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| HIFN > SEC Filings for HIFN > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
Overview
Hifn is a leading provider of network- and storage-security and data reduction products that simplify the way major network and storage original equipment manufacturers ("OEMs"), as well as small-and-medium enterprises ("SMEs"), efficiently and securely share, retain, access and protect critical data. Our products feature industry-recognized patented technology for the continuous protection of information, whether it is in transit on a network or at rest on storage. Hifn's solutions are attractive to customers because they feature high-performance, including some of the fastest compression and encryption processing speeds available in the market, multi-protocol capabilities, development tools and card level products with high-levels of integration that help reduce their time-to-market. Our applied services processors ("ASPs") perform the computation-intensive tasks of compression, encryption and authentication, providing our customers with high-performance, interoperable implementations of a wide variety of industry-standard networking and storage protocols. Our network- and security-processors, compression and data reduction solutions are used in networking, security and storage equipment such as routers, remote access concentrators, virtual private networks ("VPNs"), virtual tape libraries ("VTLs"), nearline storage systems, switches, broadband access equipment, network interface cards, firewalls and back-up storage devices.
Hifn encryption and compression ASPs allow network and storage equipment vendors to add security and data reduction functions to their products. Our encryption and compression processors provide industry-recognized algorithms that are used in products, such as VPNs, which enable businesses to reduce wide area networking costs by replacing dedicated leased-lines with lower-cost IP-based networks such as the Internet. Using VPNs, businesses can also provide customers, partners and suppliers with secure, authenticated access to the corporate network, increasing productivity through improved communications. Storage equipment vendors use our compression processor products and Express Data Reduction ("Express DR") cards to improve the performance and capacity of a wide range of disk and tape back-up systems. For example, storage OEMs who design in a Hifn Express DR card can offer their customers a storage solution that more than doubles storage capacity, saving them power, physical space and operational and capital expenses.
Additionally, Hifn acquired Siafu Software, LLC, a California LLC ("Siafu"), in July 2007, to complement our Express DR and Express Data Security ("Express DS") card business and expand our product offering to include integrated iSCSI network protocol based data encryption and compression software and sub-systems, reducing OEMs time to market in delivering secure and capacity optimized storage systems.
Hifn's network processor technology, acquired from International Business Machines Corporation ("IBM") in December 2003, complements our security processor business and expands our product offerings to include a programmable, yet deterministic, device that performs computation-intensive, deep packet inspection for high-touch services. The architecture of our network processor is unique and is an architecture used with applications that require high-touch services.
Critical Accounting Policies
The Company's critical accounting policies are disclosed in the Company's Form 10-K for the year ended September 30, 2008 and have not changed as of December 31, 2008.
Results for First Fiscal Quarter
During the three months ended December 31, 2008, our net revenues of $8.0 million decreased 11 percent from the $9.0 million in net revenues reported in the previous quarter and decreased 27 percent from the $10.9 million in net revenues reported in the first quarter of fiscal 2008. The decrease from the prior quarter was a result of a decrease in orders from three of our primary customers, Cisco, Huawei Technologies and EMC. Fluctuation in ordering patterns from our primary customers significantly affects our revenue levels from period to period. The decrease was partially offset by an increase in software and royalty revenue, reflecting demand for and timing of customer purchases of our licensed software products.
Our expenses during the three months ended December 31, 2008 were lower than in the preceding quarter, primarily due to decreased non-recurring engineering expenses, together with a decrease in sales and marketing headcount and recruitment costs partially offset by an increase in professional services.
Results of Operations
Net Revenues.
The following table sets forth net revenues by category, as a percentage of
total net revenues and the year-over-year change:
December 31,
2008 2007 Year-
% of net % of net over-Year
Three Months Ended $ revenues $ revenues Growth
(dollars in thousands)
Processors $ 6,907 87% $ 9,985 91% (31)%
Software licenses and other 1,051 13% 944 9% 11%
$ 7,958 100% $ 10,929 100% (27)%
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Net revenues decreased by $3.0 million for the quarter ended December 31, 2008 as compared to net revenues for the quarter ended December 31, 2007. Our processor revenues decreased $3.1 million, primarily due to decreased orders from three of our primary customers, Cisco, Huawei Technologies and EMC, partially offset by higher revenues from software licenses and royalties of $107,000.
