PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CIPRICO INC.
CONDENSED BALANCE SHEET
(Unaudited)
(In thousands)
|
|
December 31,
2007
|
|
|
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,205
|
|
Marketable securities and short term
investments
|
|
1,554
|
|
Accounts receivable, less allowance
|
|
1,321
|
|
Inventories, net of reserve
|
|
1,879
|
|
Other current assets
|
|
518
|
|
Total current assets
|
|
10,477
|
|
|
|
|
|
Property and equipment, net of depreciation
|
|
979
|
|
Goodwill
|
|
2,784
|
|
Other assets
|
|
38
|
|
|
|
$
|
14,278
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
|
$
|
2,078
|
|
Accrued compensation
|
|
610
|
|
Other accrued expenses
|
|
622
|
|
Deferred revenue
|
|
57
|
|
Total current liabilities
|
|
3,367
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
Convertible notes
|
|
4,286
|
|
Deferred rent
|
|
69
|
|
Deferred tax liability
|
|
148
|
|
Total long term liabilities
|
|
4,503
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
Capital stock
|
|
51
|
|
Additional paid-in capital
|
|
38,189
|
|
Retained deficit
|
|
(31,832
|
)
|
Total stockholders equity
|
|
6,408
|
|
|
|
$
|
14,278
|
|
See accompanying notes to
condensed financial statements.
3
CIPRICO INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months
Ended
December 31,
|
|
(In thousands, except per share amounts)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
2,008
|
|
$
|
2,766
|
|
Cost of sales
|
|
1,168
|
|
1,581
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
840
|
|
1,185
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
Research and development
|
|
1,507
|
|
704
|
|
Sales and marketing
|
|
1,598
|
|
780
|
|
General and administrative
|
|
757
|
|
672
|
|
Total operating expenses
|
|
3,862
|
|
2,156
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
(3,022
|
)
|
(971
|
)
|
Interest expense
|
|
(15
|
)
|
|
|
Other income, primarily interest
|
|
82
|
|
149
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
(2,955
|
)
|
(822
|
)
|
|
|
|
|
|
|
Income tax expense
|
|
16
|
|
16
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,971
|
)
|
$
|
(838
|
)
|
|
|
|
|
|
|
Shares used to calculate net loss per
share:
|
|
|
|
|
|
Basic and diluted
|
|
5,113
|
|
5,018
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.58
|
)
|
$
|
(0.17
|
)
|
See accompanying notes to condensed financial
statements.
4
CIPRICO INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(2,971
|
)
|
$
|
(838
|
)
|
Adjustments to reconcile net loss to cash
used in operating activities
|
|
|
|
|
|
Depreciation and amortization
|
|
123
|
|
84
|
|
Compensation related to stock transactions
|
|
152
|
|
66
|
|
Changes in operating assets and liabilities
|
|
198
|
|
58
|
|
|
|
|
|
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
(2,498
|
)
|
(630
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Equipment purchases
|
|
(283
|
)
|
(146
|
)
|
Purchases of marketable securities
|
|
(2,233
|
)
|
(1,906
|
)
|
Proceeds from sale or maturity of
marketable securities
|
|
3,958
|
|
1,593
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
|
|
1,442
|
|
(459
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
72
|
|
Proceeds from issuance of convertible notes
and warrants
|
|
5,185
|
|
|
|
Debt acquisition costs
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
|
|
4,990
|
|
72
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
3,934
|
|
(1,017
|
)
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
1,271
|
|
4,357
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
5,205
|
|
3,340
|
|
|
|
|
|
|
|
Marketable securities, current
|
|
1,554
|
|
6,992
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable
securities
|
|
$
|
6,759
|
|
$
|
10,332
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
Value of warrants and conversion feature
related to convertible notes and warrants
|
|
$
|
902
|
|
|
|
See accompanying notes to condensed financial
statements.
5
CIPRICO INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2007
(Unaudited)
NOTE A DESCRIPTION OF BUSINESS
Ciprico Inc. (the Company or we
or our or us) is a leading provider of intelligent storage software
solutions for servers, professional workstations and digital media workflows.
