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| ENWV > SEC Filings for ENWV > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Results of Operations
Three and nine months ended September 30, 2008 and 2007
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of product revenues 69.5 72.1 69.2 73.1
Cost of product revenues, amortization of
intangible assets 0.9 1.1 0.9 0.9
Research and development 17.3 20.2 18.0 18.8
Selling, general and administrative 18.8 23.4 20.5 23.1
Amortization of intangible assets 1.1 1.3 1.1 0.8
Total costs and expenses 107.6 118.1 109.7 116.8
Loss from operations (7.6 ) (18.1 ) (9.7 ) (16.8 )
Interest and other income, net 1.7 6.1 2.2 6.4
Loss before provision for income taxes (5.9 ) (12.0 ) (7.6 ) (10.3 )
Provision for income taxes - - - -
Net loss (5.9 )% (12.0 )% (7.6 )% (10.3 )%
Total revenues
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Total revenues $ 16,979 $ 13,794 23.1 % $ 48,440 $ 42,084 15.1 %
Product revenues $ 16,937 $ 13,608 24.5 % $ 47,810 $ 41,339 15.7 %
Development fees $ 42 $ 186 (77.4 %) $ 630 $ 745 (15.4 %)
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Total revenues consist of product revenues and development fees. Product
revenues are attributable to sales of our RF products. Development fees are
attributable to the development of product prototypes and custom products
pursuant to development agreements that provide for payment of a portion of our
research and development or other expenses. We expect to enter into more
development contracts in the future as we seek to further penetrate the defense
electronics market, where development contracts are customary, but we do not
expect development fees to represent a significant percentage of our total
revenues for the foreseeable future.
During the three months ended September 30, 2008, total revenues increased by
23% compared to the same period in 2007. This increase was primarily the result
of an increase in revenues from our non-telecommunication customers. We
experienced a $2.9 million increase in revenues from our non-telecommunication
customers and an increase of $283,000 in revenues from our telecommunication
customers.
During the nine months ended September 30, 2008, total revenues increased by
15% compared to the same period in 2007. This increase was the result of an
increase in revenues from our non-telecommunication customers. We experienced a
$6.7 million increase in revenues from our non-telecommunication customers which
was partially offset by a $294,000 decrease in revenues from our
telecommunication customers.
Cost of product revenues
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Cost of product revenues $ 11,798 $ 9,940 18.7 % $ 33,529 $ 30,768 9.0 %
Percentage of total revenues 69.5 % 72.1 % 69.2 % 73.1 %
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Cost of product revenues consists primarily of: costs of direct materials and
labor utilized to assemble and test our products; equipment depreciation; costs
associated with procurement, production control, quality assurance and
manufacturing engineering; costs associated with maintaining our manufacturing
facilities; fees paid to our offshore manufacturing vendor; reserves for
potential excess or obsolete material; costs related to stock-based
compensation; and accrued costs associated with potential warranty returns
offset by the benefit of usage of materials that were previously written off.
During the third quarter of 2008, the cost of product revenues as a
percentage of revenues decreased compared to the same period in 2007. This
decrease was primarily attributable to the increased absorption of our overhead
costs resulting from increased production and to a change in product mix
favoring certain higher margin products. The cost of product revenues in both
periods was favorably impacted by the utilization of inventory that was
previously written off, amounting to $49,000 during the third quarter 2008 and
$62,000 during the third quarter 2007.
During the first nine months of 2008, the cost of product revenues as a
percentage of revenues decreased compared to the same period in 2007. This
decrease was primarily attributable to the increased absorption of our overhead
costs resulting from increased production and to a change in product mix
favoring certain higher margin products. Additionally, the cost of product
revenue during the first nine months of 2007 was negatively impacted by the
write down of certain raw material inventory and increased inventory reserves
associated with the end of life of one of our customer programs. The cost of
product revenues in both periods was favorably impacted by the utilization of
inventory that was previously written off, amounting to $157,000 during the
first nine months of 2008 and $477,000 during the first nine months of 2007.
