Entorian Technologies Reports Third Quarter 2011 Financial Results

AUSTIN, Texas--(BUSINESS WIRE)--

Entorian Technologies Inc. (OTC MARKETS: ENTN), a leader in rugged, mission-critical mobile computing solutions for use in harsh, demanding environments, today announced financial results for the third quarter ended September 30, 2011.

Third Quarter Summary:

• Third quarter revenue of $14.9 million
• GAAP net loss of $7.9 million, or ($2.03) per share
• Non-GAAP net loss of $7.3 million, or ($1.89) per share (excludes non-cash charges for stock-based compensation and amortization of acquisition intangibles)
• Cash and cash equivalents of $16.0 million

Management Commentary

“Our third quarter financial performance was negatively impacted by charges primarily related to excess inventory and estimated future warranty costs. These inventory charges were largely driven by lower than expected sales of our old generation products and a faster transition to our new platform. Although our third quarter results were disappointing, initial end user feedback on the new product has been very positive,” stated Stephan Godevais, Entorian's president and CEO.

Third Quarter 2011 Financial Results

Total revenue for the third quarter of 2011 was $14.9 million, including $14.4 million of product revenue associated with the company's rugged technology solutions and $0.5 million in memory license revenue. This compares to total revenue of $17.0 million in the second quarter of 2011, which included $16.4 million of rugged technology product revenue and $0.6 million in memory license revenue.

In accordance with GAAP, gross loss for the third quarter of 2011 was $5.7 million, or negative 38.0 percent of revenue, compared to gross profit of $1.7 million, or 9.8 percent of revenue, in the previous quarter. On a non-GAAP basis, gross loss was negative 35.3 percent in the third quarter of 2011, compared to gross profit of 13.7 percent in the previous quarter. The third quarter gross loss included $5.2 million of excess inventory charges related to a transition to the next generation of rugged notebooks, as well as approximately $1.4 million of charges primarily related to an increase in estimated future warranty costs, increased service costs related to a specific customer, and other inventory charges. Excluding these charges, the third quarter would have resulted in a GAAP gross profit of $1.0 million or 6.4 percent of revenue.

On a GAAP basis, total operating expenses in the third quarter of 2011 were $2.2 million, compared to $2.6 million in the previous quarter. On a non-GAAP basis, total operating expenses for the third quarter of 2011 were $2.1 million, which excluded approximately $0.1 million in stock-based compensation expense, as compared to $2.4 million in the previous quarter.

Third quarter GAAP net loss was $7.9 million, or ($2.03) per share, compared to a net loss of $0.8 million, or ($0.21) per share in the previous quarter. Excluding the charges to gross profit during the third quarter, the GAAP net loss would have been $1.3 million or ($0.33) per share.

Excluding non-cash charges for stock-based compensation of $0.1 million and amortization of acquisition intangibles totaling $0.4 million, non-GAAP net loss for the third quarter was $7.3 million, or ($1.89) per share, compared to the non-GAAP net income of $21,000, or $0.01 per share, in the previous quarter. Excluding the charges to gross profit, the non-GAAP net loss for the third quarter would have been $0.7 million or ($0.19) per share. A reconciliation of GAAP results to non-GAAP results has been provided in the financial statement tables following the text of this press release.

As of September 30, 2011, cash and cash equivalents were $16.0 million, compared to $17.6 million on June 30, 2011. Inventory was $9.2 million, compared to $15.2 million in the previous quarter. The inventory decrease was primarily due to the charges taken in the third quarter combined with sales of components for our line of rugged servers.

Business Outlook

“We remain very cautious with our short to mid term outlook due to on-going cuts in federal, state and local government spending, which constitute the majority of our customer base. However, we are encouraged with early sales trends for our latest generation product in the Corporate business sector,” concluded Mr. Godevais.