Ciprico has been a leader in many aspects of data storage protection and
introduced one of the first data protection RAID systems in 1988. In June 2006
we acquired the RAIDCore line of business from Broadcom via asset purchase and
technology license. With the RAIDCore software as a base, the Company is once
again focused on being a leader in data protection technology with its software
based virtual RAID technology.
NOTE B BASIS OF PRESENTATION
Significant Accounting Policies and
Estimates-
Note 1 of the Notes to the Consolidated
Financial Statements included in the Annual Report on Form 10-KSB includes
a summary of the significant accounting policies and methods used in the
preparation of our financial statements.
In the opinion of management, the
accompanying unaudited condensed financial statements contain all necessary
adjustments and disclosures to present fairly the financial position as of December 31,
2007 and the results of operations for the three-month periods ended December 31,
2007 and 2006, and the cash flows for the three-month periods ended December 31,
2007 and 2006. The results of operations for the three-month period ended December 31,
2007 are not necessarily indicative of the results for the full year. These
condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Companys Form 10-KSB
filed on December 27, 2007.
In preparation of the Companys financial
statements, management is required to make estimates and assumptions that
affect reported amounts of assets and liabilities and related revenues and
expenses. The most significant estimates reflected in these financial statements
include accounts receivable and sales allowances, purchase accounting,
stock-based compensation, inventory valuation and income tax assets valuation
allowances. Actual results could differ
from the estimates used by management.
NOTE C MARKETABLE SECURITIES AND SHORT TERM
INVESTMENTS
The Company invests its excess cash in commercial paper, government
agencies and other asset-backed short term investments. These investments are
classified as available-for-sale securities, and their amortized cost approximates
fair value, and thus there are no unrealized gains or losses. Other investments
are classified as held-to-maturity given the Companys intent and ability to
hold the securities to maturity and are carried at amortized cost, which
approximates fair value. At December 31, 2007, marketable securities
consist entirely of asset-backed short term investments, which are
participation loans in real estate mortgages. The mortgage loans are for first
and/or second mortgages for residential, commercial and development properties.
Investments that have maturities of less than one year have been classified as
current marketable securities.
NOTE D
ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consist of the following (in
thousands):
|
|
December 31, 2007
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
1,445
|
|
Less allowance
|
|
(124
|
)
|
|
|
$
|
1,321
|
|
6
NOTE E INVENTORIES
Inventories are stated at the lower of cost
or replacement market. Inventory costs
include outside assembly charges, allocated manufacturing overhead and direct
material costs. Cost is determined using
an average cost method, which approximates a first in first out cost. Inventory consists of the following (in
thousands):
|
|
December 31, 2007
|
|
|
|
|
|
Finished Goods
|
|
$
|
202
|
|
Work-in-Process
|
|
450
|
|
Raw Materials
|
|
1,227
|
|
|
|
$
|
1,879
|
|
NOTE F
PROPERTY AND EQUIPMENT, NET OF DEPRECIATION
Property and
equipment, net of depreciation, consist of the following (in thousands):
|
|
December 31, 2007
|
|
Furniture and fixtures
|
|
$
|
415
|
|
Equipment
|
|
3,225
|
|
Construction in process
|
|
147
|
|
|
|
3,787
|
|
Accumulated depreciation
|
|
(2,808
|
)
|
Property and equipment, net
|
|
$
|
979
|
|
NOTE G
CONVERTIBLE NOTES AND WARRANTS
On December 26, 2007, the Company entered into a Convertible Note
Purchase Agreement (Purchase Agreement) with multiple accredited investors
for the private placement of $5.2 million of convertible notes with a
conversion price of $3.86 and common stock warrants for $0.25 worth of warrant
shares for each $1.00 of principal invested.
The notes are due and payable in full on March 26, 2009. The warrants are exercisable from the date of
issuance until March 26, 2012. The
notes are convertible at any time after the issuance date and before the maturity
date.
