UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
|
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from
to
Commission File Number 000-50553
ENTORIAN TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
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Delaware
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56-2354935
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4030 West Braker Lane, Austin, TX 78759
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(512) 334-0111
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
x
NO
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). YES
¨
NO
¨
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 definition of “accelerated filer”, “larger accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
x
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
¨
NO
x
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of September 30, 2009, was 3,893,408.
ENTORIAN TECHNOLOGIES INC.
FORM 10-Q QUARTERLY REPORT
QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2009
TABLE OF CONTENTS
CAUTIONARY STATEMENT
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-Q (AS WELL AS DOCUMENTS
INCORPORATED HEREIN BY REFERENCE) MAY BE CONSIDERED “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. THESE
FORWARD-LOOKING STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ENTORIAN TECHNOLOGIES INC. AND ITS MANAGEMENT, AND MAY BE EVIDENCED BY WORDS SUCH AS WE “EXPECT,” “ANTICIPATE,”
“TARGET,” “PROJECT,” “BELIEVE,” “GOALS,” “ESTIMATE,” “POTENTIAL,” “PREDICT,” “MAY,” “MIGHT,” “COULD,” “INTEND,” VARIATIONS OF THESE TYPES
OF WORDS AND SIMILAR EXPRESSIONS. YOU ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTIES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED UNDER “RISK FACTORS” AND ELSEWHERE IN THIS REPORT. ENTORIAN TECHNOLOGIES INC. DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ALL
PERCENTAGE AMOUNTS AND RATIOS WERE CALCULATED USING THE UNDERLYING DATA IN THOUSANDS.
2
PART I
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ITEM 1.
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FINANCIAL STATEMENTS
|
ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
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|
|
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|
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September 30,
2009
|
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December 31,
2008
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(unaudited)
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ASSETS
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Current assets:
|
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|
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|
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Cash and cash equivalents
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|
$
|
2,536
|
|
|
$
|
15,651
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|
|
Investments
|
|
|
8,647
|
|
|
|
1,639
|
|
|
Accounts receivable, net of allowance of $186 in 2009 and $597 in 2008
|
|
|
16,585
|
|
|
|
5,256
|
|
|
Inventories
|
|
|
7,552
|
|
|
|
5,018
|
|
|
Prepaid expenses
|
|
|
500
|
|
|
|
510
|
|
|
Income tax recoverable
|
|
|
1,646
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|
|
|
1,571
|
|
|
Deferred tax asset
|
|
|
272
|
|
|
|
271
|
|
|
Other current assets
|
|
|
443
|
|
|
|
1,592
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|
|
|
|
|
|
|
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|
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Total current assets
|
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38,181
|
|
|
|
31,508
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|
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Property, plant and equipment, net
|
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3,624
|
|
|
|
4,439
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|
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Long-term investments
|
|
|
—
|
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7,337
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|
|
Other intangible assets, net
|
|
|
8,750
|
|
|
|
10,611
|
|
|
Other assets
|
|
|
111
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
50,666
|
|
|
$
|
53,976
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
|
|
$
|
14,438
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|
|
$
|
4,995
|
|
|
Accrued compensation
|
|
|
199
|
|
|
|
1,951
|
|
|
Accrued liabilities
|
|
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1,558
|
|
|
|
1,490
|
|
|
Deferred revenue
|
|
|
876
|
|
|
|
45
|
|
|
|
|
|
|
|
|
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|
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Total current liabilities
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|
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17,071
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|
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|
8,481
|
|
|
Other accrued liabilities
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|
|
69
|
|
|
|
180
|
|
|
Deferred tax liabilities
|
|
|
170
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|
|
|
170
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|
|
Convertible notes payable
|
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3,633
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|
|
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3,847
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Related party convertible notes payable
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6,428
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|
|
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6,805
|
|
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Redeemable preferred stock; $0.001 par value; 5,000,000 shares authorized
|
|
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—
|
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|
—
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Stockholders’ equity:
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Common stock; $0.001 par value; 8,333,333 shares authorized at September 30, 2009 and December 31, 2008; 4,455,970
shares and 4,446,901 shares issued at September 30, 2009 and December 31, 2008, respectively
|
|
|
4
|
|
|
|
4
|
|
|
Additional paid-in capital
|
|
|
150,367
|
|
|
|
149,424
|
|
|
Treasury stock, at cost; 562,562 shares and 538,909 shares at September 30, 2009 and December 31, 2008, respectively
|
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(25,947
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)
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(25,850
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)
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|
Accumulated other comprehensive income
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1
|
|
|
|
26
|
|
|
Accumulated deficit
|
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|
(101,130
|
)
|
|
|
(89,111
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)
|
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|
|
|
|
|
|
|
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|
Total stockholders’ equity
|
|
|
23,295
|
|
|
|
34,493
|
|
|
|
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|
|
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|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
50,666
|
|
|
$
|
53,976
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated condensed financial
statements.
3
ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
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Three Months Ended
September 30,
|
|
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|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
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|
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Product
|
|
$
|
11,237
|
|
|
$
|
17,750
|
|
|
License
|
|
|
551
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
|
|
|
11,788
|
|
|
|
18,463
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
Product (1)
|
|
|
9,908
|
|
|
|
16,861
|
|
|
Amortization of acquisition intangibles
|
|
|
626
|
|
|
|
970
|
|
|
Impairment of acquisition intangibles and fixed assets
|
|
|
—
|
|
|
|
3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
10,534
|
|
|
|
21,768
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
1,254
|
|
|
|
(3,305
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (1)
|
|
|
2,616
|
|
|
|
5,132
|
|
|
Research and development (1)
|
|
|
1,937
|
|
|
|
2,089
|
|
|
Restructuring
|
|
|
(133
|
)
|
|
|
192
|
|
|
Amortization of acquisition intangibles
|
|
|
23
|
|
|
|
165
|
|
|
Impairment of acquisition intangibles
|
|
|
—
|
|
|
|
4,312
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
4,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,443
|
|
|
|
16,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,189
|
)
|
|
|
(20,147
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
34
|
|
|
|
218
|
|
|
Interest expense
|
|
|
(156
|
)
|
|
|
(195
|
)
|
|
Other, net
|
|
|
53
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(69
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,258
|
)
|
|
|
(20,118
|
)
|
|
Provision (benefit) for income taxes
|
|
|
2
|
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,260
|
)
|
|
$
|
(19,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.84
|
)
|
|
$
|
(5.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.84
|
)
|
|
$
|
(5.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,897
|
|
|
|
3,904
|
|
|
Diluted
|
|
|
3,897
|
|
|
|
3,904
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
5
|
|
|
$
|
97
|
|
|
Selling, general and administrative expense
|
|
$
|
251
|
|
|
$
|
388
|
|
|
Research and development expense
|
|
$
|
66
|
|
|
$
|
108
|
|
The accompanying notes are an integral part of these consolidated condensed financial
statements.
4
ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
31,107
|
|
|
$
|
32,639
|
|
|
License
|
|
|
1,469
|
|
|
|
3,349
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
32,576
|
|
|
|
35,988
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
Product (1)
|
|
|
25,500
|
|
|
|
34,156
|
|
|
Amortization of acquisition intangibles
|
|
|
1,877
|
|
|
|
2,161
|
|
|
Impairment of acquisition intangibles and fixed assets
|
|
|
—
|
|
|
|
4,097
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
27,377
|
|
|
|
40,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
5,199
|
|
|
|
(4,426
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (1)
|
|
|
8,643
|
|
|
|
12,088
|
|
|
Research and development (1)
|
|
|
6,229
|
|
|
|
4,486
|
|
|
Restructuring
|
|
|
2,303
|
|
|
|
406
|
|
|
Amortization of acquisition intangibles
|
|
|
94
|
|
|
|
518
|
|
|
Impairment of acquisition intangibles
|
|
|
—
|
|
|
|
4,312
|
|
|
Goodwill impairment
|
|
|
(159
|
)
|
|
|
4,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,110
|
|
|
|
26,762
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,911
|
)
|
|
|
(31,188
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
154
|
|
|
|
1,076
|
|
|
Interest expense
|
|
|
(473
|
)
|
|
|
(201
|
)
|
|
Other, net
|
|
|
249
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(70
|
)
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(11,981
|
)
|
|
|
(30,250
|
)
|
|
Provision (benefit) for income taxes
|
|
|
38
|
|
|
|
(795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,019
|
)
|
|
$
|
(29,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.08
|
)
|
|
$
|
(7.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.08
|
)
|
|
$
|
(7.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,903
|
|
|
|
3,899
|
|
|
Diluted
|
|
|
3,903
|
|
|
|
3,899
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
16
|
|
|
$
|
264
|
|
|
Selling, general and administrative expense
|
|
$
|
719
|
|
|
$
|
1,356
|
|
|
Research and development expense
|
|
$
|
211
|
|
|
$
|
339
|
|
The accompanying notes are an integral part of these consolidated condensed financial
statements.
5
ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,019
|
)
|
|
$
|
(29,455
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangibles
|
|
|
3,579
|
|
|
|
5,546
|
|
|
Impairment of intangibles and fixed assets
|
|
|
(159
|
)
|
|
|
13,361
|
|
|
Stock-based compensation expense
|
|
|
946
|
|
|
|
1,961
|
|
|
Other non-cash charges
|
|
|
77
|
|
|
|
399
|
|
|
Net change in operating assets and liabilities
|
|
|
(5,043
|
)
|
|
|
(5,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(12,619
|
)
|
|
|
(13,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
—
|
|
|
|
(4,418
|
)
|
|
Sales and maturities of investments
|
|
|
425
|
|
|
|
22,881
|
|
|
Additions to property, plant and equipment
|
|
|
(1,344
|
)
|
|
|
(1,149
|
)
|
|
Proceeds from sale of equipment
|
|
|
753
|
|
|
|
34
|
|
|
Acquisition of Augmentix Corporation, net of cash acquired
|
|
|
—
|
|
|
|
(13,021
|
)
|
|
Patent application costs
|
|
|
(217
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(383
|
)
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net proceeds from the issuance of common stock
|
|
|
1
|
|
|
|
103
|
|
|
Share repurchases
|
|
|
(97
|
)
|
|
|
(219
|
)
|
|
Return of capital related to the acquisition of Augmentix Corporation
|
|
|
—
|
|
|
|
(9,662
|
)
|
|
Payments on capitalized lease obligations
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(113
|
)
|
|
|
(9,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(13,115
|
)
|
|
|
(19,523
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
15,651
|
|
|
|
34,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,536
|
|
|
$
|
14,490
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance of long-term convertible debt in connection with the acquisition of Augmentix
|
|
$
|
—
|
|
|
$
|
10,652
|
|
The accompanying notes are an integral part of these consolidated condensed financial
statements.
6
ENTORIAN TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements of Entorian Technologies Inc. (we, us, our), have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC). These financial
statements do not include all of the information and footnotes required by United States generally accepted accounting principles for annual financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect reported
assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. In addition, operating results for the three and nine months ended
September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009, or for any other period.
Following our acquisition of Augmentix Corporation (Augmentix) on July 14, 2008, we divided our operations into two reportable segments, Memory Solutions and Rugged Technology Solutions.
Subsequently, as a result of exiting the manufacturing activities of our memory business, which we completed during the first quarter of 2009, we now operate under only Rugged Technology Solutions.
Effective October 30, 2009, we completed a 1-for-12 reverse split of our outstanding shares of common stock. The number of common
shares related to the company’s convertible notes and stock options has been proportionately adjusted to reflect the reverse split. Our reverse stock split was accounted for retroactively and reflected in our common stock, treasury stock, stock
option and restricted stock unit (RSU) activity as of and during the periods ended December 31, 2008 and September 30, 2009. See Note 18, “Subsequent Events,” for additional information regarding our reverse stock split.
These financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2008, which we filed with the SEC on March 12, 2009.
Concentration of Risk
Until our acquisition of Augmentix, we derived nearly all of our revenue from sales or licenses of our Stakpak and memory module solutions.
In the first quarter of 2009, we exited from our memory solutions manufacturing business and now are focusing on our Rugged Technology Solutions business, which derives nearly all of its revenue from sales to Dell. For the three and nine months
ended September 30, 2009, Dell accounted for approximately 89% and 74%, respectively, of our total revenue. We expect these sales to continue to account for a substantial portion of our total revenue in the foreseeable future.
In addition, we have an arrangement with a manufacturer in which this third party purchases and takes title of certain inventory relating to
certain of our products upon shipment from the original manufacturers of such inventory. This third party recovers the cost of inventory upon the sale of finished goods to us. This program offers us several advantages; however, this
arrangement also results in concentrated credit and inventory risk for us. Approximately $8.7 million of our accounts receivable balance as of September 30, 2009 was with this third party. This was offset by a balance of $9.3 million in
accounts payable due to this third party for the production and delivery of finished goods by the manufacturer relating to certain of our products at September 30, 2009. As our sales increase, these amounts will increase.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued ASC Topic 105 to establish the FASB Standards Accounting Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied to non-governmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon
its effective date. FASB ASC Topic 105 is effective for interim or annual periods ending after September 15, 2009. The adoption of FASB ASC Topic 105 did not have a material impact on our financial position, results of operations, cash flows or
disclosures.
7
|
2.
|
Fair Value Measurements
|
On January 1, 2009, we adopted FASB ASC Topic 820 for our non-financial assets and liabilities. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. The following table details the fair value measurements within the fair value hierarchy of our financial and non-financial assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
September 30, 2009
|
|
Fair Value Measurements at September 30, 2009 Using:
|
|
Description
|
|
|
Quoted Prices in
Active Markets
Using Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Available-for-sale securities
|
|
$
|
1,588
|
|
$
|
1,588
|
|
$
|
—
|
|
$
|
—
|
|
Trading securities
|
|
|
6,525
|
|
|
—
|
|
|
—
|
|
|
6,525
|
|
Put option on trading securities
|
|
|
534
|
|
|
—
|
|
|
—
|
|
|
534
|
|
Assets held for sale
|
|
|
60
|
|
|
—
|
|
|
60
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,707
|
|
$
|
1,588
|
|
$
|
60
|
|
$
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance at December 31, 2008
|
|
$
|
7,337
|
|
|
Transfers in to (out of) Level 3
|
|
|
—
|
|
|
Net gain included in other income (expense)
|
|
|
147
|
|
|
Purchases, issuances and settlements
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
7,059
|
|
|
|
|
|
|
|
We have included our investments related to auction rate securities (ARS) of
approximately $6.5 million, or 92% of par value, and our put option of $0.5 million, respectively, in the Level 3 category. See Note 4, “Investments,” for additional information regarding our auction rate securities.
As a result of our decision to close our operations in Reynosa, Mexico, we decided to sell approximately $0.8 million in fixed assets from
our Memory Solutions business, which we recorded as assets held for sale at December 31, 2008. During the three months ended March 31, 2009, we recorded an impairment charge of approximately $0.4 million related to our assets held for sale
based on quoted market prices for similar assets. Also, during the nine months ended September 30, 2009, we sold various assets recorded as assets held for sale with a net book value of approximately $0.3 million for a net gain of approximately
$0.4 million.
