UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the Quarterly Period Ended December 31,
2008
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|
|
o
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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 0-24765
hi/fn,
inc.
(Exact
Name of Registrant as specified in its Charter)
|
Delaware
|
33-0732700
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
Incorporation
or Organization)
|
Identification
Number)
|
750
University Avenue, Los Gatos, California 95032
(Address
of principal executive offices and Zip Code)
Registrant’s
telephone number, including area code:
(408) 399-3500
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
þ
NO
o
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large accelerated
filer
o
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Accelerated filer
þ
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|
|
|
|
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|
Non-accelerated
filer
o
|
Smaller reporting
company
o
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|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).
YES
o
NO
þ
The
number of shares outstanding of the Registrant’s Common Stock, par value $.001
per share, was 14,742,837 as of February 2, 2009.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
With
the exception of historical facts, the statements contained in this Annual
Report on Form 10-Q are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the
safe harbor provisions created by such statutes. Forward-looking statements
include our statements about business trends and future operating results and
business plans. Many such statements can be found in the following
sections of this Report titled ”Risk Factors” and“Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” Forward-looking statements often include words such as
“believes,” “anticipates,” “estimates,” “expects,” “intend,” “plan,” “project,”
“outlook,” ”may,” “will,” “should,” ”could,” “would,” “predict,” “potential,”
“continue,” the negative of these terms and words of similar import. Such
statements are based on current expectations and are subject to risk,
uncertainties and changes in condition, significance, value and effect,
including those discussed within the section of this report entitled “Risk
Factors” and reports filed by hi/fn, inc. with the Securities and Exchange
Commission, specifically Forms 10-K, Forms 8-K and Forms 10-Q. Such risks,
uncertainties and changes in condition, significance, value and effect could
cause our actual results to differ significantly from those anticipated events.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could be wrong. We disclaim
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
INDEX
TO FORM 10-Q
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|
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|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
(in
thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2008
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|
September
30,
2008
|
|
|
|
|
|
|
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|
|
ASSETS
|
|
|
|
|
|
|
|
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|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
11,267
|
|
$
|
9,492
|
|
|
Short-term
investments
|
|
|
23,585
|
|
|
24,879
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|
|
Trade accounts receivable, net
|
|
|
3,639
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|
|
6,651
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|
|
Inventories (finished
goods)
|
|
|
2,781
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|
|
2,283
|
|
|
Prepaid expenses and other current
assets
|
|
|
1,4
06
|
|
|
1,4
82
|
|
|
Total current assets
|
|
|
42,678
|
|
|
44,787
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
1,857
|
|
|
1,927
|
|
|
Intangible
assets,
net
|
|
|
2,283
|
|
|
3,032
|
|
|
Goodwill
|
|
|
1,425
|
|
|
1,425
|
|
|
Other
assets,
net
|
|
|
2,54
4
|
|
|
2,
116
|
|
|
Total assets
|
|
$
|
50,787
|
|
$
|
5
3,287
|
|
|
|
|
|
|
|
|
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|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
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CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,151
|
|
$
|
1,930
|
|
|
Accrued expenses and other current
liabilities
|
|
|
3,458
|
|
|
3,744
|
|
|
Total current
liabilities
|
|
|
4,609
|
|
|
5,
674
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
15
|
|
|
Additional paid-in
capital
|
|
|
175,990
|
|
|
175,164
|
|
|
Accumulated other comprehensive income
(loss)
|
|
|
134
|
|
|
(102
|
)
|
|
Accumulated
deficit
|
|
|
(123,969
|
)
|
|
(121,472
|
)
|
|
Treasury stock, at cost
|
|
|
(5,992
|
)
|
|
(
5,992
|
)
|
|
Total stockholders’
equity
|
|
|
46,178
|
|
|
47,613
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
50,787
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|
$
|
53,287
|
|
See
accompanying notes to condensed consolidated financial statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
(in
thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
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|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
revenues:
|
|
|
|
|
|
|
Processors
|
|
$
|
6,907
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|
$
|
9,985
|
|
|
Software
licenses and