The notes carry an interest rate on the unpaid principal amount as a
fluctuating annual rate of interest equal to the one month LIBOR rate adjusted
monthly, plus 6.0%. At December 31, 2007, the interest rate being accrued
was 10.855% per annum. Interest is paid
at the notes maturity date, or converted into shares upon conversion.
At December 31, 2007, the notes and accrued interest are
convertible into 1,345,593 shares.
335,786 shares are issuable upon exercise of the warrants, and are
subject to adjustment in the event of stock splits or dividends, business
combinations, sale of assets or other similar transitions.
The proceeds were allocated between the convertible notes and warrants
based on their relative fair values.
The fair value of the warrants was determined using the Black Scholes
option pricing model using the following assumptions:
Conversion price
|
|
$
|
3.86
|
|
Average maturity
|
|
5 years
|
|
Risk-free rate
|
|
3.72
|
%
|
Volatility
|
|
36.4
|
%
|
The allocation of proceeds based on their relative fair values resulted
in a value assigned to the convertible notes and warrants of $4,734,000 and of
$451,000 respectively. As a result of the relative fair value allocation to the
warrants, the Purchase Agreement creates a beneficial conversion option value
of $451,000. The total warrant and
beneficial conversion fair values were recorded as additional paid in capital
and a discount, contra-asset, to the convertible note principal balance. The discount on the convertible notes is
being amortized to interest expense using the effective interest method until
the maturity date.
7
We incurred debt issuance costs of approximately $195,000 which were
recorded as deferred debt acquisition costs.
Deferred debt acquisition costs are being amortized to interest expense
using the effective interest method until the maturity date.
Interest expense consists the following (in thousands):
|
|
Three Months Ended
December 31, 2007
|
|
Interest accrued to convertible note holders
|
|
$
|
9
|
|
Amortization of deferred acquisition costs
|
|
3
|
|
Amortization of discount on convertible
notes
|
|
3
|
|
Total interest expense
|
|
$
|
15
|
|
NOTE H
STOCKHOLDERS EQUITY
Stock Option
Plan
The Company has stock-based compensation plans under which employees,
officers, and directors may be granted stock awards or options to purchase the
Companys common stock, generally at the market price on the date of grant. The
options become exercisable over various periods, typically four years for
employees and one year for non-employee directors, and have a maximum term of
ten years. Stock awards typically vest
over four years. As of December 31,
2007, 285,722 shares of common stock remain available to cover future stock
option grants under the Companys stock-based compensation plans.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 123
(revised 2004) (SFAS No. 123(R)),
Share-Based Payment
,
the Company records stock-based compensation expense for the fair value of
stock options. SFAS No. 123(R) requires
companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the awards portion that
is ultimately expected to vest is recognized as expense over the requisite service
periods.
As of December 31, 2007, total unrecognized share-based
compensation cost related to unvested stock options was $925,000 which is
expected to be recognized over a weighted average period of approximately
four years. The Company has included the following amounts for share-based
compensation cost, in the accompanying unaudited condensed statement of
operations (amounts in thousands, except per share amount):
|
|
Three Months Ended
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
1
|
|
$
|
2
|
|
Research and development
|
|
13
|
|
7
|
|
Sales and marketing
|
|
35
|
|
17
|
|
General and administrative
|
|
24
|
|
31
|
|
Share-based compensation before taxes
|
|
73
|
|
57
|
|
Related deferred income tax benefit
|
|
|
|
|
|
Share-based compensation after taxes
|
|
$
|
73
|
|
$
|
57
|
|
Net share-based compensation expense per
basic and diluted common share
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Share-based compensation expense recognized during the three-month
periods ended December 31, 2007 and 2006 included (1) compensation
expense for awards granted prior to, but not yet fully vested as of October 1,
2006, and (2) compensation expense for the share-based payment awards
granted subsequent to September 30, 2006 based on the grant date fair
values estimated in accordance with the provisions of SFAS No. 123(R).
SFAS No. 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The Company has historically and will continue to
estimate the fair value of share-based awards using the Black-Scholes
option-pricing model. Total unrecognized share-based compensation cost related
to unvested stock options as of December 31, 2007 has been adjusted for
estimated forfeitures.