During November 2008, we accepted a settlement offer from one of our investment providers to sell, at par
value, our ARS at any time during a two-year period beginning June 30, 2010 and ending July 2, 2012. In connection with this settlement, we elected to account for the put option related to our ARS under FASB ASC Topic 825, which allows us
to elect the fair value option for our put option on the date the put option is first recorded in our financial statements. During the nine months ended September 30, 2009, we recorded a net loss of $0.1 million in Other income (expense)
related to the change in fair value of our put option.
8
|
3.
|
Accounts Receivable, net
|
The following are the components of accounts receivables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
Gross accounts receivable
|
|
$
|
16,771
|
|
|
$
|
5,853
|
|
|
Allowance for doubtful accounts
|
|
|
(186
|
)
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,585
|
|
|
$
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our accounts receivable balance at September 30, 2009, compared
to December 31, 2008, was primarily due to receivables of $9.0 million related to the sale of previously consigned inventory to our manufacturing partners. These receivables were offset by a balance of $10.2 million in accounts payable to these
manufacturing partners for the production of finished goods and inventory held by the manufacturer related to certain of our products at September 30, 2009. In addition, the increase in our accounts receivable balance was due to the timing of
sales during the third quarter of 2009. The balance in our allowance for doubtful accounts at December 31, 2008 was primarily due to the bankruptcy of a large memory business customer. We wrote off the associated receivable and allowance for
doubtful accounts during the second quarter of 2009.
As of
September 30, 2009, we held approximately $6.5 million in ARS at 92% of par value and $0.5 million in a put option, which are classified as short-term investments in the Level 3 category.
Our ARS are investments in government-backed student loans. The final maturity dates of the ARS that we own are between 2034 and 2041 and
the securities are rated Aaa and AA. Approximately 67% of the student loans underlying our ARS are guaranteed by the federal government under the Federal Family Education Loans Program (FFELP). The FFELP guarantees between 95% and 98% of the par
value of these loans. The remaining 33% of our ARS are private loans, of which 85% are insured.
Our ARS have historically
traded at par and are callable at par at the option of the issuer. Beginning in February 2008, auctions for these securities began to fail, and the interest rates for these ARS reset to the maximum rate according to the applicable investment
offering document. As of September 30, 2009, there was insufficient observable ARS market information available to determine the fair value of these investments. Therefore, our ARS were valued based on a pricing model that included certain
assumptions, such as our ARS maximum interest rate, probability of passing auction, default probability and discount rate. Based on this assessment of fair value, as of September 30, 2009, we determined there was an increase in the fair value
of our ARS of approximately $0.3 million during the nine months ended September 30, 2009.
As of September 30, 2009,
the maximum interest rates for our ARS ranged from 0.5% to 1.1%. Through September 30, 2009, we have continued to receive interest payments on our ARS in accordance with their terms and believe we will continue to receive interest payments as
long as we hold these securities. During the nine months ended September 30, 2009, approximately $0.4 million of our ARS was called at par by the issuer.
During November 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell them to this firm, at par value, at any time over a two-year period, beginning
June 30, 2010 and ending July 2, 2012. The agreement also provides access to loans of 75% of the market value of our ARS until June 30, 2010. As a result of accepting this offer, during 2008 we transferred our ARS from
available-for-sale to trading and reclassified approximately $0.9 million from other comprehensive loss to other expense. In addition, upon acceptance of this settlement, we recorded the estimated fair value of the put option of approximately $0.7
million, which was classified as long-term investments in the Level 3 category, and elected to apply the fair value provisions of FASB ASC Topic 825, which allows us to elect the fair value option for our put option on the date the put option is
first recorded in our financial statements. We will recognize future changes in the fair value of the ARS and the put option in the statement of operations. The fair value adjustments to the ARS and the put option will largely offset and should
result in a minimal net impact to the statement of operations in future periods. As of June 30, 2009, we reclassified our ARS and related put option to short-term investments based on our intent to sell them to the investment firm on
June 30, 2010.
9
Trading Securities
Our trading securities as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Estimated
Fair Value
|
|
Net Realized
Loss
|
|
|
Estimated
Fair Value
|
|
Net Realized
Loss
|
|
|
Auction rate securities
|
|
$
|
6,525
|
|
$
|
(575
|
)
|
|
$
|
6,662
|
|
$
|
(863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
6,525
|
|
$
|
(575
|
)
|
|
$
|
6,662
|
|
$
|
(863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses on our ARS that we classified as trading securities held at the reporting
date were $0.6 million and $0.9 million as of September 30, 2009 and December 31, 2008, respectively.
Available-for-Sale
Securities
Our available-for-sale securities are carried at fair value with unrealized gains and losses, if any,
included as a component of accumulated other comprehensive income (loss). Realized gains and losses are recognized based on the specific identification method.
The amortized cost, net unrealized gains and losses and estimated fair value of our available-for-sale securities as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Net
Unrealized
Gains
|
|
Net
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
1,587
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,587
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
1,613
|
|
$
|
26
|
|
$
|
—
|
|
$
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,613
|
|
$
|
26
|
|
$
|
—
|
|
$
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains at September 30, 2009 and December 31, 2008 were the
result of fluctuations in the current market value of our available-for-sale securities in the marketplace.
Maturities of
investment securities classified as available-for-sale at September 30, 2009 and December 31, 2008 by contractual maturity are shown below (in thousands). Expected maturities will vary from contractual maturities because borrowers may have
the right to recall or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Within 1 year
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Between 1 and 5 years
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Between 5 and 10 years
|
|
|
1,587
|
|
|
1,588
|
|
|
1,613
|
|
|
1,639
|
|
After 10 years
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,587
|
|
$
|
1,588
|
|
$
|
1,613
|
|
$
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2009, we did not sell any
of our investment securities held as available-for-sale. We sold approximately $2.5 million and $22.9 million in investment securities held as available-for-sale during the three and nine months ended September 30, 2008, respectively.
10
Inventories
consisted of the following (in thousands) at the respective dates:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009
|
|
December 31,
2008
|
|
Raw materials
|
|
$
|
6,028
|
|
$
|
4,849
|
|
Finished goods
|
|
|
1,524
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,552
|
|
$
|
5,018
|
|
|
|
|
|
|
|
|
The increase in our inventory balance at September 30, 2009, compared to
December 31, 2008, was primarily driven by the introduction of two new product platforms and procuring material to meet anticipated demand, partially offset by the decision to exit manufacturing activities of our Memory Solutions business
during the first quarter of 2009. At September 30, 2009 and December 31, 2008, our reserve for excess, slow-moving and obsolete inventory was approximately $41,000 and $3.0 million, respectively. The decrease in our reserve for excess,
slow-moving and obsolete inventory at September 30, 2009, compared to December 31, 2008, was primarily due to the final disposal of our memory inventory.
|
6.
|
Property, Plant and Equipment
|
We evaluate our long-lived assets, such as property plant and equipment and finite-lived intangible assets, for impairment when events or changes in circumstances indicate that the undiscounted cash flows estimated to be associated with
these assets are less than their carrying value. During 2008, due to a decline in revenue and negative cash flow related to our dual in-line memory module (DIMM) business unit, we reviewed our long-lived assets associated with this business unit for
impairment. As a result of this review, we recorded a non-cash charge of $2.4 million during the three months ended September 30, 2008, which was included in Impairment of acquisition intangibles and fixed assets in cost of revenue, for the
write-down of the lab equipment related to our DIMM business unit.
As a result of our decision to implement a new enterprise
resource planning (ERP) system during the second quarter of 2009, we reviewed the remaining useful life related to our legacy system. Based on that review, we determined the remaining useful life for our legacy system did not extend beyond
March 31, 2009 and recorded additional depreciation of approximately $0.3 million, or $0.08 per share, during the nine months ended September 30, 2009.
In addition, as a result of our decision to close our operations in Reynosa, Mexico, we decided to sell approximately $0.8 million in fixed assets from our Memory Solutions business, which we recorded as
assets held for sale at December 31, 2008. During the three months ended March 31, 2009, we recorded an impairment charge of approximately $0.4 million related to our assets held for sale based on quoted market prices for similar assets,
which we recorded in Restructuring expense. Also, during the first quarter of 2009, we recorded a provision of approximately $0.5 million related to certain fixed assets no longer used in manufacturing, which we recorded in Restructuring expense.
During the nine months ended September 30, 2009, we sold various assets recorded with a net book value of approximately $0.3 million for a net gain of approximately $0.4 million. These assets were recorded as assets held for sale.
Effective July 31, 2009, we entered into a lease agreement with Invensys Electronica Reynosa, S. de R.L. de C.V. (Invensys) to lease
our manufacturing facility in Reynosa, Mexico. The lease has a term of five years, with two renewal periods of five years each. Invensys may terminate the lease after the third year. As of September 30, 2009, the cost and accumulated
depreciation of our manufacturing facility in Reynosa, Mexico was approximately $1.6 million and $0.5 million, respectively.
|
7.
|
Goodwill and Other Intangible Assets
|
Goodwill represented the excess purchase price over the fair value of net assets acquired in our acquisition of Southland Micro Systems, Inc. (Southland) on August 31, 2007 and our acquisition of
Augmentix on July 14, 2008. We allocate goodwill to reporting units for goodwill impairment testing. A reporting unit is defined as a component of an entity for which the operating results are regularly reviewed by management and discrete
financial information is available.
11
We assess whether goodwill is impaired on an annual basis, as well as when events occur or
circumstances change that would indicate the book value of goodwill has been impaired. Upon determining the existence of goodwill impairment, we measure the impairment based on the amount by which the book value of goodwill exceeds its fair value.
As a result of the decline in revenue and negative cash flow related to our DIMM business unit during the third quarter of 2008, we undertook an assessment to determine the fair value of our DIMM business. As a result of this review, we recorded a
non-cash charge of $5.0 million for the write off of the goodwill related to our DIMM business unit, which we recorded in a separate line in cost of revenue.
Critical estimates made in determining the fair value of our DIMM business included expected future cash flows from product sales, customer turnover and future overhead expenses. Management’s best
estimates of fair value were based upon assumptions we believed to be reasonable, but which are inherently uncertain and unpredictable.
In addition, when we believe that the carrying value of our intangible assets may not be recoverable, we compare the projected undiscounted future cash flows of these assets to their respective
carrying values to determine if impairment exists. Impairment, if any, is measured as the excess of the carrying amount over the fair value, based on discounted cash flows. As of September 30, 2008, as a result of a decline in revenue and
negative cash flow related to our DIMM business unit, we impaired the remaining residual value of the trade name intangible asset acquired through our Southland acquisition and recorded a charge of approximately $1.6 million, which was included in
Impairment of acquisition intangibles and fixed assets in cost of revenue. We also impaired the remaining residual value of our customer relationship and non-compete agreements acquired through our Southland acquisition, and recorded a charge of
approximately $4.3 million, which was included Impairment of acquisition intangibles in operating expenses.
We accrue a
provision for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses, tax-exempt income and the application of a valuation allowance for certain deferred tax assets, for which we believe there
is uncertainty regarding their realization. The provision for income taxes may include amounts intended to satisfy unfavorable adjustments by tax authorities in any current or future examination of our income tax returns.
We recorded a provision for income taxes of $38,000 during the nine months ended September 30, 2009, and an income tax benefit of $0.8
million during the nine months ended September 30, 2008. The provision for the nine months ended September 30, 2009 reflected our estimated annual effective tax rate of 0%. The benefit for the nine months ended September 30, 2008
reflected our estimated annual effective tax rate of 3% and included a discrete benefit of $0.3 million due to the inclusion of a research and development tax credit in our 2007 tax return that was not reflected in our 2007 year-end tax accrual.
For the three and nine months ended September 30, 2009 and 2008, our effective tax rate differed from the federal
statutory rate of 35%, primarily due to recording an increase in the valuation allowance against our net U.S. deferred tax assets as there is substantial doubt we will realize the majority of the benefit of our net deferred tax assets.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. With few exceptions, we are
no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The tax years 2003 through 2008 remain open to examination by all the major taxing jurisdictions to which we are
subject. We are currently under U.S. federal examination for the short tax year ending August 20, 2003 relating to research credits, though we do not expect any material adverse adjustments from the examination.
We had no liability for unrecognized tax benefits at December 31, 2008 or September 30, 2009.
During the
fourth quarter of 2008, we recorded restructuring expense of $2.7 million due to a workforce reduction of approximately 180 positions as a result of our plan to close manufacturing activities for our Memory Solutions business. During the first
quarter of 2009, we completed closing our manufacturing activities. During the nine months ended September 30, 2009, we recorded additional restructuring charges totaling $2.6 million. These charges included approximately $1.7 million
related to employee severance expenses, $0.4 million related to exiting one of our facilities located in Austin, Texas and $0.5 million related to certain fixed assets no longer used in manufacturing. In addition, during the nine months ended
September 30, 2009, we recorded a reduction in
12
our facility accrual of approximately $0.2 million as a result of a change in our estimated future liability. There was no material restructuring activity during the three months ended
September 30, 2009. The following table details the changes in the related restructuring accrual (in thousands) during the first nine months of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Facility
|
|
|
Total
|
|
|
Restructuring accrual at December 31, 2008
|
|
$
|
833
|
|
|
$
|
—
|
|
|
$
|
833
|
|
|
Restructuring expenses accrued
|
|
|
1,727
|
|
|
|
394
|
|
|
|
2,121
|
|
|
Reversal of accrued restructuring expenses
|
|
|
—
|
|
|
|
(175
|
)
|
|
|
(175
|
)
|
|
Payments of restructuring expenses
|
|
|
(2,422
|
)
|
|
|
(62
|
)
|
|
|
(2,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual at September 30, 2009
|
|
$
|
138
|
|
|
$
|
157
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Convertible Notes Payable
|
In connection with our acquisition of Augmentix, we issued approximately $10.7 million in convertible notes with an annual interest rate of 6% to certain stockholders of Augmentix. Effective June 3, 2009, we finalized the post-closing
working capital adjustment as set forth in the merger agreement. The result was an adjustment to the working capital in our favor of approximately $0.6 million. The convertible notes were reduced from approximately $10.7 million to approximately
$10.1 million. Interest payments are due each January 31 and July 30, with the principal due on December 31, 2010. The former Augmentix stockholders have the right to convert the principal and any unpaid interest into our common stock
at a conversion price of $30.00 at any time prior to the earlier of (i) December 31, 2010, (ii) a change of control of Entorian or (iii) the redemption of all of the outstanding principal amount of the notes. At any time
subsequent to the issuance of the convertible notes, we have the right to redeem the notes for the redemption amount, which is equal to the outstanding principal balance plus accrued interest, with at least 30 days prior written notice. As of
September 30, 2009, the fair value of our convertible notes was approximately $9.3 million, and these notes were convertible into approximately 0.3 million shares of common stock.