other
|
|
|
1,051
|
|
|
944
|
|
|
Total net
revenues
|
|
|
7,958
|
|
|
10,929
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenues –
processors
|
|
|
2,251
|
|
|
3,320
|
|
|
Cost
of revenues – software licenses and
other
|
|
|
153
|
|
|
152
|
|
|
Research
and
development
|
|
|
3,431
|
|
|
3,602
|
|
|
Sales
and
marketing
|
|
|
2,130
|
|
|
2,394
|
|
|
General
and
administrative
|
|
|
1,940
|
|
|
1,722
|
|
|
Amortization
of
intangibles
|
|
|
749
|
|
|
749
|
|
|
Total costs and operating
expenses
|
|
|
10,654
|
|
|
11,939
|
|
|
Loss from
operations
|
|
|
(2,696
|
)
|
|
(1,010
|
)
|
|
Interest
income
|
|
|
231
|
|
|
462
|
|
|
Other expenses,
net
|
|
|
13
|
|
|
(117
|
)
|
|
Loss before income
taxes
|
|
|
(2,452
|
)
|
|
(665
|
)
|
|
Provision
for income
taxes
|
|
|
45
|
|
|
15
|
|
|
Net
loss
|
|
$
|
(2,497
|
)
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and
diluted
|
|
$
|
(0.17
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and
diluted
|
|
|
14,693
|
|
|
14,776
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
(in
thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,497
|
)
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
491
|
|
|
|
387
|
|
|
Amortization of intangible
assets
|
|
|
749
|
|
|
|
749
|
|
|
Stock-based compensation expense
|
|
|
638
|
|
|
|
433
|
|
|
Short-term investment
impairment
|
|
─
|
|
|
|
90
|
|
|
Provision for excess and obsolete
inventory
|
|
|
70
|
|
|
|
22
|
|
|
Benefit from doubtful
accounts
|
|
|
(11
|
)
|
|
─
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3,023
|
|
|
|
(1,413
|
)
|
|
Inventories
|
|
|
(568
|
)
|
|
|
219
|
|
|
Prepaid expenses and other current
assets
|
|
|
76
|
|
|
|
125
|
|
|
Other
assets
|
|
|
(633
|
)
|
|
|
(83
|
)
|
|
Accounts
payable
|
|
|
(779
|
)
|
|
|
953
|
|
|
Accrued expenses and other current
liabilities
|
|
|
(286
|
)
|
|
|
29
|
|
|
Net cash provided by operating
activities
|
|
|
273
|
|
|
|
831
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Maturities
of short-term
investments
|
|
|
7,320
|
|
|
|
11,571
|
|
|
Purchases
of short-term
investments
|
|
|
(5,790
|
)
|
|
|
(5,134
|
)
|
|
Purchases
of property and
equipment
|
|
|
(216
|
)
|
|
|
(204
|
)
|
|
Refund
of escrow funds relating to Siafu
acquisition
|
|
─
|
|
|
|
(150
|
)
|
|
Net cash provided by investing activities
|
|
|
1,314
|
|
|
|
6,083
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for stock option exercises and employee
stock purchase plan
|
|
|
188
|
|
|
|
1,497
|
|
|
Net cash provided by financing
activities
|
|
|
188
|
|
|
|
1,497
|
|
|
Net increase in cash and cash
equivalents
|
|
|
1,775
|
|
|
|
8,411
|
|
|
Cash
and cash equivalents at beginning of
period
|
|
|
9,492
|
|
|
|
17,049
|
|
|
Cash
and cash equivalents at end of
period
|
|
$
|
11,267
|
|
|
$
|
25,460
|
|
See
accompanying notes to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
1 - Basis of Presentation
hi/fn,
inc., together with its subsidiaries, Hifn Limited, Hifn Netherlands B.V., Hifn
Japan K.K. and Hifn International and its subsidiary, Hifn (Hangzhou)
Information Technologies Co., Ltd. (previously known as Saian (Hangzhou)
Microsystems, Co., Ltd.), together with Hangzhou Ansai Information Technology
Co., Ltd., a contractually controlled company of Hifn International,
(collectively referred to as the “Company,” “Hifn,” “we,” “us” or “our”) is a
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-size enterprises (“SMEs”), share, retain,
access and protect critical data.
The
accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the Financial Statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2008. In the opinion of
management, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, which the
Company believes are necessary for a fair statement of the Company’s financial
position as of December 31, 2008 and its results of operations for the three
months ended December 31, 2008 and 2007, respectively. These condensed
consolidated financial statements are not necessarily indicative of the results
to be expected for the entire year.
The
semiconductor industry has experienced significant downturns and wide
fluctuations in supply and demand. The industry has also experienced significant
fluctuations in anticipation of changes in general economic conditions. This has
caused significant variances in product demand, production capacity and rapid
erosion of average selling prices. Industry-wide fluctuations in the future
could harm our business, financial condition and results of
operations.
The
Company has an accumulated deficit of $124.0 million as of December 31, 2008 and
incurred a net loss of $2.5 million during the three months ended December 31,
2008. The Company believes that its existing cash resources are adequate to fund
anticipated operating losses, and any purchases of capital equipment and provide
adequate working capital for the next twelve months. The Company’s liquidity is
affected by many factors including, among others, the extent to which the
Company pursues additional capital expenditures, the level of the Company’s
product development efforts, and other factors related to the uncertainties of
the industry and global economy. Accordingly, there can be no assurance that
events in the future will not require the Company to seek additional capital
sooner or that such capital, if required, will be available on terms acceptable
to the Company.