We continue to focus on reducing the cost of product revenues as a percentage
of total revenues through the introduction of new designs and technology and
further improvements to our manufacturing processes. In addition, our product
costs are impacted by the mix and volume of products sold and will continue to
fluctuate as a result.
Research and development expenses
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Research and
development expenses $ 2,943 $ 2,792 5.4 % $ 8,715 $ 7,906 10.2 %
Percentage of total
revenues 17.3 % 20.2 % 18.0 % 18.8 %
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Research and development expenses consist primarily of salaries and related
expenses for research and development personnel, outside professional services,
prototype materials, supplies and labor, depreciation for related equipment,
allocated facilities costs and expenses related to stock-based compensation.
During the third quarter of 2008, research and development expenses increased
in absolute dollars compared to the same period in 2007. The increase in
research and development costs was primarily attributable to an increase of
$126,000 in personnel-related expenses.
During the first nine months of 2008, research and development expenses
increased in absolute dollars compared to the same period in 2007. The increase
in research and development expenses in absolute dollars was primarily
attributable to an increase of $855,000 in personnel-related expenses and an
increase of $82,000 for stock based compensation which were partially offset by
a decrease of $212,000 in project-related expenses.
During the remainder of 2008, we expect research and development expenses to
be flat relative to the third quarter of 2008 in absolute dollar terms.
Selling, general and administrative expenses
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Selling, general and
administrative expenses $ 3,200 $ 3,230 (0.9 %) $ 9,927 $ 9,709 2.2 %
Percentage of total
revenues 18.8 % 23.4 % 20.5 % 23.1 %
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Selling, general and administrative expenses consist primarily of salaries
and related expenses for executive, sales, marketing, finance, accounting,
legal, information technology and human resources personnel, professional fees,
facilities costs, expenses related to stock-based compensation and promotional
activities.
During the third quarter of 2008, selling, general and administrative
expenses decreased as percentage of revenues due to our increase in revenues
compared to the same period in 2007. During the third quarter of 2008, selling,
general and administrative expense remained consistent in absolute dollars
compared to the same period in 2007.
During the first nine months of 2008, selling, general and administrative
expenses increased in absolute dollars compared to the same period in 2007. The
increase in absolute dollars was primarily attributable to an increase of
$643,000 in personnel-related expenses which was partially offset by a decrease
of $235,000 in professional services and a decrease of $152,000 for stock based
compensation.
During the remainder of 2008, we anticipate selling, general and
administrative expenses will be flat relative to the third quarter of 2008 in
absolute dollar terms.
Amortization of intangible assets
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Cost of product
revenues, amortization
of intangible assets $ 149 $ 149 0.0 % $ 447 $ 399 12.0 %
Amortization of
intangible assets $ 179 $ 180 (0.6 %) $ 537 $ 352 52.6 %
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As part of our acquisition of ALC Microwave, Inc., or ALC, in April 2007, we
acquired $2.9 million of identifiable intangible assets, including $900,000 for
customer relationships, $880,000 for developed technology, $560,000 for customer
backlog, $370,000 for the non-compete agreement and $230,000 for the tradename.
These assets are subject to amortization and have approximate estimated useful
lives as follows: customer relationships - six years, developed technology - six
years, customer backlog - two years, non-compete agreement - four years, and
tradename - six years.
As part of our acquisition of JCA Technology, Inc., or JCA, in July 2004, we
acquired $4.2 million of identifiable intangible assets, including $2.3 million
for developed technology, $1.1 million for the tradename, $780,000 for customer
relationships and $140,000 for customer backlog. These assets are subject to
amortization and have approximate estimated useful lives as follows: developed
technology - five years, customer backlog - six months and customer
relationships - five years. The tradename intangible asset is not subject to
amortization and will be evaluated for impairment at least annually or more
frequently if events and changes in circumstances suggest that the carrying
amount may not be recoverable.