8
The following table sets forth the weighted-average key assumptions and
fair value results for stock options granted during the three-month period
ended December 31.
|
|
Three Months Ended
December 31, 2007
|
|
Three Months Ended
December 31, 2006
|
|
Expected volatility
|
|
32.2-36.4
|
%
|
30.9-36.8
|
%
|
Weighted-average volatility
|
|
32.4
|
%
|
36.2
|
%
|
Expected dividends
|
|
|
%
|
|
%
|
Expected term (in years)
|
|
4.0
|
|
3.2-4.4
|
|
Risk-free interest rate
|
|
3.03-3.78
|
%
|
4.5-4.7
|
%
|
The expected volatility is based on historical volatility of our stock
taking into consideration the thinly traded nature of our stock and the
expected term of the option. We have not paid dividends in the past and do not
plan to pay any dividends in the future.
The expected term of the equity award is based on Company specific
historical experience, including grant behavior particular to officers,
directors and employee groups. Based on
the Companys historical turnover rates, an annualized forfeiture rate of 4.5%
has been used in calculating the estimated compensation cost for the
three-month period ended December 31, 2007. This estimate will be revised if actual
forfeitures differ from previous estimates. Prior to the adoption of SFAS
123(R), forfeitures were not estimated at the time of award. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent remaining
term.
The following table is a summary of option activity and changes during
the three-month period ended December 31, 2007:
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at October 1, 2007
|
|
886,900
|
|
$
|
5.13
|
|
|
|
|
|
Granted
|
|
34,500
|
|
7.58
|
|
|
|
|
|
Exercised
|
|
(1,050
|
)
|
4.57
|
|
|
|
|
|
Forfeited or expired
|
|
(16,025
|
)
|
4.95
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
904,325
|
|
$
|
5.97
|
|
3.8
|
|
$
|
5,402,446
|
|
Exercisable at December 31, 2007
|
|
357,044
|
|
$
|
5.31
|
|
2.8
|
|
$
|
1,896,281
|
|
The Companys 1999 Amended and Restated Stock Option Plan authorized
1,678,752 shares of stock be reserved and available under the Plan.
The Company did not realize any actual tax benefit from the tax
deductions for stock option exercises during the three -month period ended December 31,
2007, due to the full valuation allowance on the Companys U.S. deferred tax
assets.
Deferred Compensation Related to Restricted Stock
The following table summarizes the status of the Companys non-vested
restricted stock as of December 31, 2007:
|
|
Non-Vested Restricted Stock
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Weighted-
Average
Remaining
Recognition
Period (in
years)
|
|
Aggregate
Intrinsic
Value
|
|
Non-Vested at September 30, 2007
|
|
116,200
|
|
$
|
6.37
|
|
|
|
|
|
Granted
|
|
1,000
|
|
5.50
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Non-Vested at
December 31, 2007
|
|
117,200
|
|
$
|
6.36
|
|
0.7
|
|
745,392
|
|
9
During the three-month period ended December 31, 2007, $79,000 of
expense was recognized related to outstanding restricted stock awards. The vesting period for these awards currently
ranges from one to two years. Those that
vest over a one-year period vest without other conditions. Those that vest over a two-year period vest
only if certain service and market conditions and criteria are met.
The Company has included the following amounts for share-based
compensation cost, in the accompanying unaudited condensed statement of
operations (amounts in thousands, except per share amount):
|
|
Three Months Ended
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Cost of goods sold
|
|
$
|
|
|
$
|
|
|
Research and development
|
|
16
|
|
|
|
Sales and marketing
|
|
2
|
|
|
|
General and administrative
|
|
61
|
|
9
|
|
Share-based compensation before taxes
|
|
79
|
|
9
|
|
Related deferred income tax benefit
|
|
|
|
|
|
Share-based compensation after taxes
|
|
$
|
79
|
|
$
|
9
|
|
Net share-based compensation expense per
basic and diluted common share
|
|
$
|
0.02
|
|
$
|
|
|
NOTE I NET
LOSS PER SHARE
Basic and diluted net loss per share amounts were computed using
weighted average shares outstanding for each respective period. As the Company
incurred net losses in the three -month periods ended December 31, 2007
and 2006, the effect of potentially dilutive securities has been excluded from
the calculation of loss per share as inclusion would have had an anti-dilutive
effect.