Critical
Accounting Policies and Estimates
Adoption
of Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), which clarifies the definition of fair value,
establishes guidelines for measuring fair value, and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair
value measurements and eliminates inconsistencies in guidance found in various
prior accounting pronouncements. In February 2008, the FASB issued FASB
Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “Effective
Date of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from the scope of
SFAS 157. FSP FAS 157-2 delays the effective date of SFAS 157 from October 1,
2008 to October 1, 2009 for all nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. Effective October 1, 2008, the Company adopted SFAS 157 for
financial assets and liabilities recognized at fair value on a recurring basis.
The adoption did not have a material impact on the Company’s consolidated
financial statements. In accordance with FSP FAS 157-2, the Company will adopt
SFAS 157 for its other assets and liabilities measured at fair value in the
first quarter of fiscal 2010. The Company is evaluating the impact that this
statement will have on its consolidated financial statements. See Note 3,
Financial Instruments, for further information regarding the Company’s fair
value measurements.
Note
2 - Balance Sheet Details
Inventory
consists of finished goods of $2,781 and $2,283 as of December 31, 2008 and
September 30, 2008, respectively. If forecasted revenue and gross
margin rates are not achieved, it is reasonably possible that the Company may
have increased requirements for inventory provisions.
|
|
|
December
31,
2008
|
|
September
30,
2008
|
|
|
|
|
($
in thousands)
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
Computer
equipment
|
|
$
|
6,394
|
|
$
|
6,181
|
|
|
Furniture and
fixtures
|
|
|
915
|
|
|
914
|
|
|
Leasehold
improvements
|
|
|
823
|
|
|
822
|
|
|
Office
equipment
|
|
|
745
|
|
|
744
|
|
|
|
|
|
8,877
|
|
|
8,661
|
|
|
Less: accumulated depreciation and
amortization
|
|
|
(7,020
|
)
|
|
(6,734
|
)
|
|
|
|
$
|
1,857
|
|
$
|
1,927
|
|
|
Intangible
assets:
|
|
|
|
|
|
|
Developed and core
technology
|
|
$
|
14,983
|
|
$
|
14,983
|
|
|
Less: accumulated
amortization
|
|
|
(12,700
|
)
|
|
(11,951
|
)
|
|
|
|
$
|
2,283
|
|
$
|
3,032
|
|
The
estimated future amortization expense related to intangible assets as of
December 31, 2008 is as follows:
|
Fiscal
year ending September 30,
|
|
|
|
|
|
|
|
2009
(9 months ended)
|
|
$
|
482
|
|
|
|
|
|
2010
|
|
|
643
|
|
|
|
|
|
2011
|
|
|
643
|
|
|
|
|
|
2012
|
|
|
515
|
|
|
|
|
|
Total
estimated amortization
|
|
$
|
2,283
|
|
|
|
|
The first
step of the goodwill impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired, thus the second step
of the impairment test is unnecessary. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test
shall be performed to measure the amount of impairment loss, if
any. The second step of the goodwill impairment test, used to measure
the amount of impairment loss, compares the implied fair value of reporting unit
goodwill with the carrying amount of that goodwill. If the carrying
amount of reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss shall be recognized in an amount equal to that
excess.
As of
December 31, 2008, the carrying value of goodwill was $1.4
million. During the quarter ended December 31, 2008, the Company
evaluated and concluded there had been a triggering event indicating the
carrying value of its goodwill may be impaired.
The
Company currently operates as one reporting unit. Accordingly, the impairment
test is a comparison of the Company’s market capitalization as measured by the
price of its common stock to the Company’s net book value. As of December 31,
2008, the Company's market capitalization was below its net book
value. As a result, the Company compared its market capitalization
after consideration of a control premium to its net book value and concluded
that the second step in the goodwill impairment assessment was not
required. The Company estimates its fair value by reference to its
market capitalization. Accordingly, further reductions in its market
capitalization may result in goodwill impairment that could have a material
effect on the Company’s consolidated financial position and results of
operations.