NASDAQ requires that the market value of publicly held shares be at least $5 million. If the market value of publicly held shares is
below $5 million for 30 consecutive days and NASDAQ notifies us of this deficiency, we would have 90 days to comply. The market value of our publicly held shares has ranged from approximately $3.6 million to approximately $5.4 million since
September 1, 2009. On November 6, 2009, NASDAQ called us, informing us that our thirtieth consecutive trading day below $5 million would be November 16, 2009, unless our stock price increased prior to November 16, 2009. As of
November 12, 2009, the market value of our publicly held shares was approximately $4.5 million. In the event we do not satisfy this requirement, we could explore issuing additional shares to increase the value of our publicly held shares,
although there is no certainty that we could do so in the time period required by NASDAQ, if at all. As an alternative, our Board of Directors may decide to delist from NASDAQ. In addition, given the ongoing costs associated with public
reporting, our Board could elect to deregister our shares under the Exchange Act. If our stock is delisted for a period of 20 consecutive trading days, this event would constitute an event of default under our outstanding convertible notes,
which could result in the note holders requiring immediate payment in full of the principal balance and interest of the notes.
During
the first quarter of 2009, a financial institution issued a letter of credit to one of our suppliers, which guarantees up to $0.5 million of our outstanding account balance with this supplier. As a result of this agreement, we are required to
maintain a compensating balance of $0.5 million on deposit with the financial institution for a term of 12 months ending on February 26, 2010. As of September 30, 2009, we had this required amount on deposit.
|
12.
|
Commitments and Contingencies
|
During October 2008, we entered into a minimum purchase agreement with one of our vendors. The minimum purchase terms stipulate the purchase of $0.2 million of product by March 31, 2009, an additional $0.3 million by
September 30, 2009, and an additional $0.5 million by March 31, 2010. As of September 30, 2009, we met our minimum purchase requirement for this time period and expect to continue to fulfill the minimum purchase
requirement within the agreed-upon time frame.
13
We have indemnification agreements with our directors and executive officers. The agreements
do not set monetary limits on our indemnity obligations. We have a director and officer insurance policy that enables us to recover a portion of any future amounts paid in respect of our indemnity obligations to our directors and officers.
Currently we are not involved in any material legal proceedings. However, from time to time, we may be subject to legal
proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate, and non-contractual customer claims we may agree to in the interest of maintaining business relationships.
Samsung License Agreement
We have a license arrangement with Samsung Electronics Co., Ltd. (Samsung), pursuant to which we have licensed certain technologies to Samsung, and Samsung provides to us quarterly reports of its license usage and pays corresponding royalty
amounts in accordance with the terms of the agreement. We have primarily relied on these reports from Samsung and subsequent cash payment to record revenue from this license agreement.
During the second quarter of 2008, Samsung sent us a letter asserting that it made errors in the royalty reports that it previously
delivered to us during the period beginning in the fourth quarter of 2005 and ending in the first quarter of 2008. Samsung stated that it believes that these errors resulted in an overpayment to us of an aggregate of approximately $2.9 million, and
Samsung has requested that we refund this amount. Samsung paid to us a total of $14.2 million during this time period.
Because of information provided to us by Samsung regarding excessive yield loss and independent information we have obtained, we do not believe it would be appropriate to make any changes to our financial reports or book allowances related
to this refund request, and we believe that our revenue recognition has been appropriate.
Effective
October 30, 2009, we completed a 1-for-12 reverse split of our outstanding shares of common stock, which we accounted for retroactively and is reflected in our common stock activity presented below. See Note 18, “Subsequent Events,”
for additional information regarding our reverse stock split.
As of September 30, 2009 and December 31, 2008, we
had 4,455,970 and 4,446,901 shares of common stock issued, respectively.
During the first nine months of 2009, we purchased
23,653 shares of our common stock under our stock repurchase program at a total cost of approximately $97,000. As of September 30, 2009, we may purchase up to an additional $6.7 million of our stock under this program.
|
14.
|
Stock-Based Compensation
|
In July 2003, we adopted the 2003 Stock Option Plan, which currently has 1,402,500 authorized shares. Options generally vest over a four-year period and are exercisable for a period of ten years from the date of grant.
We account for all forms of our share-based payments to employees, including stock options, under the fair value provisions of FASB ASC
Topic 718 on the date of grant, utilizing the Black-Scholes method of valuation. We recognize stock-based compensation, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award and only recognize
compensation cost for those shares expected to vest.
Effective October 30, 2009, we completed a 1-for-12 reverse split
of our outstanding shares of common stock, which we accounted for retroactively and is reflected in our stock option activity presented in the table below. See Note 18, “Subsequent Events,” for additional information regarding our reverse
stock split.
14
Information with respect to stock option activity for the nine months ended
September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2008
|
|
842,130
|
|
|
$
|
20.69
|
|
|
|
|
|
|
Granted
|
|
6,410
|
|
|
$
|
3.23
|
|
|
|
|
|
|
Exercised
|
|
(6,608
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
(136,295
|
)
|
|
$
|
37.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
705,637
|
|
|
$
|
17.50
|
|
7.1
|
|
$
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2009
|
|
294,128
|
|
|
$
|
31.98
|
|
4.5
|
|
$
|
11
|
As of September 30, 2009, there was approximately $1.8 million of unrecognized
compensation cost related to outstanding stock options, which we expect to recognize over a weighted average period of 3.0 years. For the nine months ended September 30, 2009 and 2008, the total intrinsic value of exercised stock options was
approximately $38,000 and $95,000, respectively.
For grants issued during the nine months ended September 30, 2009 and
2008, the weighted average assumptions used in determining fair value under the Black-Scholes model are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2009
|
|
|
Nine Months Ended
September 30, 2008
|
|
|
Expected volatility
|
|
98.4
|
%
|
|
66.0
|
%
|
|
Dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Expected term (in years)
|
|
6.7
|
|
|
6.9
|
|
|
Risk-free interest rate
|
|
2.5
|
%
|
|
3.5
|
%
|
The computation of expected volatility is based on historical volatility of our
common stock. The expected term of options is estimated based on the average of the vesting period and contractual term of the options. The risk-free rate is based on U.S. Treasury yields for securities in effect at the time of grant, with terms
approximating the expected term until exercise of the option. The weighted-average fair value of stock options granted during the nine months ended September 30, 2009 and 2008 was $2.61 and $7.79, respectively. During the three and nine months
ended September 30, 2009, we recorded share-based compensation expense for options of approximately $0.2 million and $0.7 million, respectively. During the three and nine months ended September 30, 2008, we recorded share-based
compensation expense for options of approximately $0.4 million and $1.4 million, respectively.
Restricted Stock Units
During the second quarter of 2006, we adopted our Equity-Based Compensation Plan, which provides for granting restricted stock awards, stock
appreciation rights, RSUs, bonus stock and dividend equivalents to eligible employees. As of September 30, 2009, we had 66,666 authorized shares under this plan. RSUs vest over a four-year period. Effective October 30, 2009, we completed a
1-for-12 reverse split of our outstanding shares of common stock, which we accounted for retroactively and is reflected in our RSU activity presented in the table below.
Information with respect to RSU activity for the nine months ended September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
|
Weighted Average Grant
Date Fair Value
|
|
Outstanding at December 31, 2008
|
|
12,291
|
|
|
$
|
67.04
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
(3,556
|
)
|
|
$
|
69.46
|
|
Forfeited
|
|
(4,468
|
)
|
|
$
|
67.20
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
4,267
|
|
|
$
|
64.85
|
|
|
|
|
|
|
|
|
15
Share-based compensation related to RSUs is recorded based on our stock price as of the
grant date. For the three and nine months ended September 30, 2009, RSU compensation expense was $75,000 and $0.2 million, respectively. For the three and nine months ended September 30, 2008, RSU compensation expense was $0.2 million and
$0.6 million, respectively.
|
15.
|
Accumulated Other Comprehensive Income
|
The components of our accumulated other comprehensive income were as follows (in thousands) at the respective dates:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009
|
|
December 31,
2008
|
|
Unrealized gain on investment securities, net of tax
|
|
$
|
1
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
1
|
|
$
|
26
|
|
|
|
|
|
|
|
|
The components of our comprehensive loss, net of tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(3,260
|
)
|
|
$
|
(19,590
|
)
|
|
Change in unrealized loss on investment securities, net of tax
|
|
|
(10
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of tax
|
|
$
|
(3,270
|
)
|
|
$
|
(19,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(12,019
|
)
|
|
$
|
(29,455
|
)
|
|
Change in unrealized loss on investment securities, net of tax
|
|
|
(25
|
)
|
|
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of tax
|
|
$
|
(12,044
|
)
|
|
$
|
(30,257
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share is computed by dividing net loss by the weighted-average number of vested common shares outstanding for the period. Diluted loss per share is computed under the treasury method giving effect to all potential dilutive common stock,
including options, RSUs, warrants and common stock subject to repurchase. The treasury method assumes that estimated proceeds received from exercising potential dilutive common stock instruments will be used to repurchase shares of treasury stock on
the open market.
Effective October 30, 2009, we completed a 1-for-12 reverse split of our outstanding shares of common
stock. We accounted for our reverse stock split retroactively. Our common stock and loss per share data as of and during the three and nine month periods ended September 30, 2008 and September 30, 2009 reflect this reverse stock split. See
Note 18, “Subsequent Events,” for additional information regarding this reverse stock split.
16
A reconciliation of the numerator and denominator used in the calculation of basic and
diluted loss per share follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,260
|
)
|
|
$
|
(19,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,897
|
|
|
|
3,904
|
|
|
Less: Weighted average common shares subject to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common shares used in computing basic loss per share
|
|
|
3,897
|
|
|
|
3,904
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common shares subject to repurchase, stock options, RSUs and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common shares used in computing diluted loss per share
|
|
|
3,897
|
|
|
|
3,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.84
|
)
|
|
$
|
(5.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.84
|
)
|
|
$
|
(5.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,019
|
)
|
|
$
|
(29,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,903
|
|
|
|
3,899
|
|
|
Less: Weighted average common shares subject to repurchase
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common shares used in computing basic loss per share
|
|
|
3,903
|
|
|
|
3,899
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common shares subject to repurchase, stock options, RSUs and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common shares used in computing diluted loss per share
|
|
|
3,903
|
|
|
|
3,899
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.08
|
)
|
|
$
|
(7.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.08
|
)
|
|
$
|
(7.55
|
)
|
|
|
|
|
|
|
|
|
|
|
We
determine our operating segments in accordance with FASB ASC Topic 280, which requires companies to disclose separately information about each material operating segment. An operating segment is a component of an entity that earns revenue and incurs
expense, its reporting results are regularly reviewed by the chief operating decision maker and discrete financial information is available. Following our acquisition of Augmentix, we divided our operations into two reportable segments, Memory
Solutions and Rugged Technology Solutions. Subsequently, as a result of exiting the manufacturing activities of our memory business, which we completed during the first quarter of 2009, we now operate under only Rugged Technology Solutions. Our
chief operating decision maker currently reviews our operating results using consolidated financial information to assess financial performance and to allocate resources. Our Memory Solutions segment produced advanced module and system-level
technologies for demanding high-reliability and high-performance markets. Our Rugged Technology Solutions segment produces rugged computing technologies.
17
Summarized financial information concerning our reportable segments for the three and nine
months ended September 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
September 30,
2008
|
|
|
September 30,
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Memory Solutions
|
|
$
|
8,084
|
|
|
$
|
25,609
|
|
|
Rugged Technology Solutions
|
|
|
10,379
|
|
|
|
10,379
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
18,463
|
|
|
$
|
35,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
|
Memory Solutions
|
|
$
|
(5,538
|
)
|
|
$
|
(13,509
|
)
|
|
Rugged Technology Solutions
|
|
|
320
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment loss from operations
|
|
$
|
(5,218
|
)
|
|
$
|
(13,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Memory Solutions
|
|
$
|
42,679
|
|
|
|
|
|
|
Rugged Technology Solutions
|
|
|
28,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
71,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of our segment loss from operations to our consolidated loss from
operations for the three and nine months ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
September 30,
2008
|
|
|
September 30,
2008
|
|
|
Total segment loss from operations
|
|
$
|
(5,218
|
)
|
|
$
|
(13,189
|
)
|
|
Stock-based compensation expense
|
|
|
(593
|
)
|
|
|
(1,959
|
)
|
|
Amortization of acquisition intangibles
|
|
|
(1,135
|
)
|
|
|
(2,679
|
)
|
|
Impairment of acquisition intangibles and fixed assets
|
|
|
(8,249
|
)
|
|
|
(8,409
|
)
|
|
Goodwill impairment
|
|
|
(4,952
|
)
|
|
|
(4,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss from operations
|
|
$
|
(20,147
|
)
|
|
$
|
(31,188
|
)
|
|
|
|
|
|
|
|
|
|
|
We
have evaluated subsequent events through November 13, 2009, the filing date of this Quarterly Report on Form 10-Q.
IPotential, LLC
Agreement
Effective October 30, 2009, we entered into an agreement with IPotential, LLC (IPotential), regarding the
sale of our memory patent portfolio. IPotential has agreed to act as our exclusive representative in connection with the sale of our memory patents, and we have agreed to pay IPotential a commission with this sale.
Reverse Stock Split
Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock. Our common stock will trade on a split-adjusted basis under the temporary NASDAQ ticker symbol “ENTND” until
November 30, 2009. Following this date, the stock will resume trading under the symbol “ENTN.”
The objective
of the reverse stock split was to regain compliance with NASDAQ’s $1 minimum bid rule. The total number of shares of common stock outstanding (excluding treasury shares) was reduced from
18
approximately 47 million shares to approximately 4 million shares. The number of common shares related to the company’s convertible notes and stock options has been automatically
proportionately adjusted to reflect the reverse split.
Under the terms of the reverse split, stockholders holding 12 or more
shares of Entorian common stock at the close of business September 23, 2009 received one new Entorian share for every 12 shares held. Stockholders holding fewer than 12 shares received cash consideration in lieu of fractional shares.
DRAM Settlement
We are a claimant in the class action antitrust litigation entitled In Re Dynamic Random Access Memory (DRAM) Antitrust Litigation pending in the United States District Court of the Northern District of California (the Court). A settlement
was reached in this litigation, subject to approval by the Court. Pursuant to terms of the settlement, claimants who purchased DRAM from April 1, 1999 through June 30, 2002 were able to make claims for recovery, based on evaluation and
approval by the Court. We purchased DRAM in this time period and submitted a claim with the claims administrator. On October 28, 2009, the judge approved the final distribution of funds pursuant to this settlement, although the approval is
subject to a 30-day appeal period, which terminates on November 27, 2009.
Based on the approved settlement, the claims
administrator informed us that we are scheduled to receive approximately $7.5 million, with payment to be made in December 2009. However, any distribution is subject to this 30-day appeal period, so this amount and timing could change.
Worker, Homeownership, and Business Assistance Act of 2009
On November 6, 2009, Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009 (the Act). The Act amended Section 172 of the Internal Revenue Code to allow net operating
losses realized in either tax year 2008 or 2009 to be carried back up to five years, compared to two years prior to enactment of the Act. This change will allow us to carry back our 2008 taxable losses to years not previously available to us, and
receive an additional refund of approximately $5.0 million of previously paid Federal income taxes. We fully reserved the deferred tax assets related to this refund at December 31, 2008 and September 30, 2009.