Actual weighted average shares outstanding used in calculating basic
and diluted loss per share were:
|
|
Three Months Ended
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
5,112,994
|
|
5,018,380
|
|
Effect of dilutive securities
|
|
|
|
|
|
Diluted Shares outstanding
|
|
5,112,994
|
|
5,018,380
|
|
Securities excluded from the computation of diluted loss per share
because inclusion would have had an anti-dilutive effect:
|
|
Three Months Ended
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
Stock options
|
|
70,038
|
|
107,543
|
|
Convertible shares
|
|
87,602
|
|
|
|
Warrants
|
|
21,899
|
|
|
|
Anti-dilutive securities
|
|
179,539
|
|
107,543
|
|
NOTE J
INCOME TAXES
Income tax expense for the three-month periods ended December 31,
2007 and 2006 is related to goodwill. In
accordance with SFAS No. 142, goodwill and other intangible assets with
indefinite lives are not amortized for financial reporting purposes. As goodwill is amortized for tax purposes,
the Company has recorded deferred tax expense of approximately $16 and $16 for
the three-month periods ended December 31, 2007, and 2006,
respectively. The deferred tax expense
and deferred tax liability are related to an asset with an indefinite life and
are thus created as it is more likely than not that any deferred tax asset will
not be realized.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN No. 48),
Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109
. FIN No. 48 prescribes a comprehensive
model for recognizing, measuring, presenting and disclosing in the financial
statements tax positions taken or expected to be taken on a tax return,
including the decision whether to file or not to file in a particular
jurisdiction. The
10
Company has adopted FIN No. 48 as of October 1, 2007. We analyzed our tax positions as of October 1,
2007 and determined that the implementation of FIN 48 has no impact on our
financial statements as we maintain a full valuation allowance on our deferred
tax assets due to our operating losses.
As a result of the implementation of FIN No. 48, the Company
recognized no change in the liability for unrecognized tax benefits or deferred
tax assets. The Company anticipates it
will record interest and penalties for unknown tax liabilities as they become
known in income tax expense in the consolidated statements of operations, if
necessary.
The Company files income tax returns in the U.S. federal jurisdiction
and various states.
NOTE K
SIGNIFICANT CUSTOMERS
Sales to significant customers as a
percentage of sales for the three-month periods ended December 31, 2007
and 2006 are shown in the chart below.
|
|
2007
|
|
2006
|
|
Customer A
|
|
25
|
%
|
*
|
%
|
Customer B
|
|
13
|
|
*
|
|
Customer C
|
|
*
|
|
11
|
|
Customer D
|
|
*
|
|
11
|
|
* Sales were less than 10% for the period
NOTE L RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007 the
FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No.
115
. SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value and is effective for the Companys fiscal year beginning October 1,
2008. Adoption of SFAS No. 159 is not expected to have a material impact
on the Companys financial position or results of operations.
In September 2006
the FASB issued SFAS No. 157,
Fair
Value Measurements
, which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value measurements, but its
provisions apply to all other accounting pronouncements that require or permit
fair value measurement. SFAS No. 157 is effective for the Companys fiscal
year beginning October 1, 2008. Adoption of SFAS No. 157 is not
expected to have a material impact on the Companys financial position or
results of operations.
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-QSB, including, but
not limited to, statements regarding the development and growth of our
business, our intent, belief or current expectations, primarily with respect to
our future operating performance and the products and services we expect to
offer and other statements contained herein regarding matters that are not
historical facts 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, and are subject to the safe
harbor created by those sections. Generally, words such as may, should, expect,
plan, anticipate, believe, estimate, will, predict, intend, or potential
and similar expressions identify forward-looking statements. Because such
statements include risks and uncertainties, many of which are beyond our
control, actual results may differ materially from those expressed or
implied by these forward-looking statements. These risks and uncertainties
include, but are not limited to: (i) competitive factors, including
pricing pressures; (ii) variability in quarterly sales; (iii) economic
trends generally and in various markets; (iv) general economic conditions;
(v) risks associated with introducing new products, features and
services; and (vi) other events and important factors disclosed previously
and from time to time in our filings with the U.S. Securities and Exchange
Commission (SEC). Future SEC filings, future press releases and oral or
written statements made by us or with our approval, which are not statements of
historical fact, may also contain forward-looking statements.