|
Other
assets:
|
|
|
|
|
|
|
Design tools and other licensed intellectual property
|
|
$
|
5,417
|
|
$
|
4,794
|
|
|
Less: Accumulated
amortization
|
|
|
(3,185
|
)
|
|
(2,981
|
)
|
|
|
|
|
2,232
|
|
|
1,813
|
|
|
Other
receivables
|
|
|
136
|
|
|
129
|
|
|
Refundable
deposits
|
|
|
176
|
|
|
174
|
|
|
|
|
$
|
2,544
|
|
$
|
2,116
|
|
|
Accrued
expenses and other current liabilities:
|
|
|
|
|
|
|
Accrued vacant facility lease
cost
|
|
$
|
323
|
|
$
|
376
|
|
|
Accrued non-recurring engineering
costs
|
|
|
319
|
|
|
765
|
|
|
Compensation and employee
benefits
|
|
|
1,743
|
|
|
1,830
|
|
|
Deferred income and
revenue
|
|
|
630
|
|
|
583
|
|
|
Income taxes
payable
|
|
|
64
|
|
|
20
|
|
|
Other
|
|
|
379
|
|
|
170
|
|
|
|
|
$
|
3,458
|
|
$
|
3,744
|
|
Note
3 - Financial Instruments
Fair Value of Financial
Instruments
Fair
value is defined under SFAS 157 as the exchange price that would be received for
an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair
value under SFAS 157 must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based
on three levels of inputs, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value which are the
following:
Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The
Company’s fair value measurements by level as of December 31, 2008 for its
financial assets are as follow:
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Instruments
Level
1
|
|
|
Significant
Other
Observable
Inputs
Level
2
|
|
|
Significant
Unobservable
Inputs
Level
3
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
funds
|
|
$
|
8,812
|
|
|
$
|
─
|
|
$
|
─
|
|
$
|
8,812
|
|
|
Government agency discount
notes
|
|
─
|
|
|
|
10,387
|
|
|
─
|
|
|
10,387
|
|
|
Corporate
securities
|
|
─
|
|
|
|
6,245
|
|
|
─
|
|
|
6,245
|
|
|
Government agency
obligation
|
|
─
|
|
|
|
1,876
|
|
|
─
|
|
|
1,876
|
|
|
Commercial
paper
|
|
─
|
|
|
|
5,545
|
|
|
─
|
|
|
5,545
|
|
|
Asset backed and other
securities
|
|
─
|
|
|
|
6
|
|
|
─
|
|
|
6
|
|
|
Total available-for-sale securities
|
|
$
|
8,812
|
|
|
$
|
24,059
|
|
$
|
─
|
|
$
|
32,871
|
|
The
Company’s money market funds are classified within Level 1 of the fair value
hierarchy because they are valued using quoted prices for identical instruments
in active markets. The Company conducted its fair value assessment of
all other securities using level 2 inputs. Management has reviewed the
underlying securities portfolios which are substantially comprised of commercial
paper, agency discount notes, government agency obligations and corporate
securities issued by highly rated entities.
Cash and
cash equivalents and short-term investments classified as available-for-sale
securities were comprised of the following:
|
Years
Ended
|
|
December
31, 2008
|
|
September
30, 2008
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Gains
|
|
Gross
Losses
|
|
Fair
Value
|
|
Cost
|
|
Gross
Gains
|
|
Gross
Losses
|
|
Fair
Value
|
|
|
|
|
($
in thousands)
|
|
|
|
|
$
|
8,812
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,812
|
|
$
|
1,589
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,589
|
|
|
|
|
|
6,236
|
|
|
16
|
|
|
(7
|
)
|
|
6,245
|
|
|
7,311
|
|
|
1
|
|
|
(80
|
)
|
|
7,232
|
|
Government agency obligations
|
|
|
1,859
|
|
|
17
|
|
|
|
|
|
1,876
|
|
|
1,020
|
|
|
—
|
|
|
(1
|
)
|
|
1,019
|
|
Government agency discount
notes
|
|
|
10,287
|
|
|
100
|
|
|
—
|
|
|
10,387
|
|
|
4,982
|
|
|
2
|
|
|
(2
|
)
|
|
4,982
|
|
|
|
|
|
5,537
|
|
|
8
|
|
|
—
|
|
|
5,545
|
|
|
18,675
|
|
|
—
|
|
|
(22
|
)
|
|
18,653
|
|
Asset backed and other securities
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Total available-for-sale securities
|
|
$
|
32,737
|
|
$
|
141
|
|
$
|
(7
|
)
|
$
|
32,871
|
|
$
|
33,583
|
|
$
|
3
|
|
$
|
(105
|
)
|
$
|
33,481
|
|
All investments with an unrealized loss
position as of December 31, 2008 and September 30, 2008 have been in continuous
unrealized loss positions for less than one year. The Company has determined
that the gross unrealized losses on investments as of December 31, 2008 and
September 30, 2008 are temporary in nature.
The
classification and contractual maturities of available-for-sale securities is as
follows:
|
Years
Ended
|
|
December
31,
2008
|
|
September
30,
2008
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,286
|
|
$
|
8,602
|
|
|
|
|
|
23,585
|
|
|
24,879
|
|
|
|
|
$
|
32,871
|
|
$
|
33,481
|
|
|
|
|
|
|
|
|
|
|
Due in less than one year
|
|
$
|
32,871
|
|
$
|
33,481
|
|
Note
4 - Net Income (Loss) Per Share
Basic
income (loss) per share is computed using the weighted-average number of common
shares outstanding for the period. Diluted income (loss) per share is computed
using the weighted-average number of common and potentially dilutive securities
outstanding for the period. Potentially dilutive securities consist of stock
options and restricted stock units (“RSUs”) outstanding during the period, using
the treasury method, except when their effect is anti-dilutive.