19
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The terms “Entorian,” “we,” “us” and “our” refer to Entorian Technologies Inc. and all of its
subsidiaries that are consolidated in conformity with United States generally accepted accounting principles.
Cautionary Statement
The following discussion should be read along with the unaudited consolidated condensed financial statements and notes
included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2008, which we filed with the SEC on March 12, 2009. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future
events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions of our management including, without limitation, our expectations and beliefs regarding the following: receiving
approximately $7.5 million in connection with the DRAM settlement and approximately $5.0 million in connection with a tax refund; fulfilling our minimum purchase requirement within the agreed-upon time frame with respect to a minimum purchase
agreement we entered into with one of our suppliers; experiencing any material adverse adjustments from a U.S. federal tax examination relating to research credits; our future success will depend in large part upon our relationships with key Dell
personnel; our sales to Dell will continue to account for a substantial portion of our total revenue in the near term; the lack of significant credit losses from our customers; our current assets, including cash, cash equivalents and investments,
and expected cash flows from operating activities, will be sufficient to fund our operations in 2009, our anticipated additions to property, plant and equipment, interest payments and any share repurchases under our stock repurchase program for at
least the next 12 months; the current liquidity issues related to our auction rate securities will not impact our ability to fund our ongoing business operations; we will continue to receive interest payments as long as we hold the auction rate
securities; our facilities are suitable and adequate to meet our current operating needs; a ten percent change in interest rates will not have a significant impact on our interest income; the critical accounting estimates we disclosed address our
most critical accounting estimates; our strong patent portfolio and intellectual property position will allow us to continue to expand our business; the strength of our intellectual property rights is, and will continue to be, critical to the
success of our business and will allow us to compete favorably against our competition; our intent to vigorously protect our intellectual property; our revenue recognition with respect to Samsung’s claim has been appropriate; and our future
success will depend upon our ability to attract and retain personnel. Words such as “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,”
“potential,” “predict,” “may,” “might,” “could,” “intend,” variations of these types of words and similar expressions are intended to identify these forward-looking statements. Readers are
cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any
forward-looking statements.
Among the important factors that could cause actual results to differ materially from those
indicated by our forward-looking statements are those discussed in “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this report. We undertake no obligation to revise or update publicly any
forward-looking statement for any reason. Readers should carefully review the risk factors described in Item 1A, as well as in the documents filed by us with the SEC, specifically our Annual Report on Form 10-K for the year ended
December 31, 2008, which we filed with the SEC on March 12, 2009, as well as our Quarterly Reports on Form 10-Q and in our other SEC filings, as they may be amended from time to time.
Overview
Until July 2008,
we focused exclusively on providing advanced module and system-level products for high-reliability and high-performance markets by offering stacking services, as well as memory module services, as explained in more detail below.
20
On July 14, 2008, we acquired Augmentix Corporation. Augmentix primarily re-engineers
and “ruggedizes” certain Dell products to provide solutions with the latest technologies, high performance levels, enhanced functionality and reliability, and the potential for a low total cost of ownership for mission-critical, rugged
computing solutions. As a result of this acquisition, we reported under two segments, Memory Solutions and Rugged Technology Solutions.
On December 17, 2008, we announced our plan to close manufacturing activities of our Memory Solutions business in the first quarter of 2009. We are licensing our stacking patent portfolio and have
transferred our memory and stacking customers and certain manufacturing assets to third parties. Following our acquisition of Augmentix, we decided to shift our focus away from commodity component markets towards vertical computing segments. As a
result of exiting the manufacturing activities of our memory business, which we completed during the first quarter of 2009, we now operate under only Rugged Technology Solutions.
We have an IP portfolio of more than 200 patents and patent applications pending, many of which relate to our now-closed memory business. We
are collecting royalties under one license agreement with respect to our memory patents and are exploring other strategic alternatives with respect to these patents.
Rugged Technology Solutions
Through Augmentix, we develop
innovative, highly differentiated and leveraged solutions for a large OEM customer, enabling us to address targeted vertical markets representing incremental growth opportunities. Our rugged notebook solutions, which we sell to a large OEM as part
of an engineering and manufacturing relationship, redefine the value customers should expect from military standard (MIL-STD 810F) rugged devices.
We also re-engineer and ruggedize Dell PowerEdge servers to provide leveraged solutions that are setting new standards for rugged servers with the latest technologies, extreme performance levels and
enhanced functionality and reliability.
NASDAQ Update
Effective October 30, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock. Our common stock will trade
on a split-adjusted basis under the temporary NASDAQ ticker symbol “ENTND” until November 30, 2009. Following this date, the stock will resume trading under the symbol “ENTN.”
The objective of the reverse stock split was to regain compliance with NASDAQ’s $1 minimum bid rule. The total number of shares of
common stock outstanding (excluding treasury shares) was reduced from approximately 47 million shares to approximately 4 million shares. The number of common shares related to the company’s convertible notes and stock options has been
proportionately adjusted to reflect the reverse split.
Under the terms of the reverse split, stockholders holding 12 or more
shares of Entorian common stock at the close of business September 23, 2009 received one new Entorian share for every 12 shares held. Stockholders holding fewer than 12 shares received cash consideration in lieu of fractional shares.
In addition, NASDAQ requires that the market value of publicly held shares be at least $5 million. If the market value
of publicly held shares is below $5 million for 30 consecutive days and NASDAQ notifies us of this deficiency, we would have 90 days to comply. The market value of our publicly held shares has ranged from approximately $3.6 million to approximately
$5.4 million since September 1, 2009. On November 6, 2009, NASDAQ called us, informing us that our thirtieth consecutive trading day below $5 million would be November 16, 2009, unless our stock price increased prior to November 16, 2009.
As of November 12, 2009, the market value of our publicly held shares was approximately $4.5 million. In the event we do not satisfy this requirement, we could explore issuing additional shares to increase the value of our publicly held shares,
although there is no certainty that we could do so in the time period required by NASDAQ, if at all. As an alternative, our Board of Directors may decide to delist from NASDAQ. In addition, given the ongoing costs associated with public
reporting, our Board could elect to deregister our shares under the Exchange Act. If our stock is delisted for a period of 20 consecutive trading days, this event would constitute an event of default under our outstanding convertible notes,
which could result in the note holders requiring immediate payment in full of the principal balance and interest of the notes.
If our common stock is delisted by NASDAQ, the trading market for our common stock would be adversely affected, as price quotations would not be as readily obtainable, which would likely have a material adverse effect on the market price of
our common stock and on the ability of stockholders to buy or sell our shares. If we deregister our shares from the Exchange Act, there will be no public market for our shares.
21
Samsung Update
We have a license arrangement with Samsung, pursuant to which we have licensed certain technologies to Samsung, and Samsung provides to us
quarterly reports of its license usage and pays corresponding royalty amounts in accordance with the terms of the agreement. We have primarily relied on these reports from Samsung and subsequent cash payment to record revenue from this license
agreement.
During the second quarter of 2008, Samsung sent us a letter asserting that it made errors in the royalty reports
that it previously delivered to us during the period beginning in the fourth quarter of 2005 and ending in the first quarter of 2008. Samsung stated that it believes that these errors resulted in an overpayment to us of an aggregate of approximately
$2.9 million, and Samsung has requested that we refund this amount. Samsung paid to us a total of $14.2 million during this time period.
Because of information provided to us by Samsung regarding excessive yield loss and independent information we have obtained, we do not believe it would be appropriate to make any changes to our financial
reports or book allowances related to this refund request, and we believe that our revenue recognition has been appropriate.
Results of
Operations - a comparison of the three months ended September 30, 2009 and 2008
The following table presents our
results of operations for the periods indicated expressed as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Product
|
|
95.3
|
%
|
|
96.1
|
%
|
|
License
|
|
4.7
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
100.0
|
|
|
100.0
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
Product
|
|
84.1
|
|
|
91.3
|
|
|
Amortization of acquisition intangibles
|
|
5.3
|
|
|
5.3
|
|
|
Impairment of acquisition intangibles and fixed assets
|
|
—
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
89.4
|
|
|
117.9
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
10.6
|
|
|
(17.9
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
22.2
|
|
|
27.8
|
|
|
Research and development
|
|
16.4
|
|
|
11.3
|
|
|
Restructuring
|
|
(1.1
|
)
|
|
1.0
|
|
|
Amortization of acquisition intangibles
|
|
0.2
|
|
|
0.9
|
|
|
Impairment of acquisition intangibles
|
|
—
|
|
|
23.4
|
|
|
Goodwill impairment
|
|
—
|
|
|
26.8
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
37.7
|
|
|
91.2
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(27.1
|
)
|
|
(109.1
|
)
|
|
Other income (expense), net
|
|
(0.6
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(27.7
|
)
|
|
(108.9
|
)
|
|
Provision (benefit) for income taxes
|
|
—
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(27.7
|
)%
|
|
(106.1
|
)%
|
|
|
|
|
|
|
|
|
22
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Product revenue
|
|
$
|
11,237
|
|
$
|
17,750
|
|
(36.7
|
)%
|
|
License revenue
|
|
|
551
|
|
|
713
|
|
(22.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
11,788
|
|
$
|
18,463
|
|
(36.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Our product revenue for the third quarter of 2009 was $11.2 million, a
decrease of 36.7% from $17.8 million for the third quarter of 2008. License revenue for the third quarter of 2009 was $0.6 million, a decrease of 22.7% from $0.7 million for the third quarter of 2008.
The decrease in our product revenue during the third quarter of 2009, compared to the third quarter of 2008, was driven by our decision to
exit memory manufacturing during the first quarter of 2009. The decrease in revenue from memory products was partially offset by revenue generated from rugged technology products as a result of the Augmentix acquisition in July 2008.
The decline in license revenue during the three months ended September 30, 2009, compared to the three months ended September 30,
2008, was due to decreased demand for stacked memory.
The following table summarizes sales to customers that
represented 10% or more of consolidated total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Dell
|
|
89
|
%
|
|
41
|
%
|
|
SMART
|
|
*
|
|
|
13
|
%
|
|
Synnex
|
|
*
|
|
|
11
|
%
|
|
*
|
Amount does not equal or exceed 10% for the indicated period.
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Gross profit (loss)
|
|
$
|
1,254
|
|
|
$
|
(3,305
|
)
|
|
NA
|
|
Percent of total revenue
|
|
|
10.6
|
%
|
|
|
(17.9
|
)%
|
|
|
Gross profit for the three months ended September 30, 2009 was $1.3 million, or
10.6% of our total revenue, compared to a gross loss of $3.3 million, or 17.9% of our total revenue, for the three months ended September 30, 2008.
The increase in our gross profit for the three months ended September 30, 2009, compared to September 30, 2008, was primarily due to the strategic decision to shift our focus away from commodity
component markets toward vertical computing segments. During the third quarter of 2008, we produced memory modules and stacked memory in our facility in Reynosa, Mexico. As of September 30, 2008, we did not cover our manufacturing costs in that
segment as a result of a decrease in volume. By exiting manufacturing in the memory segment and focusing on our rugged technology segment, we earned a positive gross profit during the third quarter of 2009. In addition, the change in our gross
profit was due to recording an impairment charge during the third quarter of 2008 related to our trade name intangible asset and lab equipment for our DIMM business for approximately $3.9 million, as a result of a decline in revenue and negative
cash flow related to this business.
23
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
2,616
|
|
|
$
|
5,132
|
|
|
(49.0
|
)%
|
|
Percent of total revenue
|
|
|
22.2
|
%
|
|
|
27.8
|
%
|
|
|
|
Selling, general and administrative expense for the three months ended
September 30, 2009 was $2.6 million, or 22.2% of total revenue. This amount reflected a decrease of approximately $2.5 million, or 49.0%, compared to $5.1 million, or 27.8% of total revenue, in the three months ended September 30, 2008.
For the third quarter of 2009 and 2008, selling, general and administrative expense included stock-based compensation expense of $0.3 million and $0.4 million, respectively.
The decrease in selling, general and administrative expense during the third quarter of 2009, compared to the third quarter of 2008, was
largely driven by lower personnel-related costs. These lower costs were primarily due to our strategic shift away from commodity component markets towards vertical computing systems and consolidating our general and administrative functions
following our Augmentix acquisition. Additionally, the third quarter of 2008 included higher professional services expense associated with acquisition integration, as well as bad debt expense of approximately $0.5 million.
Research and development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
|
Research and development
|
|
$
|
1,937
|
|
|
$
|
2,089
|
|
|
(7.3
|
)%
|
|
Percent of total revenue
|
|
|
16.4
|
%
|
|
|
11.3
|
%
|
|
|
|
Research and development expense for the three months ended September 30, 2009
was $1.9 million, or 16.4% of total revenue, which reflected a decrease of $0.2 million, or 7.3%, compared with $2.1 million, or 11.3% of total revenue, for the three months ended September 30, 2008. For the third quarter of 2009 and 2008,
research and development expense included stock-based compensation expense of approximately $0.1 million.
The decrease in
research and development expense during the third quarter of 2009, relative to the third quarter of 2008, was primarily due to decreased costs related to our memory business, which were largely replaced by costs associated with the acquisition of
Augmentix.
Amortization and impairment of acquisition intangibles and fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
Change
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Amortization of acquisition intangibles
|
|
$
|
649
|
|
$
|
1,135
|
|
(42.8
|
)%
|
|
Impairment of acquisition intangibles and fixed assets
|
|
$
|
—
|
|
$
|
8,249
|
|
(100.0
|
)%
|
Amortization of acquisition intangibles was $0.6 million for the three months ended
September 30, 2009, which reflected a decrease of $0.5 million, or 42.8%, as compared with $1.1 million for the three months ended September 30, 2008.
24
The acquisition intangibles were originally valued using a discounted cash flow methodology.
As a result, each year the total annual amortization expense of these intangibles is scheduled to decline. For interim periods within each year, amortization expense is recorded on a straight-line basis. The amortization expense for the third
quarter of 2008 includes amortization of approximately $0.7 million for intangibles acquired during the quarter in connection with our acquisition of Augmentix.
Impairment of acquisition intangibles and fixed assets was $0 for the three months ended September 30, 2009, as compared with $8.2 million for the three months ended September 30, 2008. As of
September 30, 2008, as a result of a decline in revenue and negative cash flow related to our DIMM business unit, we impaired the remaining residual value of the trade name intangible asset acquired through our Southland acquisition and we
impaired the lab equipment for our DIMM business unit and recorded a charge of approximately $3.9 million, which is included in Impairment of acquisition intangibles and fixed assets in cost of revenue. In addition, we impaired the remaining
residual value of certain intangible assets acquired through our Southland acquisition as a result of the decline in revenue and negative cash flow related to our DIMM business unit, and recorded a charge of approximately $4.3 million, which is
included in Impairment of acquisition intangibles in operating expenses.
