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| NENG > SEC Filings for NENG > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein are forward-looking statements and may contain projections related to financial results, economic conditions, trends and known uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of factors, which include those discussed in this section and in Part II, Item 1A, Risk Factors, of this report and the risks discussed in our other filings with the Securities and Exchange Commission (the "SEC"). Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly reissue these forward-looking statements to reflect events or circumstances that arise after the date hereof.
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed by us with the SEC.
Overview
We develop and manufacture application platform solutions that enable leading original equipment manufacturers, or OEMs, independent software vendors, or ISVs, and service providers to deliver their software applications in the form of a network-ready device. Application platforms are pre-configured network infrastructure devices designed to optimally deliver specific software application functionality, ease deployment, improve integration and manageability, accelerate time to market and increase the security of that software application in a customer's network. We offer application platform customers an extensive suite of services associated with the design, development, manufacturing, brand fulfillment and post-sale support of these devices. We produce, brand and fulfill devices branded for our customers, and derive our revenues primarily from the sale of value-added hardware platforms to these customers. Our customers subsequently resell and support the platforms under their own brands to their customer bases.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these financial statements, we have made estimates and judgments in determining certain amounts included in the financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies since September 30, 2008.
Results of Operations
Three months ended June 30, 2009 compared to the three months ended June 30, 2008
The following table summarizes financial data for the periods indicated, in thousands and as a percentage of net revenues, and provides the changes in thousands and percentages:
Three months ended June 30,
2009 2008 Increase (Decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Net revenues $ 33,329 100.0 % $ 47,046 100.0 % $ (13,717 ) (29.2 )%
Gross profit 5,037 15.1 % 7,650 16.3 % (2,613 ) (34.2 )%
Operating expenses 6,344 19.0 % 8,020 17.1 % (1,676 ) (20.9 )%
Loss from operations (1,307 ) (3.9 )% (370 ) (0.8 )% (937 ) 253.2 %
Net loss (1,243 ) (3.7 )% (283 ) (0.6 )% (960 ) 339.2 %
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Net Revenues
Our revenues are derived primarily from sales of application platform solutions and related maintenance services to our OEM, ISV and service provider customers.
Our net revenues decreased for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to decreases in sales volumes, which were significantly impacted by the global economic downturn. These decreases were partially offset by revenues generated from new customer wins secured in recent periods. Also, some of our storage customers are using larger hard disk drives, enabling them to provide their customers with the same storage capacity with fewer appliances, resulting in a decrease in sales volume compared to the prior period. In addition, we are transitioning away from some of our non-strategic, transactional revenues to projects that are more in line with our business model.
Gross Profit
Gross profit represents net revenues recognized less the cost of revenues. Cost of revenues includes cost of materials, manufacturing costs, warranty costs, inventory write-downs, shipping and handling costs and customer support costs. Manufacturing costs are primarily comprised of compensation, contract labor costs and, when applicable, contract manufacturing costs.
Gross profit as a percentage of net revenue decreased for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The decrease from the prior year was primarily due to an increase in inventory write-downs, customer and product mix, and manufacturing costs remaining fairly constant from the prior year relative to the decrease in net revenues.
Gross profit is affected by customer and product mix, component material costs, pricing and the volume of orders as well as by the mix of product manufactured internally compared to product manufactured by a contract manufacturer, which carries higher manufacturing costs. In addition, we have won some new business which will have gross margins that are lower than current levels, in order to increase revenues and leverage those revenues over a fixed infrastructure to improve operating margins. We may seek opportunities to win additional new business with gross margins which are lower than current levels.