The following
table sets forth the computing of basic and diluted weighted-average common
shares:
|
|
|
December
31,
|
|
|
Three
Months Ended
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
14,693,149
|
|
|
14,776,498
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares for diluted computation
|
|
|
14,693,149
|
|
|
14,776,498
|
|
Weighted
stock options outstanding and RSUs were excluded from the computation of diluted
income per share because of their anti-dilutive impact to the following
periods:
|
|
|
December
31,
|
|
|
Three
Months Ended
|
|
2008
|
|
2007
|
|
|
|
|
|
|
In-the-money stock options and RSUs
|
|
|
113,628
|
|
|
208,370
|
|
Out-of-the-money stock options
|
|
|
3,062,311
|
|
|
2,645,015
|
|
Weighted stock options outstanding
and RSUs to purchase common
stock
|
|
|
3,175,939
|
|
|
2,853,385
|
|
Weighted
stock options outstanding, representing common stock equivalents, under the
treasury method, with an exercise price lower than the Company’s average stock
price for the period (“in-the-money options”), restricted stock units and
out-of-the-money stock options are
excluded. Weighted
stock options outstanding are excluded from the calculation of diluted net loss
per share since the effect would be anti-dilutive due to the net loss for the
three months ended December 31, 2008 and 2007.
Note
5 - Comprehensive Income (Loss)
Other
comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive income (loss) includes unrealized gains
and losses on the Company’s short-term investments, which are classified as
available-for-sale. The components of comprehensive loss for the three months
ended December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
Three Months Ended
|
|
2008
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Net
loss
|
|
$
|
(2,497
|
)
|
$
|
(680
|
)
|
|
Unrealized
gain (loss) on short-term investments,
net
|
|
|
236
|
|
|
(89
|
)
|
|
Reclassification
adjustment for losses included in net
income
|
|
─
|
|
|
90
|
|
|
Comprehensive
loss
|
|
$
|
(2,261
|
)
|
$
|
(679
|
)
|
Note
6 – Employee Stock Benefit Plans
Employee
Stock Options
The
following table summarizes options outstanding at December 31, 2008 and related
weighted average exercise prices and lives as follows:
|
|
|
|
|
Options
Vested and
Exercisable
|
|
|
Range
of
Exercise
Prices
|
|
Quantity
|
|
Weighted
Average
Remaining
Life
(in
years)
|
|
Weighted
Average
Exercise
Price
|
|
Quantity
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.03 - $
4.12
|
|
|
363,390
|
|
|
7.38
|
|
$
|
3.31
|
|
|
149,505
|
|
$
|
4.06
|
|
|
|
4.15 - 4.85
|
|
|
328,750
|
|
|
8.30
|
|
|
4.68
|
|
|
159,999
|
|
|
4.85
|
|
|
|
4.90 - 5.10
|
|
|
318,583
|
|
|
7.60
|
|
|
5.10
|
|
|
176,200
|
|
|
5.09
|
|
|
|
5.11 - 5.93
|
|
|
310,138
|
|
|
8.20
|
|
|
5.70
|
|
|
110,359
|
|
|
5.59
|
|
|
|
5.94 - 6.33
|
|
|
327,028
|
|
|
7.88
|
|
|
6.16
|
|
|
228,374
|
|
|
6.16
|
|
|
|
6.45 - 6.71
|
|
|
302,543
|
|
|
4.42
|
|
|
6.63
|
|
|
244,071
|
|
|
6.64
|
|
|
|
6.74 - 8.35
|
|
|
313,217
|
|
|
6.25
|
|
|
7.44
|
|
|
268,769
|
|
|
7.45
|
|
|
|
8.43 - 11.17
|
|
|
328,050
|
|
|
4.16
|
|
|
9.97
|
|
|
328,050
|
|
|
9.97
|
|
|
|
11.52
- 16.00
|
|
|
310,248
|
|
|
2.95
|
|
|
14.32
|
|
|
310,248
|
|
|
14.32
|
|
|
|
16.13
- 69.88
|
|
|
78,143
|
|
|
1.73
|
|
|
36.41
|
|
|
78,143
|
|
|
36.41
|
|
|
$
|
2.03 - $ 69.88
|
|
|
2,980,090
|
|
|
6.26
|
|
$
|
7.73
|
|
|
2,053,718
|
|
$
|
9.00
|
|
Restricted
Stock Units
The fair
value of our performance-based share awards is determined based on the closing
market price of our stock on the date of grant. A summary of our
performance-based non-vested share awards at December 31, 2008, is as
follows:
|
|
|
Shares
|
|
Weighted
Average
Fair
Value
Per
Share
|
|
|
Balance at September 30,
2008
|
|
|
287,059
|
|
$
|
5.91
|
|
|
|
|
|
456,750
|
|
|
2.49
|
|
|
|
|
|
(62,085
|
)
|
|
6.19
|
|
|
|
|
|
(167,500
|
)
|
|
5.93
|
|
|
Balance at December 31,
2008
|
|
|
514,224
|
|
$
|
2.83
|
|
During the
quarter ended December 31, 2008, $277,000 was expensed to compensation expense
relating to performance-based share awards and 62,085 of the performance-based
share awards vested. On October 8, 2008, the Board of Directors approved the
decision of management to cease the sale of the Swarm box product
line. The decision triggered the full acceleration of 45,000
restricted stock units. This resulted in an increase in stock-based compensation
expense during the quarter ended December 31, 2008 of $153,000. As of December
31, 2008, there was $1.3 million of unrecognized compensation expense related to
performance-based non-vested share awards that is expected to be recognized over
a weighted-average period of 1.91 years.
