Cash Provided by Operating Activities
We used $1,226,224 of cash in our operating activities during the six months ended June 30, 2015 compared to $1,096 ,009used by our operating activities for the six months ended June 30, 2014 . The increase in net cash used results primarily from an increase in net loss of $176,775 (after adjusting for non-cash expenses), partially offset by the net changes in other current assets and liabilities.
Net Cash Used in Investing Activities
We did not incur any costs for the purchase of furniture and equipment during the six months ended June 30, 2015 , compared to $6,529 used for the purchase of furniture and equipment during the six months ended June 30, 2014 .
Net Cash Provided by Financing Activities
During the six months ended June 30, 2015 , we received $1,285,650 from the sale of notes and convertible securities. We repaid $99,521 of notes payable and paid $11,050 of accrued preferred stock dividends.
During the six months ended June 30, 2014 , we received $472,000 from the sale of our preferred stock, $961,000 from the sale of notes and convertible debentures and $21,000 from stockholder advances. We repaid $82,654 of notes payable and repaid $118,631 of shareholder advances.
We presently do not have any available credit, bank financing or other external sources of liquidity. We will need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, we may incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
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Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