Operating Expenses
The following table presents operating expenses during the periods indicated, in
thousands and as a percentage of net revenues, and provides the changes in
thousands and percentages:
Three months ended June 30,
2009 2008 Increase (Decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Operating expenses:
Research and
development $ 1,644 4.9 % $ 2,135 4.6 % $ (491 ) (23.0 )%
Selling and marketing 2,039 6.1 % 2,761 5.9 % (722 ) (26.1 )%
General and
administrative 2,222 6.7 % 2,639 5.6 % (417 ) (15.8 )%
Amortization of
intangible asset 439 1.3 % 485 1.0 % (46 ) (9.5 )%
Total operating
expenses $ 6,344 19.0 % $ 8,020 17.1 % $ (1,676 ) (20.9 )%
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Research and Development
Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants and outside service providers, material costs for prototype and test units and other expenses related to the design, development, testing and enhancements of our application platform solutions. We expense all of our research and development costs as they are incurred. The following table summarizes the most significant components of research and development expense for the periods indicated, in thousands and as a percentage of total research and development expense, and provides the changes in thousands and percentages:
Three months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
Research and development:
Compensation and related
expenses $ 1,052 64.0 % $ 1,369 64.1 % $ (317 ) (23.2 )%
Stock-based compensation 58 3.5 % 161 7.5 % (103 ) (64.0 )%
Prototype 247 15.0 % 247 11.6 % - 0.0 %
Consulting and
professional services 147 9.0 % 189 8.9 % (42 ) (22.2 )%
Other 140 8.5 % 169 7.9 % (29 ) (17.2 )%
Total research and
development $ 1,644 100 % $ 2,135 100 % $ (491 ) (23.0 )%
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Research and development expenses decreased in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to decreases in compensation and related expenses and stock-based compensation. Compensation and related expenses and stock-based compensation expenses decreased primarily due to a decrease in headcount from 44 at June 30, 2008 to 36 at June 30, 2009, and lower variable compensation, which was directly related to the decrease in net revenues and results of operations.
Our application platform development strategy emphasizes the utilization of standard component technologies, which utilize off-the-shelf components. However, we expect that in some cases, significant development efforts will be required to fulfill our current and potential customers' needs using customized platforms. We expect that prototype and consulting and professional services costs will be variable and could fluctuate depending on the timing and magnitude of our development projects.
Selling and Marketing
Selling and marketing expenses consist primarily of salaries and commissions for personnel engaged in sales and marketing, and costs associated with our marketing programs, which include costs associated with our attendance at trade shows, public relations, product literature costs, web site enhancements, and travel. The following table summarizes the most significant components of selling and marketing expense for the periods indicated, in thousands and as a percentage of total selling and marketing expense, and provides the changes in thousands and percentages:
Three months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
Selling and marketing:
Compensation and related
expenses $ 1,506 73.9 % $ 1,899 68.8 % $ (393 ) (20.7 )%
Stock-based compensation 76 3.7 % 92 3.3 % (16 ) (17.4 )%
Marketing programs 195 9.5 % 311 11.3 % (116 ) (37.3 )%
Travel 83 4.1 % 169 6.1 % (86 ) (50.9 )%
Other 179 8.8 % 290 10.5 % (111 ) (38.3 )%
Total selling and
marketing $ 2,039 100 % $ 2,761 100 % $ (722 ) (26.1 )%
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Selling and marketing expenses decreased in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to decreases in compensation and related expenses, marketing programs, and other expenses. Compensation and related expenses decreased primarily due to a decrease in headcount from 56 as of June 30, 2008, to 42 as of June 30, 2009, and lower variable compensation, which was directly related to the decrease in net revenues and results of operations. The decrease in marketing programs was mostly attributable to rebranding costs that were incurred in the prior year which did not recur in the current year.
General and Administrative
General and administrative expenses consist primarily of salaries and other related costs for executive, finance, information technology and human resources personnel; professional services, which include legal, accounting, audit and tax fees; and director and officer insurance. The following table summarizes the most significant components of general and administrative expense for the periods indicated, in thousands and as a percentage of total general and administrative expense, and provides the changes in thousands and percentages:
Three months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
General and
administrative:
Compensation and related
expenses $ 1,103 49.6 % $ 1,313 49.8 % $ (210 ) (16.0 )%
Stock-based compensation 152 6.9 % 173 6.6 % (21 ) (12.1 )%
Consulting and
professional services 504 22.7 % 754 28.5 % (250 ) (33.2 )%
Director and officer
insurance 56 2.5 % 66 2.5 % (10 ) (15.2 )%
Other 407 18.3 % 333 12.6 % 74 22.2 %
Total general and
administrative $ 2,222 100 % $ 2,639 100 % $ (417 ) (15.8 )%
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General and administrative expenses decreased in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, primarily due to decreases in compensation and related expenses and consulting and professional services expenses. The decrease in compensation and related expenses was attributable to lower headcount and lower variable compensation, which was directly related to the decrease in net revenues and results of operations. The decrease in consulting and professional services expenses was primarily due to costs related to the integration of Alliance Systems incurred during the three months ended June 30, 2008, which did not recur during the three months ended June 30, 2009.