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Goodwill impairment
|
|
$
|
—
|
|
$
|
4,952
|
|
(100.0
|
)%
|
The decline in revenue and negative cash flow related to our DIMM business unit
during the third quarter of 2008 was an indicator of potential goodwill impairment, and because of this decline, we undertook an assessment to determine the fair value of our DIMM business. As a result of that review, we recorded a non-cash charge
of $5.0 million for the write off of the goodwill related to our DIMM business unit, which we established in connection with our Southland acquisition. The impairment charge reflected the changing business prospects for our DIMM business and
declining demand for our products.
Critical estimates made in determining the fair value of our DIMM business included
expected future cash flows from product sales, customer turnover and future overhead expenses. Management’s best estimates of fair value were based upon assumptions we believed to be reasonable, but which are inherently uncertain and
unpredictable.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands, except %)
|
|
|
|
Other income (expense), net
|
|
$
|
(69
|
)
|
|
$
|
29
|
|
NA
|
Other expense, net for the three months ended September 30, 2009, was $69,000,
compared to Other income, net of $29,000 for the three months ended September 30, 2008.
The change in other income
(expense), net from the three months ended September 30, 2009, compared to the same period of 2008, was primarily due to a lower balance in our cash, cash equivalents and investments. In addition, during the third quarter of 2009 and 2008, we
recorded approximately $0.2 million and $0.1 million, respectively, in interest expense related to our convertible notes payable that we issued in connection with our acquisition of Augmentix and other financing charges.
Provision (benefit) for income taxes
We recorded a provision for income taxes of $2,000 during the third quarter of 2009 and an income tax benefit of $0.5 million during the third quarter of 2008. The $0.5 million benefit for the three
months ended September 30, 2008 includes a discrete benefit of $0.3 million due to including a research and development tax
25
credit in our 2007 tax return that was not reflected in our 2007 year-end tax accrual. Our effective tax rate was approximately 0% and 3% for the third quarter of 2009 and 2008, respectively. For
the third quarter of 2009 and 2008, our effective tax rate differed from the federal statutory rate of 35%, primarily due to recording an increase in the valuation allowance against our net deferred tax assets. Management has determined that there
is substantial doubt we will realize the majority of the benefit of our net deferred tax assets.
Results of Operations - a comparison of
the nine months ended September 30, 2009 and 2008
The following table presents our results of operations for the
periods indicated expressed as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Product
|
|
95.5
|
%
|
|
90.7
|
%
|
|
License
|
|
4.5
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
100.0
|
|
|
100.0
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
Product
|
|
78.3
|
|
|
94.9
|
|
|
Amortization of acquisition intangibles
|
|
5.8
|
|
|
6.0
|
|
|
Impairment of acquisition intangibles and fixed assets
|
|
—
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
84.1
|
|
|
112.3
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
15.9
|
|
|
(12.3
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
26.5
|
|
|
33.6
|
|
|
Research and development
|
|
19.1
|
|
|
12.5
|
|
|
Restructuring
|
|
7.1
|
|
|
1.1
|
|
|
Amortization of acquisition intangibles
|
|
0.3
|
|
|
1.4
|
|
|
Impairment of acquisition intangibles
|
|
—
|
|
|
12.0
|
|
|
Goodwill impairment
|
|
(0.5
|
)
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
52.5
|
|
|
74.4
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(36.6
|
)
|
|
(86.7
|
)
|
|
Other income (expense), net
|
|
(0.2
|
)
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(36.8
|
)
|
|
(84.1
|
)
|
|
Provision (benefit) for income taxes
|
|
0.1
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(36.9
|
)%
|
|
(81.9
|
)%
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Product revenue
|
|
$
|
31,107
|
|
$
|
32,639
|
|
(4.7
|
)%
|
|
License revenue
|
|
|
1,469
|
|
|
3,349
|
|
(56.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
32,576
|
|
$
|
35,988
|
|
(9.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Our product revenue for the nine months ended September 30, 2009 was
$31.1 million, a decrease of 4.7% from $32.6 million for the nine months ended September 30, 2008. License revenue for the nine months ended September 30, 2009 was $1.5 million, a decrease of 56.1% from $3.3 million for the nine months
ended September 30, 2008.
26
The decrease in our product revenue during the nine months ended September 30, 2009,
compared to the nine months ended September 30, 2008, was primarily due to our decision to exit memory manufacturing during the first quarter of 2009. The decrease in revenue from memory products was partially offset by revenue generated from
rugged technology products as a result of the Augmentix acquisition in July 2008.
The decline in license revenue during the
nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, was due to decreased demand for stacked memory.
The following table summarizes sales to customers that represented 10% or more of consolidated total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Dell
|
|
74
|
%
|
|
21
|
%
|
|
SMART
|
|
*
|
|
|
17
|
%
|
|
Micron.
|
|
*
|
|
|
11
|
%
|
|
Google
|
|
*
|
|
|
10
|
%
|
|
*
|
Amount does not equal or exceed 10% for the indicated period.
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Gross profit (loss)
|
|
$
|
5,199
|
|
|
$
|
(4,426
|
)
|
|
NA
|
|
Percent of total revenue
|
|
|
15.9
|
%
|
|
|
(12.3
|
)%
|
|
|
Gross profit for the nine months ended September 30, 2009 was $5.2
million, or 15.9% of our total revenue, compared to a gross loss of $4.4 million, or 12.3% of our total revenue, for the nine months ended September 30, 2008.
The increase in our gross profit for the nine months ended September 30, 2009, compared to September 30, 2008, was primarily due to the strategic decision to shift our focus away from commodity
component markets towards vertical computing segments. During the nine months ended September 30, 2008, we produced memory modules and stacked memory in our facility in Reynosa, Mexico. As of September 30, 2008, we did not cover our
manufacturing costs in that segment as a result of a decrease in volume. By exiting manufacturing in the memory segment and focusing on our rugged technology segment, we earned a positive gross profit during the third quarter of 2009. In addition,
during the nine months ended September 30, 2008, we recorded an impairment charge related to our trade name intangible asset and lab equipment for approximately $3.9 million, as a result of a decline in revenue and negative cash flow related to
our DIMM business unit.
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
8,643
|
|
|
$
|
12,088
|
|
|
(28.5
|
)%
|
|
Percent of total revenue
|
|
|
26.5
|
%
|
|
|
33.6
|
%
|
|
|
|
27
Selling, general and administrative expense for the nine months ended September 30,
2009 was $8.6 million, or 26.5% of total revenue. This amount reflected a decrease of approximately $3.5 million, or 28.5%, compared to $12.1 million, or 33.6% of total revenue, in the nine months ended September 30, 2008. For the first nine
months of 2009 and 2008, selling, general and administrative expense included stock-based compensation expense of $0.7 million and $1.4 million, respectively.
The decline in selling, general and administrative expense during the first nine months of 2009, compared to the first nine months of 2008, was largely due to a legal settlement and acquisition-related
expenses incurred in the first nine months of 2008. In addition, the reduction was due to our strategic shift away from commodity component markets towards vertical computing systems and consolidating our general and administrative functions
following our Augmentix acquisition. Furthermore, lower selling and stock-based compensation expenses for the nine months ended September 30, 2009 were partially offset by the reversal of the $1.1 million liability associated with the Southland
earn-out consideration during the nine months ended September 30, 2008.
Research and development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
|
Research and development
|
|
$
|
6,229
|
|
|
$
|
4,486
|
|
|
38.9
|
%
|
|
Percent of total revenue
|
|
|
19.1
|
%
|
|
|
12.5
|
%
|
|
|
|
Research and development expense for the nine months ended September 30, 2009
was $6.2 million, or 19.1% of total revenue, which reflected an increase of $1.7 million, or 38.9%, compared with $4.5 million, or 12.5% of total revenue, for the nine months ended September 30, 2008. For the first nine months of 2009 and 2008,
research and development expense included stock-based compensation expense of approximately $0.2 million and $0.3 million, respectively.
The increase in research and development expense during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, was primarily due to the addition of
development costs associated with our rugged technology products as a result of our acquisition of Augmentix in July 2008, partially offset by our decision to exit manufacturing in our memory segment.
Restructuring expense
During the nine months ended September 30, 2009, we recorded restructuring expense of $2.3 million as a result of the completion of our plan to close manufacturing activities of our Memory Solutions business, which we initiated during
the fourth quarter of 2008. This additional charge included approximately $1.7 million related to employee severance expenses, $0.5 million provision related to certain fixed assets no longer used in manufacturing and $0.4 million related to exiting
one of our facilities located in Austin, Texas. In addition, during the nine months ended September 30, 2009, we recorded a reduction in our facility accrual of approximately $0.2 million as a result of a change in our estimated future
liability.
Amortization and impairment of acquisition intangibles and fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
|
(in thousands, except %)
|
|
|
|
|
Amortization of acquisition intangibles
|
|
$
|
1,971
|
|
$
|
2,679
|
|
(26.4
|
)%
|
|
Impairment of acquisition intangibles and fixed assets
|
|
$
|
—
|
|
$
|
8,409
|
|
(100.0
|
)%
|
Amortization of acquisition intangibles was $2.0 million for the nine months ended
September 30, 2009, a decrease of $0.7 million, or 26.4%, compared to $2.7 million for the nine months ended September 30, 2008.
28
The acquisition intangibles were originally valued using a discounted cash flow methodology.
As a result, each year the total annual amortization expense of these intangibles is scheduled to decline. For interim periods within each year, amortization expense is recorded on a straight-line basis. The amortization expense for the third
quarter of 2008 includes amortization of approximately $0.7 million for intangibles acquired during the quarter in connection with our acquisition of Augmentix.
Impairment of acquisition intangibles and fixed assets was $0 for the nine months ended September 30, 2009, as compared with $8.4 million for the nine months ended September 30, 2008.
As of September 30, 2008, as a result of a decline in revenue and negative cash flow related to our DIMM business unit,
we impaired the remaining residual value of the trade name intangible asset acquired through our Southland acquisition and we impaired the lab equipment for our DIMM business unit and recorded a charge of approximately $3.9 million, which is
included in Impairment of acquisition intangibles and fixed assets in cost of revenue. In addition, we impaired the remaining residual value of certain intangible assets acquired through our Southland acquisition as a result of the decline in
revenue and negative cash flow related to our DIMM business unit and recorded a charge of approximately $4.3 million, which is included in Impairment of acquisition intangibles in operating expenses.
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
|
|
(in thousands, except %)
|
|
|
|
Goodwill impairment
|
|
$
|
(159
|
)
|
|
$
|
4,952
|
|
NA
|
In connection with our acquisition of Augmentix, we recorded goodwill of $4.0
million, and during the fourth quarter of 2008, we conducted our annual goodwill impairment test. As a result of that test, we recorded a non-cash charge of $4.0 million for the impairment of the goodwill created by the Augmentix
acquisition. Effective June 3, 2009, we finalized the post-closing working capital adjustment as set forth in the merger agreement, and that adjustment resulted in a $0.2 million recovery of certain expenditures that were included in the
original goodwill. As a result of this recovery and the prior impairment of the goodwill, we recorded a reduction in goodwill impairment expense in the second quarter of 2009.
The decline in revenue and negative cash flow related to our DIMM business unit during the third quarter of 2008 was an indicator of
potential goodwill impairment, and because of this decline, we undertook an assessment to determine the fair value of our DIMM business. As a result of that review, we recorded a non-cash charge of $5.0 million for the write off of the goodwill
related to our DIMM business unit, which we established in connection with our Southland acquisition. The impairment charge reflected the changing business prospects for our DIMM business and declining demand for our products.
Critical estimates made in determining the fair value of our DIMM business included expected future cash flows from product sales, customer
turnover and future overhead expenses. Management’s best estimates of fair value were based upon assumptions we believed to be reasonable, but which are inherently uncertain and unpredictable.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
|
|
(in thousands, except %)
|
|
|
|
Other income (expense), net
|
|
$
|
(70
|
)
|
|
$938
|
|
NA
|
Other expense, net for the nine months ended September 30, 2009, was
$70,000, compared to Other income, net of $0.9 million for the nine months ended September 30, 2008.
The change
in Other income (expense), net from the nine months ended September 30, 2009, compared to the same period of 2008, was primarily due to a lower balance in our cash, cash equivalents and investments as a result of our Augmentix acquisition. In
addition, during the first nine months of 2009 and 2008, we recorded approximately $0.5 million and $0.1 million, respectively, in interest expense related to our convertible notes payable that we issued in connection with our acquisition of
Augmentix and other financing charges.
29
Provision (benefit) for income taxes
We recorded a provision for income taxes of $38,000 for the nine months ended September 30, 2009 and an income tax benefit of $0.8
million during the nine months ended September 30, 2008. Our effective tax rate was approximately 0% and 3% for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008,
our effective tax rate differed from the federal statutory rate of 35%, primarily due to recording an increase in the valuation allowance against our net deferred tax assets. Management has determined that there is substantial doubt we will realize
the majority of the benefit of our net deferred tax assets.
Liquidity and Capital Resources
As of September 30, 2009, we had working capital of $21.1 million, including $11.2 million of cash, cash equivalents and investments,
compared to working capital of $23.0 million, including $17.3 million of cash, cash equivalents and investments, as of December 31, 2008. In addition to our working capital, we held approximately $0 and $7.3 million in long-term investments at
September 30, 2009 and December 31, 2008, respectively.
As of December 31, 2008, our long-term investments
consisted of tax-exempt ARS, which have a long-term maturity with the interest rate being reset to the maximum rate according to the applicable investment offering document. During the first quarter of 2008, auctions for certain of these securities
began to fail. As of September 30, 2009, we held approximately $6.5 million of ARS. The underlying collateral of our ARS consists primarily of student loans, of which 67% are guaranteed by the federal government as part of the FFELP. The FFELP
guarantees between 95% and 98% of the par value of these loans. The remaining 33% of our ARS are private loans, of which 85% are insured. During the nine months ended September 30, 2009, approximately $0.4 million of our ARS was called at par
by the issuer. As of September 30, 2009, there was insufficient observable ARS market information available to determine the fair value of these investments. Therefore, our ARS were valued based on a pricing model that included certain
assumptions, such as our ARS maximum interest rate, probability of passing auction, default probability and discount rate. During November 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell our
auction rate securities to this firm, at par value, at any time over a two-year period, beginning June 30, 2010 and ending July 2, 2012. The agreement also provides access to loans of 75% of the market value of our ARS until June 30,
2010. In connection with this settlement, we recorded a gain of approximately $0.7 million in other expense related to the change in fair value of our put option. As of June 30, 2009, we reclassified our ARS and put option to short-term
investments based on our intent to sell them to the investment firm on June 30, 2010. See Note 4, “Investments,” for additional information.
Net cash used in operating activities was $12.6 million for the nine months ended September 30, 2009, compared to $13.8 million for the nine months ended September 30, 2008. The decrease in net
cash used in operating activities was primarily due to a $17.4 million decrease in net loss, partially offset by a $13.5 million decrease in impairment of intangibles and fixed assets, a decrease of $2.0 million in depreciation and amortization of
intangibles and a $1.0 million decrease in stock-based compensation expense.