11
Readers are cautioned not to place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the
date on which they were made, and except as required by law, we assume no
obligation to update any forward-looking statements. Although we believe that
the expectations reflected in these statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We
do not intend to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise.
The following discussion and analysis of the
financial condition and results of operations of the Company should be read in
conjunction with the Condensed Financial Statements and the Notes thereto,
included in Part I - Financial Information.
OVERALL
In
terms of sales the first quarter of fiscal 2008 was a challenge due to general
poor economic conditions and the on-going entertainment writers strike, the latter
of which greatly affected our MediaVault product revenues. However we made substantial progress in the
development of our RAIDCore software platform and in positioning RAIDCore in
the market. Examples of this progress
include:
·
Shipments
by Ciprico of over 40,000 RAIDCore software licenses and controller boards;
·
Currently
have over 100 system builders & OEMs evaluating our RAIDCore solution;
·
Over
30 customers have purchased RAIDCore from Ciprico;
·
Achieved
a Vanguard award for our first RAIDCore based appliance, the MV5108 and
delivered first production units; and
·
Introduced
RAIDCore technology running on Intel platforms and began qualification work
with customers.
Bringing
RAIDCore and products based on RAIDCore to market represents the future of
Ciprico. From our discussions with our
customers we continue to believe we have a very significant opportunity. Customer feedback confirms that the
transition from hardware based data protection to virtualized software data
protection in the mainstream server and workstation markets has begun and will
accelerate. At this point we have made significant progress in re-establishing
the RAIDCore brand but RAIDCore has just begun to penetrate the potential
market. We believe the RAIDCore product set
we have today, and will bring to market in the next quarter, will position us
to capitalize on this opportunity.
We
would like to see the adoption rate of our software solution move faster. The
advancement of our newer RAIDCore products and appliances was temporarily
impacted by several factors:
·
Delays
in the development of a new internet based activation software approach and
related protection;
·
Supplier
component delivery delays that impacted launch of several new RAIDCore based
appliances; and
·
Broadcoms
decision to exit the storage silicon and PC chipset businesses, which forced us
to move to an alternative chip supplier, Marvell, for our RAIDCore controller
adapters and also impacted the sales of licenses to motherboard vendors using
the Broadcom core logic chipset.
Overcoming
these challenges helps position us to expand our opportunities. As noted above, customer discussions have
convinced us our core strategy is correct.
As we move forward we are focused on execution and believe we are
building momentum with our unique, virtual RAID technology. We expect to announce multiple strategic
partnerships that will accelerate RAIDCores market acceptance. In addition, we
plan to release new MediaVault and DiMeda products utilizing our RAIDCore
Technology.
SALES
Sales
for the first quarter of the fiscal year 2008 were $2.0 million, down $0.2
million, or 9% from the prior quarter, and down $0.8 million, or 27% from the
first quarter of fiscal 2007. Revenue
was adversely affected by general poor economic conditions and the on-going
entertainment writers strike, the latter of which greatly affected our
MediaVault product sales as video content creation is the key market for such
products. RAIDCore based appliance sales
increased significantly over
12
the
previous quarter when the first one was announced. Additional RAIDCore based appliance products
are being introduced and these products have much broader market applicability
than the traditional MediaVault line.
We
expect to see revenue growth for RAIDCore through both our software/board sales
and appliance sales. Given higher ASPs
we expect the RAIDCore appliance based revenue to grow faster in the short
term. Our RAIDCore software and adapter
card opportunities require a design in effort and we have seen delays between customer
acceptance and resulting revenues.