Semiconductor and software sales to our principal end customers and their respective contribution to net revenue for the respective periods were as follows:
December 31,
Three Months Ended 2008 2007
Cisco Systems, Inc. and its contract
manufacturers 38% 50%
EMC Corporation 10% 13%
Hewlett-Packard 10% 4 %
58% 67%
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Cost of Revenues.
Cost of revenues by category, as a percentage of each respective revenue
category and the year-over-year change were as follows:
December 31,
2008 2007
% of % of Year-
revenue revenue over-Year
Three Months Ended $ category $ category Change
(dollars in thousands)
Processors $ 2,251 33% $ 3,320 33% (32)%
Software licenses and other 153 15% 152 16% 1%
$ 2,404 30% $ 3,472 32% (31)%
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Cost of revenues consists primarily of cost of semiconductors, which are manufactured to our specifications by third parties for resale by us. Cost of processor revenues as a percentage of net processor revenues remained flat for the three months ended December 31, 2008 as compared to the same period in fiscal 2007. Cost of software licenses and other revenues is primarily comprised of engineering labor related to support and maintenance of sold licenses. The fluctuation in software licenses and other costs as a percentage of software licenses and other revenues is dependent upon the mix and level of licensed software and royalties earned during the period.
Operating Expenses
Research and Development.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Change
(dollars in thousands)
Research & development
expenses $ 3,431 $ 3,602 (5)%
As a percentage of net revenues 43% 33%
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Research and development costs consist primarily of salaries, employee benefits, overhead, outside contractors and non-recurring engineering fees. Such research and development expenses decreased $171,000 for the three months ended December 31, 2008 over the same period in the prior year. The decrease reflects a $287,000 decrease in non-recurring engineering and related costs, contingent upon the stage of development of projects, including an increase of $70,000 in the reimbursement of certain costs under a research and development contract, a $100,000 reduction in supplies and low value equipment, a $42,000 reduction in engineering materials due to the different stages of project completion and a $61,000 decrease in building expenses due to an expired lease. These decreases were partially offset by an increase of $239,000 in software tools and maintenance due to the amortization of new software additions, a $47,000 increase in stock-based compensation expense, a $14,000 increase in depreciation and an increase in expenses related to telephone, travel and other expenses of $19,000.
Sales and Marketing.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Change
(dollars in thousands)
Sales & marketing
expenses $ 2,130 $ 2,394 (11)%
As a percentage of net revenues 27% 22%
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Sales and marketing expenses consist primarily of salaries, commissions and benefits of sales, marketing and support personnel as well as consulting, advertising, promotion and overhead expenses. Such expenses decreased $264,000 for the three months ended December 31, 2008 over the same period in the prior year. The decrease reflects a $231,000 decrease in sales representative commissions due to a decrease in sales, a $109,000 decrease in professional services due to the completion of prior year marketing and branding related services, a $78,000 decrease in advertising and tradeshows as a result of the timing of tradeshows and related marketing activities, a $48,000 reduction in low value equipment and a $17,000 decrease in travel and entertainment and miscellaneous expenses. These decreases were partially offset by an increase in salaries and benefits of $219,000, due to higher average salary rates in connection with employee performance reviews in October 2008, including $164,000 in stock-based compensation expense primarily due to the full acceleration of 45,000 restricted stock units as a result of management decision to cease the sale of the Swarm box product line relating to the Siafu acquisition, partially offset by a decrease in average headcount.
General and Administrative.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Growth
(dollars in thousands)
General & administrative
expenses $ 1,940 $ 1,722 13%
As a percentage of net revenues 24% 16%
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General and administrative expenses are comprised primarily of salaries for administrative and corporate services personnel, legal and other professional fees. Such expenses increased $218,000 for the three months ended December 31, 2008 over the same period in the prior year. The increase reflects a $160,000 increase in professional services relating to audit and tax, a $123,000 increase in building expenses mainly due to an expired lease and sub-lease amortization, together with a $16,000 increase in miscellaneous expenses. These increases were partially offset by a decrease in salaries and benefits of $50,000 primarily due to a change in executive bonus estimate relating to fiscal 2008 and stock-based compensation expense in the December quarter, partially offset by higher average salary rates in connection with employee performance reviews in October 2008 and a $31,000 decrease in depreciation, travel, telephone and other expenses.