Net cash used in investing activities was $0.4
million for the nine months ended September 30, 2009, compared to net cash provided by investing activities of $4.1 million for the nine months ended September 30, 2008. The change in net cash provided by investing activities was due
primarily to the $18.0 million decrease in proceeds from the sale and maturities of investments, net of purchases, in the first nine months of 2009, compared to the first nine months of 2008, partially offset by $13.0 million of cash used for the
Augmentix acquisition related to the minority interest during 2008.
Net cash used in financing activities during the nine
months ended September 30, 2009 was $0.1 million, primarily related to the purchase of our common stock as part of our stock repurchase program for $0.1 million. Net cash used in financing activities during the nine months ended
September 30, 2008 was $9.8 million, primarily related to the Augmentix acquisition related to the common control owner of $9.7 million.
During the first quarter of 2009, a financial institution issued a letter of credit to one of our suppliers, which guarantees up to $0.5 million of our outstanding account balance to this supplier. As a
result of this agreement, we are required to maintain a compensating balance of $0.5 million on deposit with the financial institution for a term of 12 months ending on February 26, 2010. As of September 30, 2009, we had this required
amount on deposit.
30
We incurred negative cash flows from operations in 2008 and the first nine months of
2009. Our combined working capital plus long-term investments position has decreased by approximately $3 million per quarter for the past four quarters. In order to improve profitability and enhance cash flow, we shifted our focus away from
commodity component markets towards vertical computing segments. On December 17, 2008, we announced our plan to terminate manufacturing of our Memory Solutions business in the first quarter of 2009. We continue to receive royalties
with respect to our stacking patent portfolio but have transferred our memory and stacking customers and certain manufacturing assets to third parties. In addition, we have undertaken, and will continue to undertake, cost reductions to reduce our
operating expenses. Also, we expect to receive payments from two sources in the near future. First, as set forth in “Subsequent Events” below, we expect to receive approximately $7.5 million in December 2009 in connection with our status
as a claimant in the In Re Dynamic Random Access Memory (DRAM) Antitrust Litigation. Second, also as set forth in “Subsequent Events” below, we expect to receive a tax refund of approximately $5.0 million at such time as our revised
returns can be prepared and approved by the IRS. Based on these changes in our business operations and the receipt of these two payments, we believe that our current assets, including cash and cash equivalents, investments and expected cash flow,
will be sufficient to fund our operations, our anticipated additions to property, plant and equipment, interest payments and any share repurchases under our stock repurchase program for at least the next 12 months. Notwithstanding this situation, as
set forth under “Management’s Discussion and Analysis – NASDAQ Update,” in examining our liquidity and our position with NASDAQ, our Board of Directors has considered delisting from NASDAQ and deregistering our shares to
eliminate the expense of being a public company. The Board has not made any decisions with respect to delisting or deregistering our shares.
It is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to acquire other businesses, products or technologies. We could try to raise these funds
by borrowing money or selling more stock to the public or to selected investors. In addition, while we may not need additional funds, we may elect to sell additional equity securities or obtain credit facilities for other reasons. However, we cannot
assure that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing more equity or convertible debt securities, the ownership percentages of existing stockholders would be
reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.
Manufacturing Relationship
In addition, we have an arrangement with a
manufacturer in which this third party purchases and takes title of certain inventory relating to certain of our products upon shipment from the original manufacturers of such inventory. This third party recovers the cost of inventory upon
the sale of finished goods to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and inventory risk for us. In addition, by transferring inventory to this third party, the financial
failure of this third party could freeze this inventory, preventing us from accessing it and using it for our products. As our sales increase, these amounts will increase. As of September 30, 2009, our accounts receivable reflects
amounts owed to us of $8.7 million related to this transfer of inventory. Additionally, our liability to our vendors for the production of finished goods and inventory delivered by the manufacturer relating to certain of our products was
approximately $9.3 million.
Convertible Notes
If our stock is delisted for a period of 20 consecutive trading days, this event would constitute an event of default under our outstanding convertible notes of approximately $10.1 million, which could
result in the note holders requiring immediate payment in full of the principal balance and interest of the notes.
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Critical Accounting Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires that management
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical
accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Revenue Recognition and Presentation
.
We purchase inventory for resale to our manufacturing partners. We
evaluate these transactions and determine if the costs and revenue should be presented on a gross or net basis. In making this determination, we primarily consider if: (1) we did not add value to the inventory through our manufacturing
processes, (2) we did not take risk of ownership of the inventory and (3) our net revenue from the transaction is predefined. In situations where these conditions were met, we net the expense of the components against the revenue from
the transaction.
Royalty revenue from our license agreements is recognized in the quarter in which our licensees report
royalties to us.
Deferred Revenue.
Our agreement with our largest OEM related to sales of a specific product
line allows for price reductions, issued as rebates, as certain volume levels of shipments are reached. The per-unit price of lower-quantity tiers is variable above a certain minimum price, since the price can be retroactively adjusted downward
if certain volume levels are satisfied. Pursuant to FASB ASC Topic 605, we consider these pricing changes as a right of return and defer the amount of rebate that could occur until the end of the period when the actual volume levels are reasonably
estimable. We estimate the amount of sales based on experience as well as forecasts provided by our OEM. Revenue above the fixed minimum price is deferred until the actual volume levels are achieved. The estimate is revised each reporting period and
is ultimately adjusted to actual at the end of the year.
Impairment of Assets
.
We evaluate the
recoverability of losses on long-lived assets, such as property, plant and equipment and intangible assets, when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than the
carrying value of these assets, and accordingly, all or a portion of this carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of the assets to the carrying amounts. Determining the appropriate fair
value model and calculating the fair value of intangible assets require the input of highly subjective assumptions, including the expected future cash flows from, and the expected life of, the intangible asset, the appropriate discount rate, future
customer turnover and operating margins. The assumptions used in calculating the fair value of intangible assets represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different assumptions, we could reach a different conclusion regarding whether an intangible asset is impaired and, if so, the amount of the impairment loss.
Inventory and Inventory Reserves
.
We value our inventory at standard cost and review our inventory for
quantities in excess of production requirements and for obsolescence. We maintain a reserve for excess, slow moving and obsolete inventory, as well as for inventory with a carrying value in excess of its market value. We review inventory on hand
quarterly and record a provision for lower of cost or market, and for excess, slow moving and obsolete inventory, if necessary. The review is based on several factors, including a current assessment of future product demand, historical experience
and market conditions. If actual conditions are less favorable than those that we projected, additional inventory reserves may be required.
Warranty.
We warrant products for periods up to 37 months following the manufacture of our products. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery costs increase, our warranty costs to support the products in the field could increase.
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Income Taxes
.
We determine deferred tax assets and
liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to affect taxable income. Inherent in the measurement
of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. Our
effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions, within which we are subject to tax as well as the future recovery of deferred tax assets. The recorded amounts of income tax are subject to
adjustment upon audit, changes in interpretation and changes in judgment utilized in determining estimates.
Stock-Based
Compensation
.
Effective January 1, 2006, we adopted the fair value recognition provisions of FASB ASC Topic 718 using the modified prospective transition method. Under the fair value recognition provisions of FASB ASC Topic
718, we recognize stock-based compensation net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award and only recognize compensation cost for those shares expected to vest.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly
subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we
are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly
different from the amount we have recorded in the current period.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued ASC Topic 105 to establish the FASB Codification as the source of authoritative U.S. GAAP recognized by the
FASB to be applied to non-governmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective
date. FASB ASC Topic 105 is effective for interim or annual periods ending after September, 15, 2009. The adoption of FASB ASC Topic 105 did not have a material impact on our financial position, results of operations, cash flows or disclosures.
Subsequent Events
We have evaluated subsequent events through November 13, 2009, the filing date of this Quarterly Report on Form 10-Q.
IPotential, LLC Agreement
Effective October 30, 2009, we entered into an agreement with IPotential, LLC
(IPotential), regarding the sale of our memory patent portfolio. IPotential has agreed to act as our exclusive representative in connection with the sale of our memory patents, and we have agreed to pay IPotential a commission with this sale.
Reverse Stock Split
Effective October 29, 2009, we effected a 1-for-12 reverse split of our outstanding shares of common stock. Our common stock will trade on a split-adjusted basis under the temporary NASDAQ ticker
symbol “ENTND” until November 30, 2009. Following this date, the stock will resume trading under the symbol “ENTN.”
The objective of the reverse stock split was to regain compliance with NASDAQ’s $1 minimum bid rule. The total number of shares of common stock outstanding (excluding treasury shares) was reduced
from approximately 47 million shares to approximately 4 million shares. The number of common shares related to the company’s convertible notes and stock options has been automatically proportionately adjusted to reflect the reverse
split.
Under the terms of the reverse split, stockholders holding 12 or more shares of Entorian common stock at the close of
business September 23, 2009 received one new Entorian share for every 12 shares held. Stockholders holding fewer than 12 shares received cash consideration in lieu of fractional shares.
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DRAM Settlement
We are a claimant in the class action antitrust litigation entitled In Re Dynamic Random Access Memory (DRAM) Antitrust Litigation pending in the United States District Court of the Northern District of
California (the Court). A settlement was reached in this litigation, subject to approval by the Court. Pursuant to terms of the settlement, claimants who purchased DRAM from April 1, 1999 through June 30, 2002 were able to make claims for
recovery, based on evaluation and approval by the Court. We purchased DRAM in this time period and submitted a claim with the claims administrator. On October 28, 2009, the judge approved the final distribution of funds pursuant to this
settlement, although the approval is subject to a 30-day appeal period, which terminates on November 27, 2009.
Based on
the approved settlement, the claims administrator informed us that we are scheduled to receive approximately $7.5 million, with payment to be made in December 2009. However, any distribution is subject to this 30-day appeal period, so this amount
and timing could change.
Worker, Homeownership, and Business Assistance Act of 2009
On November 6, 2009, Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009 (the Act). The Act amended
Section 172 of the Internal Revenue Code to allow net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years, compared to two years prior to enactment of the Act. This change will allow us to carry back
our 2008 taxable losses to years not previously available to us, and receive an additional refund of approximately $5.0 million of previously paid Federal income taxes. We fully reserved the deferred tax assets related to this refund at
December 31, 2008 and September 30, 2009.
Available Information
We maintain a web site at
www.entorian.com
,
which makes available free of charge our filings with the SEC. Our Quarterly
Reports on Form 10-Q, Annual Report on Form 10-K, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available through the Investor
Relations page of our web site as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. We also maintain a web site at
www.augmentix.com
. Our web sites and the information contained
therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Foreign Currency Exchange Risk.
Most of our transactions are denominated in U.S. dollars. The functional currency of our subsidiary in Mexico is the U.S. dollar. As a result, we have little
exposure to currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments
for trading or speculative purposes. In the future, if we believe that our currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.
Interest Rate Risk.
The primary objective of our investment activities is to preserve principal while maximizing the related
income without significantly increasing risk. Even so, some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To
minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and
certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have a significant impact on our interest income. At
September 30, 2009, all of our cash was held in deposit or money market accounts, or invested in investment grade securities. From time to time, we may have amounts on deposit with financial institutions that are in excess of the federally
insured limit of $250,000; however, the majority of our deposits are held in accounts insured by the Federal Deposit Insurance Corporation (FDIC) Transaction Account Guarantee Program, which provides an unlimited guarantee through December 31,
2009. We have not experienced any losses on deposits of cash and cash equivalents.
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Our exposure to market rate risk for changes in interest rates relates to our convertible
notes. The fair market value of our convertible notes is subject to interest rate risk because of their fixed interest rate and market risk due to the convertible feature of our convertible notes. Generally, the fair market value of fixed interest
rate debt will increase as interest rates fall, and decrease as interest rates rise. The fair market value of our convertible notes will also increase as the market price of our stock increases and decrease as the market price falls. The interest
and market value changes affect the fair market value of our convertible notes but do not impact their carrying value.
Our short-term investments include approximately $6.5 million in ARS. During the first quarter of 2008, auctions for certain of these securities began to fail. The funds associated with failed auctions are not expected to be
accessible until June 30, 2010, or until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. Additionally, if we determine that an
other-than-temporary decline in the fair value of any of our ARS has occurred, we may be required to adjust the carrying value of the investments through an impairment charge. See Note 4, “Investments,” for additional information.
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ITEM 4T.
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CONTROLS AND PROCEDURES
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Evaluation of Disclosure Controls and Procedures
. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as such term
is defined under Rule 13a-15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this quarterly report, and concluded that our disclosure controls and procedures were effective for this purpose.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2009 that materially affected, or were reasonably likely to materially affect, such internal control over financial reporting.
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PART II
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ITEM 1.
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LEGAL PROCEEDINGS
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Currently, we are not involved in any material legal proceedings. However, from time to time, we may be subject to legal proceedings, claims in the ordinary course of business, claims in foreign jurisdictions where we operate, and
non-contractual customer claims or requested concessions we may agree to in the interest of maintaining business relationships.
Our
business faces significant risks. The risk factors set forth below may not be the only ones that we face. Additional risks that we are not aware of yet or that currently are not material may adversely affect our business operations.
We may not be able to increase our revenue or become profitable and our operating results are likely to fluctuate, which may cause the
trading price of our common stock to decline.
We may not be able to increase revenue or generate gross profits or net
income. Our revenue and operating results have fluctuated over the past several quarters and are likely to continue to do so, causing our stock price to fluctuate. If our revenue or operating results decline, the market price of our common stock
could decline substantially.
Factors that may contribute to fluctuations in our revenue and operating results include the
risk factors discussed elsewhere in this Quarterly Report on Form 10-Q and the following additional factors:
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the timing and volume of sales of our products;
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market demand for, and changes in the average sales prices of, our products and technologies;
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defects in our products, exposing us to product liability claims and product recalls, safety alerts or advisory notices;
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a shortage of critical parts, which may negatively impact our ability to fulfill customer orders;
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fluctuating demand for, and life cycles of, our products;
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changes in our relationship with Dell, our largest customer with which we have an exclusive sales and marketing agreement regarding certain ruggedized
computer notebook products;
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inconsistency in forecasts provided to us by Dell, resulting in increased inventory exposure as we build to the current Dell forecast;
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decreases in military spending and the budgets of federal, state and local agencies, impacting sales of our ruggedized products;
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the failure of our ruggedized products to meet the military specification MIL-STD-810F, which is the required specification for products to be
considered rugged;
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operational risks from our reliance on suppliers, subcontractors and third-party manufacturers for the production of ruggedized products;
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changes in the level of our operating expenses;
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our ability to develop new products that are successfully qualified and utilized by customers;
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our ability to have manufactured and shipped products within a particular reporting period;
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deferrals or cancellations of customer orders in anticipation of the development and commercialization of new technologies or for other reasons;
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our ability to enter into new licensing arrangements, and the terms and conditions for payment to us of license fees under those arrangements;
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changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technologies;
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changes in our products and technologies;
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seasonal purchasing patterns for our products, with lower revenue generally occurring in the first and second quarters;
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the timing of the introduction by others of competing, replacement or substitute products and technologies;
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our ability to enforce our intellectual property rights or to defend claims that we infringe the intellectual property rights of others, as well as our
ability to protect our intellectual property, and the significant costs to us of related litigation; and
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general economic conditions that may affect demand for our products.