We
remain highly optimistic that the overall transition from hardware to
virtualized software data protection in the mainstream server IT and media
workstation markets will continue. We
believe this represents a tremendous opportunity for Ciprico with its flagship
RAIDCore products and technology based on the positive feedback from our target
customer base.
During
the quarter we did record revenue related to work done on a military contract
referencing our Talon IV, RAIDCore based ruggedized appliance, which flows
through Boeing as prime contractor. We
previously announced that we had been awarded this contract and that we
expected approximately $1 million in revenue on the initial phase of the
contract. Boeing has since indicated
that due to military requested cost reductions it is suspending further work on
this phase of the contract. We have
recorded approximately $650,000 in revenue to date related to this contract. We continue to pursue engagement on the long
term aspects of this opportunity and a number of addition military
opportunities, particularly in light of the favorable customer feedback
regarding our technology and solution.
GROSS MARGIN
Gross
margin of 41.8% in the first quarter of fiscal 2008 was substantially higher
than the previous quarter to due to the recognition of the revenue related to
the military contract noted above. We
also had some significant revenue from this same marketplace in the first
quarter a year ago and had similar gross margin percentage.
OPERATING EXPENSES
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
December 31,
2007
|
|
September 30,
2007
|
|
$
Change
|
|
%
Change
|
|
December 31,
2006
|
|
$
Change
|
|
%
Change
|
|
Research and development
|
|
$
|
1,507,000
|
|
$
|
1,487,000
|
|
$
|
20,000
|
|
1.3
|
%
|
$
|
704,000
|
|
$
|
803,000
|
|
114.1
|
%
|
Sales and marketing
|
|
1,598,000
|
|
1,320,000
|
|
278,000
|
|
21.1
|
%
|
780,000
|
|
818,000
|
|
104.9
|
%
|
General and administrative
|
|
757,000
|
|
653,000
|
|
104,000
|
|
15.9
|
%
|
672,000
|
|
85,000
|
|
12.6
|
%
|
Total operating expenses
|
|
$
|
3,862,000
|
|
$
|
3,460,000
|
|
$
|
402,000
|
|
11.6
|
%
|
$
|
2,156,000
|
|
$
|
1,706,000
|
|
79.1
|
%
|
Operating expenses increased 11.6% over the previous quarter due in
large part to the first full quarter of some sales and marketing resources
hired late in the previous quarter. General and administrative expenses
increased over the previous quarter due to additional accounting and audit
costs related to our year-end, as well as non-capitalizable debt acquisition
costs incurred in the first quarter of fiscal 2008.
Research and development expenses for the three months ended December 31,
2007 were mostly unchanged from the prior quarter. Both of these quarters included some costs we
do not expect to incur again and anticipate some small level of decline in the
ensuing quarters. Research and
development expenses for the first quarter of fiscal 2008 were higher compared
to the first quarter a year ago due to the additional headcount added over the
past year necessary to update our product line and to develop the RaidCore
software.
Sales and marketing expenses for the three months ended December 31,
2007 were higher compared to the prior quarter due to the current quarter being
the first quarter with a full complement of sales and marketing resources. As compared to the prior year first quarter
the prior year figures did not reflect any sales and marketing resources
related to the RAIDcore product line. In the interim we have added experienced
sales staff necessary to aggressively bring the next generation RAIDCore
technology to market, including a Vice President of RAIDCore sales to focus on
our market strategy for software licensing and related board sales.
General and administrative expenses for the three months ended December 31,
2007 were higher compared to the prior quarter due to additional costs related
to the issuance of convertible notes and warrants and expenses related to our
annual audit and annual meeting, and are higher compared to the three months
ended December 31, 2006 due to additional costs related to issuance of the
convertible notes and additional stock compensation expense due to new grants.