Amortization of Intangibles.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Growth
(dollars in thousands)
Amortization of
intangibles $ 749 $ 749 ?%
As a percentage of net revenues 9% 7%
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Amortization of intangibles relate to acquired technology and patents. Amortization of intangibles remained flat for the three months ended December 31, 2008 over the same period in the prior year.
Interest Income and Other Expenses, net.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Growth
(dollars in thousands)
Interest income and other expenses,
net $ 244 $ 345 (29)%
As a percentage of net
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Interest income and other expenses, net, decreased $101,000 during the three months ended December 31, 2008 as compared to the same period in the prior fiscal year. The decrease was primarily a result of lower interest rates partially offset by an investment impairment of $90,000 in the prior year, relating to an investment in asset backed commercial paper with Cheyne Finance PLC.
Income Taxes.
Year-
December 31, over-Year
Three Months Ended 2008 2007 Growth
(dollars in thousands)
Provision for income
taxes $ 45 $ 15 200%
As a percentage of net Less than
revenues 1% 1%
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We recognize income tax expense based on an asset and liability approach that requires recognition of deferred tax assets and liabilities related to future tax consequences of events recognized in both our financial statements and income tax returns. We have not recognized tax benefits as a result of continuing losses over a longer period than previously expected. The provision for income taxes increased $30,000 during the three months ended December 31, 2008 over the same period in the prior year primarily due to local state taxes and our non-U.S. operations, partially offset by a federal refund. We continue to consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the valuation allowance.
Liquidity and Capital Resources
A summary of the sources and uses of cash and cash equivalents is as follows:
December 31,
Three Months Ended 2008 2007
(in thousands)
Net cash provided by operating activities $ 273 $ 831
Net cash provided by investing activities 1,314 6,083
Net cash provided by financing activities 188 1,497
Net increase in cash and cash equivalents $ 1,775 $ 8,411
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Operating Activities. Net cash provided by operating activities was $273,000 for the three months ended December 31, 2008, resulting from a net loss during the period of $2.5 million, adjusted for non-cash items including depreciation and amortization of fixed assets of $491,000, amortization of intangibles relating to acquired technologies of $750,000, stock-based compensation expense of $638,000 and obsolete inventory of $70,000. These non-cash expenses were offset by a decrease in accounts payable of $779,000,
an increase in other current assets of $634,000 due to the addition of license agreements, an increase in inventories of $568,000 mainly due to lower sales volumes and the timing of receipt of inventory purchases and a decrease in accrued liabilities of $286,000, including a decrease of $447,000 in non-recurring engineering services, sub-lease amortization of $53,000, a $113,000 reduction in accrued employee stock purchase plan withholding as a result of employee stock purchases in October 2008, partially offset by a $26,000 increase in other accrued payroll and benefits, a $60,000 increase in deferred software and distributor revenues, together with an increase of $241,000 in other accruals. Contributing to cash provided by operations was a decrease in accounts receivable of $3.0 million, reflecting lower sales volumes and a shift in the timing of shipments and payments during the first quarter of fiscal 2009, together with a decrease in prepaid expenses of $76,000.
Net cash provided by operating activities was $831,000 for the three months ended December 31, 2007, resulting from a net loss during the period of $680,000, adjusted for non-cash items including depreciation and amortization of fixed assets of $387,000, amortization of intangibles relating to acquired technologies of $749,000, stock-based compensation expenses of $433,000, an investment impairment of $90,000 and a reserve for excess and obsolete inventory of $22,000. These non-cash expenses were offset by an increase in accounts receivable of $1.4 million reflecting a shift in the timing of shipments and payments during the first quarter of fiscal 2008, and an increase in other current assets of $83,000 due to the addition of license agreements. Contributing to cash provided by operations was an increase in accounts payable of $953,000, a decrease in inventories of $219,000 mainly due to the timing of receipt of inventory purchases, a reduction in prepaid expenses of $125,000 which was related to the timing of payments made, and an increase in accrued liabilities of $29,000, including an increase of $478,000 in non-recurring engineering services and $43,000 in bonus and other accruals, partially offset by a decrease of $198,000 in deferred software and distributor revenues, sub-lease amortizations of $248,000 and a $46,000 reduction in accrued employee stock purchase plan withholding as a result of employee stock purchases in October 2007.