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We are dependent upon an exclusive contract with Dell for revenue generated from the sale of our ruggedized notebook products, which
represents a significant portion of our revenue, and in the event of any adverse change to our relationship with Dell, our business, financial condition and results of operations could be adversely affected.
Presently, Dell is our only customer for our rugged notebooks. Revenue from Dell will represent a substantial percentage of our total
revenue in 2009. The initial term of our contract with Dell ends in August 2010, although the contract automatically renews unless either party terminates it at least 180 days before the end of the applicable term. If Dell reduces or discontinues
its business with us, our business, financial condition and results of operations could be adversely affected.
In addition,
we heavily rely on the Dell sales force to sell our ruggedized notebook products and the Dell service organization to provide support to us. If we experience issues regarding insufficient training or lack of sales efforts by the Dell sales force,
the decline of sales of our ruggedized notebook products could have a material and adverse effect on our operating results.
A substantial percentage of our total revenue depends on the sale of ruggedized notebook products, and as a result, any significant reduction of sales of these products could materially and adversely affect our operating results.
Because our revenue is derived substantially from sales of our ruggedized notebook products, we are highly dependent
upon the continued market acceptance of these products. Continued market acceptance of our ruggedized notebook products is critical to our future success. Any significant reduction of sales of these products could materially and adversely affect our
business.
We are dependent on a limited number of suppliers for our ruggedized products, and the loss of these
suppliers and our inability to procure new suppliers at comparative costs could have a material and adverse effect on our business, financial condition and results of operations.
We purchase notebooks and components from a limited number of suppliers. Dell is the sole supplier of many of the components that are used
in our ruggedized laptop computers. While we believe that alternative sources are available, contractual obligations to Dell preclude our ability to secure new suppliers. The loss of our supplier could cause a disruption in the availability of these
products. In addition, we have a limited number of suppliers for other components, and a disruption in the supply of these components may also cause a disruption in the availability of these components and a delay in manufacturing, which could have
a material adverse effect on our business.
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We depend on third parties to manufacture our ruggedized products, subjecting us to
certain operational risks.
We currently depend on third-party manufacturers to manufacture our ruggedized products
and ruggedized products under development, and this reliance subjects us to significant operational risks, any of which could impair our ability to deliver products to our customers should they occur. Our reliance involves a number of risks,
including:
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reduced management and control of component purchases;
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reduced control over delivery schedule and quality assurance;
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reduced control over manufacturing yields;
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lack of adequate capacity during periods of excess demand;
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limited warranties on products supplied to us;
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potential increases in prices;
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interruption of supplies as a result of fire, natural calamity, strike or other significant events; and
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misappropriation of our intellectual property.
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We rely on sales forecasts provided by Dell, subjecting us to certain inventory risks.
We rely on sales forecasts provided by Dell on a monthly basis. We build our rugged notebooks to these forecasts as they are provided to us, which may result in increased inventory exposure in the event
Dell reduces its forecast after we have procured materials. Any such reduced forecast by Dell could have a material and adverse effect on our operating results. Additionally, the lead time to procure and ship materials may exceed the period covered
by forecasts. In those circumstances, we estimate our inventory requirements, but if our estimates are inaccurate, we will bear the cost of holding the inventory or may incur additional costs to acquire additional inventory on an expedited basis.
Our relationship with a third-party manufacturer presents certain risks to us that could negatively affect our
business, results of operations and financial condition.
We have an arrangement with a manufacturer in which this
third party purchases and takes title of certain inventory relating to certain of our products upon shipment from the original manufacturers of such inventory. This third party recovers the cost of inventory upon the sale of finished goods
to us. This program offers us several advantages; however, this arrangement also results in concentrated credit and inventory risk for us. A large percentage of our accounts receivable balance at the end of the quarter is with this third
party. This is partially offset by a balance in accounts payable due to this third party for finished goods. In addition, by transferring inventory to this third party, the financial failure of this third party could freeze this
inventory, preventing us from accessing it and using it for our products. As our sales increase, these amounts will increase.
Budget constraints of the U.S. military, federal, state and local governments could negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.
We market to the U.S. military forces as potential customers of our ruggedized products, as well as other state and local governments. Any
decrease in spending by these agencies or a change in the current political situation or overall market conditions may negatively impact sales of our ruggedized products, which could materially and adversely affect our operating results.
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In the event of a failure of our ruggedized products to meet the military
specification MIL-STD-810F, our business, financial condition and results of operations could be adversely affected.
Our products are ruggedized to meet (and in some cases, exceed) the military specifications MIL-STD-810F. Created by the U.S. government, the MIL-STD-810F specifications cover a broad range of tests that measure the durability of equipment
used under harsh conditions. A failure to meet this standard would result in our products not qualifying as “rugged” products, which could have a material and adverse effect on our operating results. In addition, this standard could
change, third-party components could fail to meet the required specifications, or a third-party manufacturer could fail to produce our products according to the required specifications, each of which could also have a material and adverse effect on
our operating results.
Some of our suppliers and subcontractors do not have long operating histories or significant
financial strength.
Some of the suppliers and subcontractors with which we engage to provide services to us are small
companies without a long operating history or significant financial strength. We have selected these third parties because of their flexibility in dealing with our schedules, their prices and expertise, among other factors, but they may not have the
reliability or financial position of larger, more well-established suppliers and subcontractors. As a result, we face increased risks in dealing with these third parties in terms of their financial position, ability to continue operations and meet
their commitments and quality control, among other issues, which could materially and adversely affect our operating results.
We depend on key Dell personnel, and in the event of changes to these Dell personnel, our business could be harmed.
We believe our future success will depend in large part upon our relationships with key Dell personnel. If any of these key personnel leave their current positions with Dell, this could jeopardize
our future relationship with Dell, as well as delay the development and introduction of, and negatively impact our ability to sell, our ruggedized notebook products.
We rely on Dell to purchase products from our inventory hub so that we can receive payment for our products. If Dell does not take possession of these products, we will not be
paid, which could materially and adversely affect our business, financial condition and results of operations.
We
stock certain of our products in a hub based on a forecast from Dell, from which Dell purchases products and pays us after taking possession. If we stock our hub but Dell does not purchase our products, this could result in an increase in our
inventory levels, as well as an increase in our working capital exposure, since we will be required to pay our suppliers prior to receiving payment from Dell. This change could materially and adversely affect our business, financial condition
and results of operations. In the future, our supply chain with Dell may change, which could impact our inventory levels, our working capital exposure, as well as our cash position.
Because we do not have long-term agreements with our customers and generally do not have a significant backlog of unfilled orders, our
revenue and operating results in any quarter are difficult to forecast.
With the exception of our exclusive sales and
marketing contract between Augmentix and Dell, we do not have long-term purchase agreements with customers. Because our expense levels are based in part on our expectations as to future revenue and to a large extent are fixed in the short term, we
likely will be unable to adjust spending on a timely basis to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall of revenue in relation to our expectations could hurt our operating results and depress our
stock price.
We do not comply with the continuing listing requirements of The NASDAQ Stock Market, which could result
in delisting our securities, and which could limit investors’ ability to trade in our securities and trigger repayment obligations we have regarding our outstanding notes.
NASDAQ requires that the market value of publicly held shares be at least $5 million. If the market value of publicly held shares is
below $5 million for 30 consecutive days and NASDAQ notifies us of this deficiency, we would have 90 days to comply. The market value of our publicly held shares has ranged from approximately $3.6 million to approximately $5.4 million since
September 1, 2009. On November 6, 2009, NASDAQ called us, informing us that our thirtieth consecutive trading day below $5 million would be November 16, 2009, unless our stock price increased prior to November 16, 2009. As of
November 12, 2009, the market value of our publicly held shares was approximately $4.5 million.
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In the event we do not satisfy this requirement, we could explore issuing additional shares to increase the value of our publicly held shares, although there is no certainty that we could do so
in the time period required by NASDAQ, if at all. As an alternative, our Board of Directors may decide to delist from NASDAQ. In addition, given the ongoing costs associated with public reporting, our Board could elect to deregister our
shares under the Exchange Act. If our stock is delisted for a period of 20 consecutive trading days, this event would constitute an event of default under our outstanding convertible notes, which could result in the note holders requiring
immediate payment in full of the principal balance and interest of the notes.
If our common stock is delisted by NASDAQ, the
trading market for our common stock would be adversely affected, as price quotations would not be as readily obtainable, which would likely have a material adverse effect on the market price of our common stock and on the ability of stockholders to
buy or sell our shares. If we deregister our shares from the Exchange Act, there will be no public market for our shares.
We must successfully complete our recent ERP implementation, as well as maintain our information technology systems.
During the second quarter of 2009, we implemented a new ERP system. This implementation subjects us to inherent costs and risks associated with replacing and changing our legacy system, including our
ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration expenses, demands on management time and other risks of delays or difficulties in transitioning
to the new system. Our ERP implementation may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of a new technology system may cause disruptions in our business
operations. Our ability to mitigate existing and future disruptions could negatively affect our business, results of operations and financial condition.
We face several issues in connection with shutting down our manufacturing facility in Reynosa, Mexico.
We leased our manufacturing facility in Reynosa, Mexico, and have listed the facility for sale. There are many legal and regulatory issues we face, and regulations with which we must comply, as a
result of our decision to close this facility. In addition, we may not be able to sell our facility. If we encounter regulatory or other issues, or if we are unable to sell our facility, our financial condition and results of operations
could be adversely affected.
If we fail to protect our proprietary rights, our customers or our competitors might gain
access to our technologies, which could adversely affect our ability to sell our products, to license our memory solutions, to compete successfully in our markets, as well as result in refunds we are required to pay to Dell and other customers and
harm our operating results.
We believe that the strength of our intellectual property rights is, and will continue to
be, important to our business. If any of our key patents or other intellectual property rights are invalidated or deemed unenforceable, if a court limits the scope of the claims in any of our key patents or other intellectual property rights, if we
fail to protect our intellectual property or unknowingly develop products based on the intellectual property of third parties, our business could be adversely affected. We indemnify Dell and other customers for patent infringement, so in the event
an infringement claim is made with respect to the notebooks we sell to Dell or other products sold to customers, if we cannot defend against the claim made, we may have to refund to Dell and other customers the purchase price of the products sold,
as well as defend against the infringement claim. In addition, if we do not protect our proprietary rights, the likelihood that companies will continue to license our memory solutions could be significantly reduced. If we fail to obtain patents or
if the patents issued to us do not cover all of the claims we asserted in our patent applications, others could use portions of our intellectual property without the payment of license fees and royalties. The results of the factors set forth above
could significantly harm our business, financial condition and results of operations.
We rely on a combination of license,
development and nondisclosure agreements and other contractual provisions and patent, trademark and trade secret laws, and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality agreements with our
employees, consultants and third parties, and control access to and distribution of our documentation and other proprietary information. It is possible that these efforts to protect our intellectual property rights may not:
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•
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prevent challenges to, or the invalidation or circumvention of, our existing patents;
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40
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•
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result in patents that lead to commercially viable products or provide competitive advantages for our products;
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•
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prevent our competitors from independently developing similar products, duplicating our products or designing around the patents owned by us;
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•
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prevent third-party patents from having an adverse effect on our ability to do business;
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•
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provide adequate protection for our intellectual property rights;
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•
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prevent disputes with third parties regarding ownership of our intellectual property rights;
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•
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prevent disclosure of our trade secrets and know-how to third parties or into the public domain; or
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•
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result in valid patents, including international patents, from any of our pending applications.
|
A court invalidation or limitation of our key patents could harm our business, financial condition and results of operations.
Our patent portfolio contains some patents that are particularly significant to our ongoing license revenue. If any of
these key patents are invalidated, or if a court limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses
could be reduced. The resulting loss in license fees and royalties could harm our business, financial condition and results of operations.
Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition.
In July 2008, we issued an aggregate principal amount of approximately $10.7 million in convertible notes (the “Notes”) due in
2010, which amount currently is approximately $10.1 million due to an adjustment to these notes. The level of our indebtedness, among other things, could:
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•
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require us to dedicate a portion of our expected cash flow or our existing cash to service our indebtedness, which would reduce the amount of our cash
available for other purposes, including working capital, capital expenditures and research and development expenditures;
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•
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make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt
service, acquisitions or general corporate purposes;
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•
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limit our flexibility in planning for or reacting to changes in our business;
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•
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limit our ability to sell ourselves or engage in other strategic transactions;
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•
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make us more vulnerable in the event of a downturn in our business; or
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•
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place us at a possible competitive disadvantage relative to less leveraged competitors
|
and competitors that have greater access to capital resources.
If we experience a decline in revenue due to any of the factors described in this section entitled “Risk Factors,” or otherwise,
we could have difficulty paying amounts due on our indebtedness. Although the Notes mature in 2010, the holders of the Notes may require us to repurchase their Notes prior to maturity under certain circumstances, including specified fundamental
changes such as the sale of a majority of the voting power of the Company. If we are unable to generate sufficient cash flow or are otherwise unable to make required payments, or if we fail to comply with the various requirements of the Notes,
including continued listing on a stock exchange, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any other indebtedness that we may have
outstanding at such time. Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition.
41
Conversion of the Notes would dilute the ownership interests of existing stockholders.
Certain former Augmentix stockholders have the right to convert the principal and any unpaid interest into our common
stock at a conversion price of $30.00 at any time prior to the earlier of (i) December 31, 2010, (ii) a change of control of the Company or (iii) the redemption of all of the outstanding principal amount of the Notes. The
conversion of some or all of the Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could adversely affect prevailing market prices of our common stock.
If our product failure rates increase, Dell could terminate our relationship and we could be subject to increased
warranty costs, both of which could have a material adverse effect on our results of operations and financial condition.
We warrant products for periods up to 37 months following the manufacture of our products. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of
our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery
costs increase, our warranty costs to support the products in the field could increase, which could have a material and adverse effect on our results of operations and financial condition. In addition, in the event of excessive product failure
rates, Dell could terminate its contract with us, which would also have a material and adverse effect on our results of operations and financial condition.
We are subject to risks relating to product concentration and lack of revenue diversification.
Until our acquisition of Augmentix, we derived nearly all of our revenue from sales or licenses of our Stakpak and memory module solutions. We terminated our memory solutions manufacturing business and
now are focusing on our Rugged Technology Solutions business, which derives nearly all of its revenue from sales to Dell. We expect these sales to continue to account for a substantial portion of our total revenue in the near term. Continued market
acceptance of our products is critical to our future success. As a result, our business, financial condition and results of operations could be adversely affected by:
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any decline in demand for our products;
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failure of our products and technologies to achieve continued market acceptance;
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•
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the introduction of products and technologies that can serve as a substitute for, replacement of or represent an improvement over, our products and
technologies;
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•
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technological innovations that we are unable to address with our products and technologies; and
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•
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any inability by us to release new products or enhanced versions of our existing products and technologies on a timely basis or the failure of our
products to achieve market acceptance.