Stock-Based
Compensation under SFAS 123(R)
The total
stock-based compensation expense recognized was allocated as follows (in
thousands):
|
|
|
|
|
|
Three
Months Ended
|
|
2008
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
Cost
of revenues
|
|
$
|
13
|
|
$
|
7
|
|
|
Research
and development
|
|
|
212
|
|
|
168
|
|
|
Sales
and marketing
|
|
|
264
|
|
|
99
|
|
|
General
and administrative
|
|
|
149
|
|
|
159
|
|
|
Total
stock-based compensation expense
|
|
$
|
638
|
|
$
|
433
|
|
As of
December 31, 2008, there was approximately $2.8 million of total unrecognized
compensation, excluding $1.3 million unrecognized compensation related to RSUs,
net of estimated forfeitures, related to unvested employee stock options, which
is expected to be recognized over an estimated weighted average period of 2.59
years. The Company has not capitalized any stock-based compensation expense. The
tax benefit, and the resulting effect on cash flows from operations and
financial activities, related to stock-based compensation expense was not
recognized as the Company currently provides a full valuation allowance for its
deferred tax assets.
Note
7 – Segment and Geographic Information
The
Company operates in one industry segment comprising the design, development and
marketing of network- and storage-security and data reduction products. Sales by
major geographic area are based on the geographic location of the distributor,
manufacturing subcontractor or OEM who purchased our products, which geographic
location may be different from the geographic locations of the end
customers.
Our major
geographic areas and their respective contribution to net revenues for the
respective periods were as follows:
|
|
|
|
|
|
Three Months Ended
|
|
2008
|
|
2007
|
|
|
|
|
(in
thousands)
|
|
|
North America:
|
|
|
|
|
|
|
United
States
|
|
$
|
2,201
|
|
$
|
4,719
|
|
|
Other
|
|
|
271
|
|
|
116
|
|
|
Total North
America
|
|
|
2,472
|
|
|
4,835
|
|
|
Asia:
|
|
|
|
|
|
|
|
|
Hong
Kong
|
|
|
3,685
|
|
|
3,970
|
|
|
Japan
|
|
|
347
|
|
|
198
|
|
|
Thailand
|
|
|
158
|
|
|
215
|
|
|
China
|
|
|
62
|
|
─
|
|
|
Taiwan
|
|
|
48
|
|
|
20
|
|
|
Malaysia
|
|
|
37
|
|
|
532
|
|
|
Singapore
|
|
|
28
|
|
|
149
|
|
|
Korea
|
|
|
12
|
|
─
|
|
|
Total
Asia
|
|
|
4,377
|
|
|
5,084
|
|
|
|
|
|
|
|
|
|
|
|
Europe and
other
|
|
|
1,109
|
|
|
1,010
|
|
|
Total
|
|
$
|
7,958
|
|
$
|
10,929
|
|
Major
Customers
The
Company’s major customers are generally original equipment manufacturers with
manufacturing subcontractors who purchase products directly from us. Our
principal end customers and their respective contribution to net revenues 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%
|
|
No other
individual customer accounted for more than 10% of revenues in the periods
presented.
Property
and Equipment
As of
December 31, 2008, the Company had net property and equipment of $1.2
million and $616,000 in the United States and China, respectively.
Note
8 – Income Taxes
The
Company has a valuation allowance for its net deferred tax asset associated with
its U.S. operations. Until such time as the Company utilizes its U.S. net
operating loss carryforwards and unused tax credits, the provision for taxes on
the Company’s U.S. operations is expected to be substantially offset by a
reduction in the valuation allowance. The provision for income taxes for
the quarter ended December 31, 2008 and 2007 primarily relates to the tax
liability on the Company’s non-U.S. operations and state margin
tax.
In
connection with its implementation of FIN 48 after October 1, 2007, the Company
did not record any changes to the liability for unrecognized tax benefits
related to tax positions taken in prior periods, and thus there was no
corresponding cumulative effect adjustment to the accumulated
deficit. At the adoption date of October 1, 2007, the Company had
$2.0 million of unrecognized tax benefits, none of which would affect its
effective tax rate if recognized due to the full valuation
allowance. At December 31, 2008, the Company had $1.9 million of
unrecognized tax benefits, none of which would affect the Company’s effective
tax rate if recognized.