Investing Activities. Net cash provided by investing activities was $1.3 million for the three months ended December 31, 2008, which primarily reflects the net sale of short-term investments of $1.5 million, partially offset by property and equipment purchases of $216,000.
Net cash provided by investing activities was $6.1 million for the three months ended December 31, 2007, which primarily reflects the net sale of short-term investments of $6.4 million, partially offset by property and equipment purchases of $204,000 together with a $150,000 refund of a portion of the Siafu purchase price held in escrow.
Financing Activities. Net cash provided by financing activities for the three months ended December 31, 2008 of $188,000 consists of cash proceeds from the issuance of common stock for employee stock purchase plan purchases.
Net cash provided by financing activities for the three months ended December 31, 2007 of $1.5 million consists of the aggregate of cash proceeds from the issuance of common stock for stock option exercises and employee stock purchase plan purchases.
The Company's inventory balance increased by $498,000 to $2.8 million at December 31, 2008 as compared to $2.3 million as of September 30, 2008. The increase in inventory was a result of the lower sales volumes and timing of inventory purchases relative to manufacturer lead-time, coupled with anticipated shipment schedules to fill customer orders for the succeeding quarter. The Company's annualized inventory turns for the three months ended December 31, 2008 were 3.6 times as compared to 5.2 times for the year ended September 30, 2008. The Company's accounts receivable balance, which is contingent upon the timing of product shipment within the respective periods, decreased $3.0 million from September 30, 2008 to December 31, 2008.
The Company uses a number of independent suppliers to manufacture substantially all of its products. As a result, the Company relies on these suppliers to allocate to the Company a sufficient portion of foundry capacity to meet the Company's needs and deliver sufficient quantities of the Company's products on a timely basis. These arrangements allow the Company to avoid utilizing its capital resources for manufacturing facilities and work-in-process inventory and to focus substantially all of its resources on the design, development and marketing of its products.
The Company requires substantial working capital to fund its business, particularly to finance accounts receivable and inventory, and for investments in property and equipment. The Company's need to raise capital in the future will depend on many factors including the rate of sales growth, market acceptance of the Company's existing and new products, the amount and timing of research and development expenditures, the timing and size of acquisitions of businesses or technologies, the timing of the introduction of new products and the expansion of sales and marketing efforts. We believe that our existing cash resources will fund anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next twelve months. Our liquidity is affected by many factors including, among others, the extent to which we pursue additional capital expenditures, the level of our product development efforts, and other factors related to the uncertainties of the industry and global economies. Accordingly,
there can be no assurance that events in the future will not require us to seek additional capital sooner or, if so required, that such capital will be available at all or on terms acceptable to us.
Contractual Obligations
The Company occupies its facilities under several non-cancelable operating
leases that expire at various dates through November 2011, and which contain
renewal options. Additionally, contractual obligations were also entered into
related to non-recurring engineering services and inventory purchases. Payment
obligations for such commitments as of December 31, 2008 are as follows:
Payments Due By Period
Less than 1 - 3 3 - 5 More than 5
Contractual Obligations Total 1 year years years years
(in thousands)
Operating lease
commitments $ 3,319 $ 2,121 $ 1,198 $ ? $ ?
Inventory Purchases 1,998 1,998 ? ? ?
Non-recurring engineering expense 223 223 ? ? ?
Totals $ 5,540 $ 4,342 $ 1,198 $ ? $ ?
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.
Guarantees and Product Warranties
Guarantees
Agreements that we have determined to be within the scope of FIN 45 ("Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others") include hardware and software license warranties, indemnification arrangements with officers and directors and indemnification arrangements with customers with respect to intellectual property. To date, the Company has not incurred material costs in relation to any of the above guarantees.
As permitted under Delaware law, the Company has agreements that provide indemnification of officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company's request in such capacity. The indemnification period is effective for the officer's or director's lifetime. The maximum potential amount of future payments that the . . .
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