The amortization associated with developed technology is a charge to cost of
product revenues. The amortization associated with developed technology was
$149,000 and $149,000 for three months ended September 30, 2008 and 2007,
respectively.
During the first nine months of 2008, the amortization associated with
developed technology was $447,000 compared to $399,000 during the first nine
months of 2007.
The amortization associated with the customer backlog, customer
relationships, non-compete and tradename is a charge to operating expenses.
During the third quarter of 2008, the $179,000 of amortization was comprised of
the following: $77,000 for customer relationships, $70,000 for customer backlog,
$23,000 for the non-compete agreement and $9,000 for the tradename. During the
third quarter of 2007, the $180,000 of amortization was comprised of the
following: $77,000 for customer relationships, $70,000 for customer backlog,
$23,000 for the non-compete agreement and $10,000 for the tradename.
During the first nine months of 2008, total amortization of $537,000 was
comprised of the following: $230,000 for customer relationships, $210,000 for
customer backlog, $70,000 for the non-compete agreement and $27,000 for the
tradename. During the first nine months of 2007, total amortization of $352,000
was comprised of the following: $180,000 for customer relationships, $117,000
for customer backlog, $38,000 for the non-compete agreement and $17,000 for the
tradename. This increase was attributable to the amortization related to the ALC
intangibles.
Interest and other income, net
Three months ended September 30, Nine months ended September 30,
2008 2007 % Change 2008 2007 % Change
(In thousands) (In thousands)
Interest and other
income, net $ 291 $ 842 (65.4 %) $ 1,042 $ 2,708 (61.5 %)
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Interest and other income, net consists primarily of interest income earned
on our cash, cash equivalents and investments, the amortization of the deferred
gain from the sale of our Diamond Springs, California location and gains and
losses related to foreign currency transactions.
The decrease in interest and other income, net during both the three and nine
months ended September 30, 2008 was primarily the result of decreased interest
earned on our investments. We had a lower cash and investment balance due to our
stock repurchase in the fourth quarter of 2007 and our acquisition of ALC during
the second quarter of 2007. Additionally, interest rates have decreased
significantly from the prior year, especially on the highest rated investment
vehicles, leading to lower interest income. During the third quarter of 2008, we
earned $268,000 of interest income, and recognized $38,000 of other income from
the amortization of the deferred gain from the sale of our Diamond Springs,
California location which were partially offset by banking charges and losses on
foreign currency transactions. During the third quarter of 2007, we earned
$843,000 of interest income and recognized $38,000 of other income primarily
from the amortization of the deferred gain from the sale of our Diamond Springs,
California location which were partially offset by banking charges and losses on
foreign currency transactions.
During the first nine months of 2008, we earned $974,000 of interest income,
recognized a gain of $45,000 from the sales of securities and recognized
$115,000 of other income from the amortization of the deferred gain from the
sale of our Diamond Springs, California location which were partially offset by
banking charges and losses on foreign currency transactions. During the first
nine months of 2007, we earned $2.7 million of interest income and recognized
$115,000 of other income primarily from the amortization of the deferred gain
from the sale of our Diamond Springs, California location which were partially
offset by banking charges and losses on foreign currency transactions.
Our functional currency is the U.S. dollar. Transactions in foreign
currencies other than the functional currency are remeasured into the functional
currency at the time of the transaction. Foreign currency transaction losses
consist of the remeasurement losses that arise from exchange rate fluctuations
related to our operations in Thailand. For the three and nine months ended
September 30, 2008, we recorded a foreign currency loss of $3,000 and $43,000,
respectively. For the three months and nine months ended September 30, 2007, we
recorded a foreign currency transaction loss of $22,000.