In
accordance with FIN 48, the Company continues its practice of recognizing
interest and penalties related to income tax as interest and other expenses
instead of income tax expense. As of October 1, 2007 and December 31,
2008, no interest and penalties were recognized in the Statement of Operations
related to the uncertain tax positions at the date of adoption.
Uncertain
tax positions relate to the allocation of income and deductions among the
Company’s global entities and to the determinations of the research and
experimental tax credit. The Company estimates that there will be no
material changes in its uncertain tax positions in the next 12
months.
The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. The Company is subject to audit by
the IRS and California Franchise Tax Board for all years since September 30,
1994.
Note
9 – 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
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a Director and Officer insurance policy that
limits its exposure and enables the Company to recover a portion of any future
amounts paid. All of the indemnification agreements were grandfathered under the
provisions of FIN 45 as they were in effect prior to December 31, 2002. As a
result of the insurance policy coverage, the Company believes the estimated fair
value of the potential liability under these agreements is minimal. Accordingly,
the Company has not recorded any liabilities for these agreements as of December
31, 2008.
The
Company enters into standard indemnification agreements in the ordinary course
of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party, generally business
partners or customers, for losses suffered or incurred in connection with
patent, copyright or other intellectual property infringement claims by any
third party with respect to the Company’s products. The term of these
indemnification agreements is generally perpetual, effective after execution of
the agreement. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is unlimited. To
date, the Company has not incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. Accordingly, the Company has not
recorded any liabilities for these agreements as of December 31, 2008. However,
the Company may, in the future, record charges related to indemnification
obligations and, depending upon the nature of any such lawsuit or claim, the
estimated fair value of such indemnification obligations may be
material.
Product
Warranties
The
Company warrants that its hardware products are free from defects in material
and workmanship under normal use and service and that its hardware and software
products will perform in all material respects in accordance with the standard
published specifications in effect at the time of delivery of the licensed
products to the customer. The warranty periods generally range from three months
to one year for software and one year for hardware. Additionally, the Company
warrants that its maintenance services will be performed consistent with
generally accepted industry standards through completion of the agreed upon
services. The Company’s policy is to provide for the estimated cost of product
and service warranties based on specific warranty claims and claim history as a
charge to cost of revenues. To date, the Company has not incurred significant
expense under its product or service warranties.
Note
10 – Recently Issued Accounting Pronouncements
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"). The intent of FSP FAS 142-3
is to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R) and other applicable accounting
literature. FSP FAS 142-3 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact, if any, of adopting FSP FAS 142-3 on its financial
position, cash flows and results of operations.
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS
141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The Company is currently evaluating the impact,
if any, of adopting SFAS 141(R) on its financial position, cash flows and
results of operations.
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-
|
|
|
Three Months Ended
|
|
$
|
|
%
of net
revenues
|
|
$
|
|
%
of net
revenues
|
|
over-Year
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)%
|
|
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%
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
$
|
|
%
of
revenue
category
|
|
$
|
|
%
of
revenue
category
|
|
Year-
over-Year
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)%
|
|
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.
|
|
|
December
31,
|
|
Year-
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%
|
|
|
|
|
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.
|
|
|
December
31,
|
|
Year-
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%
|
|
|
|
|
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.
|
|
|
December
31,
|
|
Year-
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%
|
|
|
|
|
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.
|
|
|
December
31,
|
|
Year-
over-Year
|
|
|
Three Months Ended
|
|
2008
|
|
2007
|
|
Growth
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Amortization
of
intangibles
|
|
$
|
749
|
|
$
|
749
|
|
|
─%
|
|
|
As a percentage of net revenues
|
|
|
9%
|
|
|
7%
|
|
|
|
|
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.
|
|
|
December
31,
|
|
Year-
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
revenues
|
|
|
3%
|
|
|
3%
|
|
|
|
|
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.
|
|
|
December
31,
|
|
Year-
over-Year
|
|
|
Three Months Ended
|
|
2008
|
|
2007
|
|
Growth
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Provision for income
taxes
|
|
$
|
45
|
|
$
|
15
|
|
|
200%
|
|
|
As a percentage of net
revenues
|
|
|
1%
|
|
Less
than 1%
|
|
|
|
|
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:
|
|
|
|
|
|
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
|
|
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
|
|
|
Contractual Obligations
|
|
Total
|
|
Less
than
1
year
|
|
1
– 3
years
|
|
3
– 5
years
|
|
More
than 5 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
|
|
$
|
─
|
|
$
|
─
|
|
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
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a Director and Officer insurance policy that
limits its exposure and enables the Company to recover a portion of any future
amounts paid. All of the indemnification agreements were grandfathered under the
provisions of FIN 45 as they were in effect prior to December 31, 2002. As a
result of the insurance policy coverage, the Company believes the estimated fair
value of the potential liability under these agreements is minimal. Accordingly,
the Company has not recorded any liabilities for these agreements as of December
31, 2008.