Amortization of Intangible Asset
Amortization of the intangible asset decreased by $46,000 in the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. Amortization expense for the intangible asset decreases annually over its life of 17 years, to reflect the fact that the estimated economic benefit expected to be received from the intangible asset declines over time.
Interest and Other Income, net
Interest and other income, net, decreased to $64,000 for the three months ended June 30, 2009, compared to $110,000 for the three months ended June 30, 2008. This decrease was primarily due to lower interest income, attributable to lower interest rates on the cash balances held by us during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008.
Nine months ended June 30, 2009 compared to the nine months ended June 30, 2008
The following table summarizes financial data for the periods indicated, in thousands and as a percentage of net revenues, and provides the changes in thousands and percentages:
Nine months ended June 30,
2009 2008 Increase (Decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Net revenues $ 108,025 100.0 % $ 156,560 100.0 % $ (48,535 ) (31.0 )%
Gross profit 16,413 15.2 % 26,289 16.8 % (9,876 ) (37.6 )%
Operating expenses 18,868 17.5 % 25,274 16.1 % (6,406 ) (25.3 )%
(Loss) income from operations (2,455 ) (2.3 )% 1,015 0.7 % (3,470 ) -
Net (loss) income (2,379 ) (2.2 )% 1,258 0.8 % (3,637 ) -
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Net Revenues
Our net revenues decreased for the nine months ended June 30, 2009, as compared to the nine months ended June 30, 2008, primarily due to decreases in sales volumes, which were significantly impacted by the global economic downturn. These decreases were partially offset by revenues generated from new customer wins secured in recent periods. Sales volumes have decreased in part due to the fact that some of our storage customers are using larger hard disk drives, enabling them to provide their customers with the same storage capacity with fewer appliances. In addition, we are transitioning away from some of our non-strategic, transactional revenues to projects that are more in line with our business model. In addition, two customers who have reduced or ceased their purchases from us, one because it was acquired by a larger company and one because it changed its business model, accounted for approximately $7.4 million of the decrease in net revenues. Also contributing to the decrease was the fact that the nine month period ended June 30, 2008 included the results of operations of the former German subsidiary of Alliance Systems, which we sold in February 2008. Furthermore, we ceased sales of military and government products during the three month period ended June 30, 2008. Net revenues from the German subsidiary and from sales of military and government products totaled approximately $3.0 million during the nine month period ended June 30, 2008.
Gross Profit
Gross profit as a percentage of net revenue decreased for the nine months ended June 30, 2009, as compared to the nine months ended June 30, 2008. The decrease from the prior year was primarily due to increased inventory write-downs, customer and product mix, and manufacturing costs remaining fairly constant from the prior year relative to the decrease in net revenues.