13
INTEREST EXPENSE
Interest expense for the three months ended December 31, 2007 was
$15,000 as a result of the issuance of convertible notes and warrants on December 26,
2007. Prior to this issuance of
convertible notes, we did not have interest expense. Interest expense includes:
|
|
Three Months
Ended
December
31, 2007
|
|
Interest accrued to convertible note
holders
|
|
$
|
9,000
|
|
Amortization of deferred acquisition costs
|
|
3,000
|
|
Amortization of discount on convertible
notes
|
|
3,000
|
|
Total interest expense
|
|
$
|
15,000
|
|
OTHER INCOME
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
December 31,
2007
|
|
September 30,
2007
|
|
$
Change
|
|
%
Change
|
|
December 31,
2006
|
|
$
Change
|
|
%
Change
|
|
Other Income
|
|
$
|
82,000
|
|
$
|
93,000
|
|
$
|
(11,000
|
)
|
-11.8
|
%
|
$
|
149,000
|
|
$
|
(67,000
|
)
|
-45.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income is primarily interest income and for the three months
ended December 31, 2007 is less compared to the prior quarter and less
compared to the three months ended December 31, 2006, due to lower average
cash and investment balances.
INCOME TAXES
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN
No. 48),
Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement 109
. FIN No. 48 prescribes
a comprehensive model for recognizing, measuring, presenting and disclosing in
the financial statements tax positions taken or expected to be taken on a tax
return, including the decision whether to file or not to file in a particular
jurisdiction. The Company has adopted
FIN No. 48 as of October 1, 2007.
The adoption of FIN No. 48 did not have any material impact to the
Companys financial statements, and resulted in no cumulative effect of
applying FIN No. 48 adjustment to retained earnings. As a result of the implementation of FIN No. 48,
the Company recognized no change in the liability for unrecognized tax benefits
or deferred tax assets. The Company
anticipates it will record interest and penalties for unrecognized tax benefits
in income tax expense in the consolidated statements of operations, if
necessary.
NET LOSS
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
December 31,
2007
|
|
September 30,
2007
|
|
$
Change
|
|
%
Change
|
|
December 31,
2006
|
|
$
Change
|
|
%
Change
|
|
Net (Loss)
|
|
$
|
(2,971,000
|
)
|
$
|
(2,826,000
|
)
|
$
|
(145,000
|
)
|
5.1
|
%
|
$
|
(838,000
|
)
|
$
|
(2,133,000
|
)
|
254.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increased net loss is due to the increased expenses noted above and
the impact of lower revenue.
We believe our development efforts, new products and added personnel
skills will allow for significant momentum in the marketplace although our
revenues may be inconsistent in the near term.
We continue to make investments in our future that drive significant
progress toward the products and technology that we believe will return Ciprico
to growth and profitability. Our
profitability will continue to be impacted by the investments we are making in
order to aggressively bring RAIDCore technology to market.
LIQUIDITY AND CAPITAL RESOURCES
We
ended the quarter with cash and investment balances of $6.8 million, $2.2
million higher than the prior quarter end balance of $4.6 million. During the quarter we issued $5.2 million of
convertible notes and warrants, which produced net cash proceeds of $5.0
million. Net cash used in operations was $2.5 million during the first quarter,
which includes our net loss of $3.0 million for the quarter adjusted for $0.3
million of non-cash charges (depreciation and stock compensation) and $0.2 million
of changes in operating assets and liabilities.
We also had $0.3 million in capital expenditures.
We
continue in our efforts to increase revenues in the near term and are also
evaluating ways to reduce costs to decrease cash used in operations. While the
Companys capital resources appear adequate today, the Company may seek
additional
14
financing
in the future. If additional financing is necessary, no assurance can be given
that such financing will be available and, if available, will be on terms
favorable to the Company and its stockholders.
OFF-BALANCE
SHEET ARRANGEMENTS
The Company does not have any off-balance
sheet arrangements.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note L to our
unaudited condensed consolidated financial statements included in Item 1
of this Quarterly Report on Form 10-QSB for disclosure of the impact that
recent accounting pronouncements have had or may have on our consolidated
financial statements.
Item 3.
Controls and Procedures
As of the end of the
period covered by this report (the Evaluation Date), the Company carried out
an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the Companys disclosure controls and
procedures were effective. Management
will continue to review our disclosure controls and procedures periodically to
determine their effectiveness and to consider modifications or additions to
them.
15