The
Company enters into standard indemnification agreements in the ordinary course
of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party, generally business
partners or customers, for losses suffered or incurred in connection with
patent, copyright or other intellectual property infringement claims by any
third party with respect to the Company’s products. The term of these
indemnification agreements is generally perpetual, effective after execution of
the agreement. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is unlimited. To
date, the Company has not incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. Accordingly, the Company has not
recorded any liabilities for these agreements as of December 31, 2008. However,
the Company may, in the future, record charges related to indemnification
obligations and, depending upon the nature of any such lawsuit or claim, the
estimated fair value of such indemnification obligations may be
material.
Product
Warranties
The
Company warrants that its hardware products are free from defects in material
and workmanship under normal use and service and that its hardware and software
products will perform in all material respects in accordance with the standard
published specifications in effect at the time of delivery of the licensed
products to the customer. The warranty periods generally range from
three
months to one year for software and one year for hardware. Additionally, the
Company warrants that its maintenance services will be performed consistent with
generally accepted industry standards through completion of the agreed upon
services. The Company’s policy is to provide for the estimated cost of product
and service warranties based on specific warranty claims and claim history as a
charge to cost of revenues. To date, the Company has not incurred significant
expense under its product or service warranties.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Risk.
The Company’s investment
portfolio
consists of a variety of financial instruments that exposes us
to interest rate risk, including, but not limited to, money market funds and
corporate securities
. The Company does not use
derivative financial instruments in its investment portfolio.
These
investments are generally classified as available-for-sale and, consequently,
are recorded on our balance sheet at fair market value under SFAS 157 with their
related unrealized gain or loss reflected as a component of accumulated other
comprehensive income (loss) in stockholders’ equity. Since we believe we
have the ability to liquidate this portfolio, we do not expect our operating
results or cash flows to be materially affected to any significant degree by a
sudden change in market interest rates on our investment portfolio.
The Company places
investments in instruments that meet high credit quality standards. These
securities are subject to interest rate risk, including risks associated with
exposure to the current sub-prime market crisis, and could decline in
fair
value if
interest rates fluctuate.
Foreign Currency Exchange Rate Risk.
All of our sales and the majority of our costs of manufacturing and
operating expenses are transacted in U.S. dollars. Accordingly, our results of
operations are not subject to any significant foreign exchange rate
fluctuations. To date, we have not incurred any significant gains or losses from
such fluctuations.
(a)
Evaluation of disclosure controls
and procedures.
We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. The financial statements have
been prepared in conformity with U.S. generally accepted accounting principles
(“GAAP”) and necessarily include certain amounts that are based on estimates and
informed judgments.
Based on
management’s evaluation as of the end of the period covered by this Quarterly
Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
are effective to ensure that information that is required to be disclosed in
this Quarterly Report on Form 10-Q is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b)
Changes in internal control over
financial reporting.
There was no change in our internal control over
financial reporting that was identified in connection with our evaluation of
disclosure controls and procedures that occurred during the quarter ended
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
There have
been no material changes from the risk factors included in Part 1, Item 1A
of the Company’s Annual Report on Form 10-K for the fiscal year ended September
30, 2008.
Item 4.
Submission of Matters to a Vote of Security
Holders
The Company
held its Annual Meeting of Stockholders on February 2, 2009. At the
meeting, the following proposals received the votes listed below:
Proposal
I: Election of one Class I Directors for three-year terms expiring
2012.
|
|
|
|
Votes
for:
|
Votes
withheld:
|
|
|
|
Richard M.
Noling
|
|
9,655,673
|
1,615,335
|
|
The Company’s
Board of Directors is currently comprised of five members who are divided into
three classes with overlapping three-year terms. The terms for Class II
directors (Dr. Taher Elgamal and Dr. Robert W. Johnson) will expire at the
meeting of stockholders to be held in 2010. The term for Class III directors
(Albert E. Sisto and Dr. Douglas L. Whiting) will expire at the meeting of
stockholders to be held in 2011.
Proposal II:
Approval of ratification of the appointment of PricewaterhouseCoopers LLP as
independent registered public accounting firm of the Company for the
fiscal year ending September 30, 2009.
|
|
Votes
for:
|
11,165,696
|
|
|
|
Votes
against:
|
44,535
|
|
|
|
Abstentions:
|
60,777
|
|
|
Exhibit
Number
|
Exhibit
|
Incorporated
by Reference
|
|
|
Form
|
File
No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
|
|
|
|
X
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
|
|
|
|
X
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
X
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
X
|
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.
|
|
hi/fn,
inc.
(Registrant)
|
|
Date:
February 6, 2009
|
By: /s/ William R. Walker
|
|
|
William
R. Walker
Vice
President, Finance, Chief Financial Officer and
Secretary
(duly
authorized officer)
|
|
Exhibit
Number
|
Exhibit
|
Incorporated
by Reference
|
|
|
Form
|
File
No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
|
|
|
|
X
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
|
|
|
|
X
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
X
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
X
|
-22-
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