Operating Expenses
The following table presents operating expenses during the periods indicated, in
thousands and as a percentage of net revenues, and provides the changes in
thousands and percentages:
Nine months ended June 30,
2009 2008 Increase (Decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Operating expenses:
Research and
development $ 4,739 4.4 % $ 6,823 4.4 % $ (2,084 ) (30.5 )%
Selling and marketing 6,240 5.8 % 8,826 5.6 % (2,586 ) (29.3 )%
General and
administrative 6,572 6.1 % 8,219 5.2 % (1,647 ) (20.0 )%
Amortization of
intangible asset 1,317 1.2 % 1,406 0.9 % (89 ) (6.3 )%
Total operating
expenses $ 18,868 17.5 % $ 25,274 16.1 % $ (6,406 ) (25.3 )%
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Research and Development
The following table summarizes the most significant components of research and development expense for the periods indicated, in thousands and as a percentage of total research and development expense, and provides the changes in thousands and percentages:
Nine months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
Research and development:
Compensation and related
expenses $ 3,057 64.5 % $ 4,397 64.4 % $ (1,340 ) (30.5 )%
Stock-based compensation 200 4.2 % 573 8.4 % (373 ) (65.1 )%
Prototype 631 13.3 % 596 8.7 % 35 5.9 %
Consulting and
professional services 436 9.2 % 648 9.5 % (212 ) (32.7 )%
Other 415 8.8 % 609 9.0 % (194 ) (31.9 )%
Total research and
development $ 4,739 100 % $ 6,823 100 % $ (2,084 ) (30.5 )%
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Research and development expenses decreased in the nine months ended June 30, 2009, as compared to the nine months ended June 30, 2008, primarily due to decreases in compensation and related expenses, stock-based compensation, consulting and professional services and other expenses. Compensation and related expenses and stock-based compensation expenses decreased primarily due to a decrease in headcount from 44 at June 30, 2008 to 36 at June 30, 2009, and lower variable compensation, which was directly related to the decrease in net revenues and results of operations. Consulting and professional services decreased due to the variations in the timing and magnitude of ongoing projects during the current and prior years.
Selling and Marketing
The following table summarizes the most significant components of selling and marketing expense for the periods indicated, in thousands and as a percentage of total selling and marketing expense, and provides the changes in thousands and percentages:
Nine months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
Selling and marketing:
Compensation and related
expenses $ 4,641 74.4 % $ 6,344 71.9 % $ (1,703 ) (26.8 )%
Stock-based compensation 214 3.4 % 253 2.8 % (39 ) (15.4 )%
Marketing programs 482 7.7 % 638 7.2 % (156 ) (24.5 )%
Travel 268 4.3 % 575 6.5 % (307 ) (53.4 )%
Other 635 10.2 % 1,016 11.6 % (381 ) (37.5 )%
Total selling and
marketing $ 6,240 100 % $ 8,826 100 % $ (2,586 ) (29.3 )%
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Selling and marketing expenses decreased in the nine months ended June 30, 2009, as compared to the nine months ended June 30, 2008, primarily due to decreases in compensation and related expenses, travel, and other expenses. Compensation and related expenses decreased primarily due to a decrease in headcount from 56 as of June 30, 2008, to 42 as of June 30, 2009, and lower variable compensation, which was directly related to the decreases in net revenues and results of operations. Travel expenses decreased primarily due to the decrease in headcount and efforts undertaken during the current fiscal year to reduce non-essential employee travel. Other expenses decreased as we incurred expenses associated with market research, rebranding, and trade shows for the integration of Alliance Systems in the nine months ended June 30, 2008 that did not recur in the nine months ended June 30, 2009.
General and Administrative
The following table summarizes the most significant components of general and administrative expense for the periods indicated, in thousands and as a percentage of total general and administrative expense, and provides the changes in thousands and percentages:
Nine months ended June 30,
2009 2008 Increase (Decrease)
% of % of
Expense Expense
Dollars Category Dollars Category Dollars Percentage
General and
administrative:
Compensation and related
expenses $ 3,261 49.6 % $ 4,137 50.3 % $ (876 ) (21.2 )%
Stock-based compensation 477 7.3 % 543 6.6 % (66 ) (12.2 )%
Consulting and
professional services 1,629 24.8 % 2,309 28.1 % (680 ) (29.4 )%
Director and officer
insurance 167 2.5 % 200 2.4 % (33 ) (16.5 )%
Other 1,038 15.8 % 1,030 12.6 % 8 0.8 %
Total general and
administrative $ 6,572 100 % $ 8,219 100 % $ (1,647 ) (20.0 )%
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General and administrative expenses decreased in the nine months ended June 30, 2009, as compared to the nine months ended June 30, 2008, primarily due to decreases in compensation and related expenses and consulting and professional services expenses. The decrease in compensation and related expenses was primarily due to lower headcount and lower variable compensation, which was directly related to the decreases in net revenues and results of operations. The reduction in headcount was primarily related to the integration of Alliance Systems during the nine months ended June 30, 2008. Also, the Company incurred $175,000 in severance charges during the nine months ended June 30, 2008, which did not recur in the current period. The decrease in consulting and professional services expenses was primarily due to costs related to the . . .
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