Liquidity and Capital Resources
At September 30, 2008, we had $29.1 million of cash and cash equivalents,
$15.0 million in short-term investments, working capital of $60.6 million and no
debt outstanding. The following table sets forth selected condensed consolidated
statement of cash flows data:
Nine months ended
September 30,
2008 2007
(in thousands)
Net cash provided by (used in) operating activities $ (2,129 ) $ 3,539
Net cash used in investing activities (8,209 ) (4,859 )
Net cash provided by financing activities 419 498
Cash, cash equivalents, restricted cash, short- term and
long-term investments at end of period $ 44,686 $ 65,386
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During the first nine months of 2008, operating activities used $2.1 million
of cash as compared to providing $3.5 million of cash during the first nine
months 2007. During the first nine months of 2008, our net loss, adjusted for
depreciation and other non-cash items, contributed $1.2 million of cash as
compared to $241,000 in first nine months of 2007. During the first nine months
of 2008, the offsetting use of $3.3 million of cash was primarily due to a
$3.2 million increase in inventory, a $915,000 increase in accounts receivable
and a $272,000 increase in other assets which were partially offset by a
$842,000 increase in accounts payable and a $316,000 increase in accrued
compensation, other current and long-term liabilities. During the first nine
months of 2007, the remaining $3.3 million of cash provided by operating
activities was primarily due to a $5.2 million decrease in inventory which was
partially offset by a $660,000 increase in accounts receivable, a $380,000
decrease in accounts payable, a $170,000 increase in other assets, a $111,000
decrease in accrued warranty and a $590,000 decrease in accrued compensation and
other current and long-term liabilities.
During the first nine months of 2008, investing activities used $8.2 million
of cash as compared to using $4.9 million of cash during the first nine months
of 2007. The use of cash during the first nine months of 2008 was due to the
purchase of $1.6 million of property and equipment, the $1.0 million final
payment for the purchase of ALC, a $600,000 increase to restricted cash and a
net $5.0 million increase in investments. The use of cash during the first nine
months of 2007 was due to $5.8 million used for the purchase of ALC and $748,000
used for the purchase of property and equipment partially offset by a net
$1.4 million decrease in investments and a $236,000 decrease in restricted cash.
During the first nine months of 2008, financing activities provided $419,000
of cash as compared to providing $498,000 of cash during the first nine months
of 2007. During the first nine months of 2008, we received $434,000 of cash from
the proceeds of stock issuance which was partially offset by capital lease
payments. During the first nine months of 2007, we received $368,000 of cash
from the proceeds of stock issuance and $138,000 from the exercise of stock
options.
At September 30, 2008, we had a net unrealized loss of $9,000 related to
$15.0 million of investments in 18 debt securities. The investments all mature
during 2008 and 2009 and we believe that we have the ability to hold these
investments until the maturity date. Realized gains were $45,000 for the first
nine months of 2008. There were no such gains during the first nine months of
2007. During the first nine months of 2008 and 2007, we recorded a foreign
currency transaction loss of $43,000 and $22,000, respectively.
In order to maintain and enhance our competitive position, we must be able to
satisfy our customers' short lead-times and rapidly-changing needs. As a result
of these challenges, we may increase our raw materials and finished goods
inventory so that we will be better-positioned to meet our customers' demand. We
currently have inventory consigned to a customer location and may increase this
inventory in the future. Generally, if the consigned inventory is not withdrawn
by our customer within a certain period of time we have the ability to invoice
the customer for the consigned inventory. These increases in raw materials and
finished goods may increase our working capital needs in the future.
We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. With the exception of operating leases discussed in the notes to the consolidated financial statements included in this report, we have not entered into any off-balance sheet financing arrangements and we have not established or invested in any variable interest entities. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets. The following table summarizes our future cash obligations for operating leases and capital leases, excluding interest:
Payments Due by Period
Less Than 1 More Than 5
Total Year 1-3 Years 3-5 Years Years
(In thousands)
Contractual Obligations:
Capital lease obligations,
including interest $ 49 $ 23 $ 26 $ - $ -
Operating lease obligations 4,413 1,074 1,965 1,266 108
Total $ 4,462 $ 1,097 $ 1,991 $ 1,266 $ 108
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