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It is difficult for us to verify royalty amounts owed to us
under our license agreements, and licensees may report errors in their reports after they have paid us, which may cause us to lose revenue.
The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technologies and report this data to us on a periodic basis.
Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming and potentially detrimental to our ongoing business relationship with our
licensees. As a result, to date, we have primarily relied on the accuracy of the reports themselves without independently verifying the information in them. Our failure to audit our licensees’ books and records may result in us receiving less
royalty revenue than we are entitled to under the terms of our license agreements. In addition, a licensee may report errors in reporting after the licensee has paid us royalties, which is the action Samsung has taken with royalties it has paid us
from the fourth quarter of 2005 and ending in the first quarter of 2008. If we are required to refund royalties paid in earlier quarters, a refund could adversely affect our business, financial condition, results of operations and cash position.
42
If our products include defective parts, we may be subject to product liability or
other claims.
If we sell products that are defective or contain defective components, we could be subject to product
liability claims and product recalls, safety alerts or advisory notices. While we have product liability insurance coverage, we cannot assume that it will be adequate to satisfy claims made against us in the future or that we will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition, results
of operations and reputation, and on our ability to attract and retain customers.
The viability of our ODM business
model could be threatened if we are unable to control costs.
Dell expects us to deliver products and new designs
within certain cost parameters, and our ability to pass unexpected design or manufacturing costs on to Dell is limited. We also experience pressure to reduce our margins. Accordingly, if we are unable to design or procure ruggedized notebook
products efficiently, our business model could be unprofitable.
If the supply of materials used to manufacture our
products is interrupted, our financial condition and results of operations could be adversely affected.
In order to
have our ruggedized products manufactured, we require components, such as, but not limited to, main logic boards, memory, base LCDs, power supplies, chassis, thermal systems, optical enhancements, and other rugged elements. We typically procure
these materials from limited sources. Shortages in some of these materials may occur from time to time, and have occurred in the past. In addition to shortages, we could experience quality problems with these materials. If our supply of materials is
interrupted for any reason, or our manufacturing turnaround times are extended, our financial condition and results of operations could be adversely affected.
We are vulnerable to increases in shipping costs, which could have an adverse impact on our gross profit margin.
Presently, our supply chain configuration requires us to bear the expense of transporting our rugged notebook products over 10,000 miles
before our manufacturing process is complete and the products are made available to our primary customer. Historically, we have almost exclusively relied on air transportation to ship our products due to the need to deliver products in a timely
manner.
If the cost of air transportation increases in the future, or we are unable to decrease our reliance on air
transportation and decrease the distances we must transport products, we could face a decline in our gross profit margins.
We are a small company with limited resources compared to some of our current and potential competitors, and we may not be able to compete effectively and maintain or increase our market share.
Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition, and a
larger base of customers than we have. Some of these companies are better positioned to influence industry acceptance of a particular industry standard or competing technology than we are. These companies may also be able to devote greater resources
to the development, promotion and sale of products, and may be able to deliver competitive products or technologies at a lower price. They also may be able to adopt more aggressive pricing policies than we can adopt.
We expect our competitors to continue to improve the performance of their current products, reduce their prices and introduce new services
and technologies that may offer greater performance and improved pricing, any of which could cause a decline in revenue or loss of market acceptance of our products. In addition, our competitors may develop enhancements to, or future generations of,
competitive products that may render our products or technologies obsolete or uncompetitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our
business. Competition could decrease our prices, reduce our revenue, lower our gross profits or decrease our market share.
43
If we acquire other businesses or technologies in the future, these acquisitions could
disrupt our business and harm our business, financial condition and results of operations.
As part of our growth and
product diversification strategy, we will evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities.
For example, on August 31, 2007, we acquired Southland Micro Systems, a provider of memory products and services for leading OEMs, and on July 14, 2008, we acquired Augmentix, a provider of mission-critical mobile and server computing
solutions for use in demanding environments. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including:
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difficulties in integrating the operations, systems, technologies or products of the acquired companies;
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•
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the risk of diverting management’s time and attention from the normal daily operations of the business;
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•
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insufficient revenue to offset increased expenses associated with acquisitions;
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•
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difficulties in retaining business relationships with suppliers and customers of the acquired companies;
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•
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risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
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•
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the potential loss of key employees of the acquired company; and
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•
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the potential need to amortize intangible assets.
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Future acquisitions also could cause us to incur additional debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact the ownership
percentages of our existing stockholders, our financial condition and results of operations.
Our limited
experience in acquiring other businesses, product lines and technologies may make it difficult for us to overcome problems we may encounter in connection with any acquisitions we undertake.
We evaluate and explore strategic opportunities as they arise, including business combinations, strategic relationships, capital investments
and the purchase, licensing or sale of assets. Our experience in acquiring other businesses, product lines and technologies is limited. The attention of our small management team may be diverted from our core business if we undertake future
acquisitions. Future acquisitions may also require us to incur debt or issue equity securities that may result in dilution of existing stockholders. Potential future acquisitions also involve numerous risks, including, among others:
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problems and delays in successfully assimilating and integrating the purchased operations, personnel, technologies, products and information systems;
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•
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unanticipated costs and expenditures associated with the acquisition, including any need to infuse significant capital into the acquired operations;
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•
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adverse effects on existing business relationships with suppliers, customers and strategic partners;
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•
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risks associated with entering markets and foreign countries in which we have no or limited prior experience;
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•
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contractual, intellectual property or employment issues;
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•
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potential loss of key employees of purchased organizations; and
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•
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potential litigation arising from the acquired company’s operations before the acquisition.
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We may make acquisitions that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise adversely
affect our results of operations.
We may grow our business through business combinations or other acquisitions of
businesses, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. If we make any future acquisitions, we could
issue stock that would dilute our earnings and stockholders’ percentage ownership, reduce our cash reserves, incur substantial debt, or assume contingent liabilities.
44
Furthermore, acquisitions may require material infrequent charges and could result in
adverse tax consequences, deferred compensation charges, substantial depreciation, in-process research and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment
of goodwill, any of which could negatively impact our results of operations.
Our marketing and sales efforts may be
unsuccessful.
We have limited sales and marketing resources. As our business evolves, we may have to employ more
rigorous sales and marketing efforts, hire more sales and marketing personnel and engage in lengthy negotiations to reach agreement with potential customers. As a result, our operating expenses may increase, and we may incur losses in periods that
precede the generation of revenue. If the sales and marketing efforts of our technologies are unsuccessful, then we may not be able to sell or license our technologies.
If we experience credit losses or other collections issues, our business, financial condition and results of operations could suffer.
We have not historically recorded a bad debt allowance or established reserves for our accounts receivable because we did not have
significant credit losses or other collections issues during the periods for which financial information is presented. Although we do not believe that we will incur any additional material credit losses in the foreseeable future, if we were to do
so, our financial condition and results of operations could be harmed.
If we are unable to develop new and enhanced
products that achieve market acceptance in a timely manner, our financial condition, results of operations and competitive position could be harmed.
Our future success will be based in large part on our ability to reduce our dependence on Dell by increasing revenue associated with our other products and by developing other new technologies and
enhancements that can achieve market acceptance in a timely and cost-effective manner. Successful development and introduction of new technologies on a timely basis require that we:
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identify and adjust to changing requirements of customers;
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identify and adapt to emerging technological trends in our target markets;
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maintain effective marketing strategies;
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timely design and introduce cost-effective, innovative and performance-enhancing features that differentiate our products from those of our
competitors; and
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•
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successfully develop our relationships with existing and potential customers.
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Funds associated with our auction rate securities may not be accessible in the short term, and we may be required to adjust the
carrying value of these securities through an impairment charge.
As discussed in Note 4 to the Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q, our investment securities consist of ARS, which are not currently liquid or readily available to convert to cash. We do not believe that the current liquidity issues
related to our ARS will impact our ability to fund our ongoing business operations. However, we will not be able to access these funds until a future auction for these ARS is successful or until we sell the securities in a secondary
market. During October 2008, we accepted an offer provided to us by the investment firm through which we hold our ARS to sell our ARS to them at par value at any time over a two-year period, beginning June 30, 2010 and ending July 2,
2012. As of June 30, 2009, we reclassified our ARS and related put option to short-term investments based on our intent to sell them to the investment firm on June 30, 2010.
45
The failure of any bank in which we deposit our funds could impair our operations.
The current banking crisis may place our deposits with our banks at risk and the FDIC deposit insurance will not be
sufficient to cover any potential loss arising from a bank failure. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash, cash equivalents and investments could impair our operations.
Austin Ventures controls us, and will continue to control us, as long as it beneficially owns a majority of our common
stock.
Austin Ventures beneficially owns approximately 79% of our outstanding common stock. Because Austin Ventures
and its affiliates own more than 50% of our common stock, we are considered a “controlled company” under NASD Marketplace Rule 4350(c)(5), and we are exempt from NASD rules that would otherwise require that our board of directors consist
of a majority of independent directors. As a “controlled company,” we also are exempt from NASD rules that require the compensation of officers and the nomination of company directors be determined by a committee of independent directors
or a majority of independent directors. Our board of directors currently consists of eight directors, of which three qualify as independent directors under NASD rules. As long as Austin Ventures beneficially owns a majority of our outstanding common
stock, Austin Ventures will continue to be able to elect all members of our board of directors. Purchasers of our common stock will not be able to affect the outcome of any stockholder vote until Austin Ventures beneficially owns less than a
majority of our outstanding common stock. As a result, Austin Ventures will control all matters affecting us, including:
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the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the
appointment and removal of officers;
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any determinations with respect to mergers or other business combinations;
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•
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our acquisition or disposition of assets; and
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•
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our corporate finance activities.
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In addition, to the extent that Austin Ventures continues to beneficially own a significant portion of our outstanding common stock, although less than a majority, it will continue to have a significant
influence over all matters submitted to our stockholders and to exercise significant control over our business policies and affairs. Under our certificate of incorporation, as amended, if Austin Ventures ceases to own at least 30% of our outstanding
common stock, the approval of the holders of at least two-thirds of our common stock will be required for stockholders to amend our certificate of incorporation or bylaws, to increase or decrease the authorized number of shares of our capital stock
or to remove a director. Furthermore, concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant
concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of stockholders. Austin Ventures is not
prohibited from selling a controlling interest in us to any third party, or from selling its shares at any time, which could adversely affect our stock price.
Austin Ventures and its designees on our board of directors may have interests that conflict with our interests.
Austin Ventures and its designees on our board of directors may have interests that conflict with, or are different from, our own. Conflicts
of interest between Austin Ventures and us may arise, and such conflicts of interest may not be resolved in a manner favorable to us, including potential competitive business activities, corporate opportunities, indemnity arrangements, registration
rights, sales or distributions by Austin Ventures of our common stock and the exercise by Austin Ventures of its ability to control our management and affairs. Our certificate of incorporation does not contain any provisions designed to facilitate
resolution of actual or potential conflicts of interest, or to ensure that potential business opportunities that may become available to both Austin Ventures and us will be reserved for or made available to us. Pertinent provisions of law will
govern any such matters if they arise. In addition, Austin Ventures and its director designees could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders.
46
We depend on a few key personnel to manage our business effectively, and if we lose
the services of any of those personnel or are unable to hire additional personnel, our business could be harmed.
Our
future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We believe that our future success will be dependent on retaining the services of our key
personnel, developing their successors, modifying our internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles should departures or additions to the management team occur. The loss of
any of our key employees, or the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our services and
technologies.
We may be involved in costly legal proceedings to enforce or protect our intellectual property rights or
to defend against claims that we infringe the intellectual property rights of others.
Litigation is inherently
uncertain, and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings we initiate to protect our intellectual property rights could also result in counterclaims or
countersuits against us. Any litigation, regardless of its outcome, could be time consuming and expensive to resolve and could divert our management’s time and attention. Any intellectual property litigation also could force us to take specific
actions, including:
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cease selling products that are claimed to be infringing a third party’s intellectual property;
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obtain licenses to make, use, sell, offer for sale or import the relevant technologies from the intellectual property’s owner, which licenses may
not be available on reasonable terms, or at all;
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redesign those products that are claimed to be infringing a third party’s intellectual property; or
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pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.
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We have found it necessary to litigate against others, including our customers, to enforce our intellectual
property and contractual and commercial rights, as well as to challenge the validity and scope of the proprietary rights of others and to defend against claims of infringement or invalidity.
Our stock price is volatile.
Our common stock has been publicly traded since February 2004. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. The stock
market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. We have limited liquidity in terms of the number of outstanding
shares of our common stock that are publicly traded, which may adversely affect the value of our stock. In addition, we have an ongoing stock repurchase program, which could further decrease our liquidity. As a result, the market price of our
common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought
against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.
47
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ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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The following table provides information with respect to our purchase of our common stock during the quarter ended September 30, 2009:
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Period
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Total
Number
of Shares
Purchased
(1)
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Average
Price
Paid
per
Share
(2)
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Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or
Programs
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Maximum
Approximate Dollar
Value of Shares that
May Yet Be
Purchased under the
Plans or
Programs
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July
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1,474
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$
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3.51
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1,474
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Approx. $6.7 million
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August
|
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8,812
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$
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4.32
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8,812
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Approx. $6.7 million
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September
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3,391
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$
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5.54
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3,391
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Approx. $6.7 million
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Total
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13,677
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$
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4.54
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13,677
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(1)
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On February 2, 2006, our Board of Directors renewed our existing $15.0 million stock repurchase program for up to $10.0 million to purchase shares of our common
stock. On November 14, 2006, our Board of Directors authorized an additional $10.0 million to purchase shares of our common stock.
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(2)
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Excludes commissions paid.
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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Not applicable.
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
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ITEM 5.
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OTHER INFORMATION
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Not
applicable.
48
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Exhibit Description
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Incorporated by Reference
|
|
Filed
Herewith
|
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Exhibit
Number
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Form
|
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File Number
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|
Exhibit
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Filing
Date
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3.1
|
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Amended and Restated Certificate of Incorporation
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X
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3.2
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Certificate of Ownership and Merger
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|
8-K
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000-50533
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3.1
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2/27/08
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3.3
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Amended and Restated Bylaws
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10-Q
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000-50553
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3.3
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5/15/08
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4.2
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Specimen certificate for shares of common stock of Staktek Holdings, Inc.
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S-1/A
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333-110806
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4.2
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1/20/04
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10.1
|
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Patent Broker Agreement by and between Entorian and IPotential, LLC, dated October 30, 2009.
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X
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31.1
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Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of
2002)
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X
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31.2
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Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 302 of the Sarbanes-Oxley Act of
2002)
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X
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32.1
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Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
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X
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32.2
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Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
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X
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49
SIGNATURES
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.
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ENTORIAN TECHNOLOGIES INC.
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/s/ Stephan B. Godevais
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Stephan B. Godevais
President and Chief Executive Officer
Date: November 12, 2009
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/s/ W. Kirk Patterson
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W. Kirk Patterson
Senior
Vice President and Chief Financial Officer
Date: November 12, 2009
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50
Entorian Technologies Inc. (MM) (NASDAQ:ENTND)
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