Cautionary Language

This press release contains forward-looking statements. These statements are generally accompanied by words such as “expect,” “believe,” and similar expressions. We do not have sufficient backlog to rely upon when forecasting results, so our future performance is very difficult to predict. Our forward-looking statements are based on our current expectations, estimates and assumptions and are subject to many risks, uncertainties and unknown future events that could cause actual results to differ materially. Risks and uncertainties that may cause future results to differ include, but are not limited to, the risk of a change in our relationship with our OEM customer with which we have an exclusive sales and marketing agreement regarding certain ruggedized computer notebook products; a change in the efforts by our OEM customer to sell our rugged computing products; the timing and volume of sales of our products by our OEM customer; a shortage of critical parts, which could negatively impact our ability to fulfill orders; fluctuating demand for, and life cycles of, our products; risks related to product liability and warranty claims in the event our products do not function according to specification or include defective parts; inconsistency in forecasts provided to us by our largest customer, resulting in increased inventory exposure as we build to our customer's current forecast; inventory risks from loss recognized on inventory which is no longer used due to the transition to the next generation of our products; operational risks from our reliance on suppliers, subcontractors and third-party manufacturers for the assembly and production of ruggedized products; the risk that broker-dealers may not make a market in our securities; a failure by us to develop new products that are successfully qualified and utilized by customers; our ability to manufacture and ship products within a particular reporting period; the risk that foreign or domestic manufacturers develop products that compete successfully with our own on cost or other functionality; our ability to enforce our intellectual property rights or to defend claims that we infringe the intellectual property rights of others, and the significant costs to us of related litigation; the risk that our average selling prices decline during the period more than we expect because of competitive pressures, substituted products or overall reduced demand for our products; risks associated with budget constraints of federal, state and local governments that could negatively impact sales of our ruggedized products; risks associated with the failure of our ruggedized products to meet military specifications MIL-STD-810; and the risks associated with our dependence on a few key personnel to manage our business effectively.

For a discussion of these and other factors that could impact our financial results and cause actual results to differ materially from those in the forward-looking statements, please refer to our recent filings with the OTC Markets Group Inc. The foregoing information concerning our business outlook represents our outlook as of the date of this news release, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

Non-GAAP Financial Measurements

In addition to the GAAP results provided by this document, the company has provided non-GAAP financial measurements that present net income, operating income, operating expense, gross profit, gross margin and earnings per diluted share on a basis excluding non-cash charges for stock-based compensation and amortization and impairment of acquisition intangibles. Details of these excluded items are presented in one of the tables below, which reconcile the GAAP results to non-GAAP financial measurements described in this press release. Entorian has chosen to provide non-GAAP financial measurements to investors because it believes that excluding certain charges represents a better basis for the comparison of its current results to the results of its peer companies. In addition, the company believes that it provides a means to highlight the results of core ongoing operations to investors. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

About Entorian Technologies

Entorian Technologies Inc. (OTC MARKETS: ENTN) is a leader in rugged, mission-critical mobile and server computing solutions for use in harsh, demanding environments through its subsidiary, Augmentix Corporation. Its Augmentix-produced servers and mobile products combine best‐in‐class technologies and standardized components from industry leader Dell, with proven ruggedization methods from Augmentix. These rugged systems are environmentally robust and technologically advanced. For more information, go to www.entorian.com and www.augmentix.com.

Entorian is a trademark of Entorian Technologies Inc. and Augmentix is a trademark of Augmentix Corporation.

ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
		Three Months Ended
		September 30,				June 30,				September 30,
			2011				2011				2010
Revenue:
Product		$	14,353			$	16,376			$	16,206
License			503				633				721
Total revenue			14,856				17,009				16,927
Cost of revenue:
Product (1)			20,116				14,683				13,428
Amortization of acquisition intangibles			391				651				837
Total cost of revenue			20,507				15,334				14,265
Gross profit (loss)			(5,651	)			1,675				2,662
Operating expenses:
Selling, general and administrative (1)			1,147				1,127				1,614
Research and development (1)			1,078				1,487				1,926
Restructuring			-				-				51
Total operating expenses			2,225				2,614				3,591
Loss from operations			(7,876	)			(939	)			(929	)
Other income (expense):
Interest income			3				52				4
Interest expense			(5	)			(8	)			(1	)
Other, net			(1	)			-				(16	)
Total other income (expense), net			(3	)			44				(13	)
Loss before income taxes			(7,879	)			(895	)			(942	)
Provision (benefit) for income taxes			(5	)			(87	)			213
Net loss		$	(7,874	)		$	(808	)		$	(1,155	)
Loss per share:
Basic		$	(2.03	)		$	(0.21	)		$	(0.30	)
Diluted		$	(2.03	)		$	(0.21	)		$	(0.30	)
Shares used in computing loss per share:
Basic			3,880				3,877				3,875
Diluted			3,880				3,877				3,875
(1) Includes stock-based compensation expense as follows:
Cost of revenue		$	9			$	9			$	7
Selling, general and administrative expense			116				131				169
Research and development expense			17				38				57
		$	142			$	178			$	233

ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
		Nine Months Ended
		September 30,				September 30,
			2011				2010
Revenue:
Product		$	49,487			$	58,963
License			1,789				2,080
Total revenue			51,276				61,043
Cost of revenue:
Product (1)			50,752				49,273
Amortization of acquisition intangibles			1,731				2,513
Total cost of revenue			52,483				51,786
Gross profit (loss)			(1,207	)			9,257
Operating expenses:
Selling, general and administrative (1)			3,476				4,730
Research and development (1)			4,405				4,807
Restructuring			-				105
Total operating expenses			7,881				9,642
Loss from operations			(9,088	)			(385	)
Other income (expense):
Interest income			61				125
Interest expense			(14	)			(4	)
Other, net			6				93
Total other income, net			53				214
Loss before income taxes			(9,035	)			(171	)
Provision (benefit) for income taxes			(94	)			277
Net loss		$	(8,941	)		$	(448	)
Loss per share:
Basic		$	(2.30	)		$	(0.12	)
Diluted		$	(2.30	)		$	(0.12	)
Shares used in computing loss per share:
Basic			3,880				3,876
Diluted			3,880				3,876
(1) Includes stock-based compensation expense as follows:
Cost of revenue		$	29			$	13
Selling, general and administrative expense			384				471
Research and development expense			90				137
		$	503			$	621

ENTORIAN TECHNOLOGIES INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data; unaudited)
		Three Months Ended
		September 30,				June 30,				September 30,
			2011				2011				2010
GAAP loss from operations		$	(7,876	)		$	(939	)		$	(929	)
Non-GAAP adjustments:
Amortization of acquisition intangibles			391				651				837
Stock-based compensation expense			142				178				233
Total non-GAAP adjustments			533				829				1,070
Non-GAAP income (loss) from operations		$	(7,343	)		$	(110	)		$	141
GAAP net loss		$	(7,874	)		$	(808	)		$	(1,155	)
Total non-GAAP adjustments			533				829				1,070
Non-GAAP net income (loss)		$	(7,341	)		$	21			$	(85	)
Shares used in calculating non-GAAP diluted income (loss) per share			3,880				4,155				3,875
Non-GAAP diluted income (loss) per share		$	(1.89	)		$	0.01			$	(0.02	)

ENTORIAN TECHNOLOGIES INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data; unaudited)
		Nine Months Ended
		September 30,				September 30,
			2011				2010
GAAP loss from operations		$	(9,088	)		$	(385	)
Non-GAAP adjustments:
Amortization of acquisition intangibles			1,731				2,513
Stock-based compensation expense			503				621
Total non-GAAP adjustments			2,234				3,134
Non-GAAP income (loss) from operations		$	(6,854	)		$	2,749
GAAP net loss		$	(8,941	)		$	(448	)
Total non-GAAP adjustments			2,234				3,134
Non-GAAP net income (loss)		$	(6,707	)		$	2,686
Shares used in calculating non-GAAP diluted income (loss) per share			3,880				4,005
Non-GAAP diluted income (loss) per share		$	(1.73	)		$	0.67

ENTORIAN TECHNOLOGIES INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
		September 30,				Dec. 31,
			2011				2010
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	16,049			$	19,028
Accounts receivable, net of allowance of $4 in 2011 and $10 in 2010			9,830				11,987
Inventories			9,235				8,960
Income tax receivable			826				927
Deferred tax asset			77				77
Prepaid expenses and other current assets			545				1,392
Total current assets			36,562				42,371
Property and equipment, net			1,334				1,987
Other intangibles, net			2,694				4,530
Other assets			186				193
Total assets		$	40,776			$	49,081
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	9,280			$	10,399
Accrued compensation			124				1,461
Accrued liabilities			3,409				1,193
Total current liabilities			12,813				13,053
Other accrued liabilities			933				564
Deferred tax liabilities			77				77
Stockholders' equity:
Capital stock			152,006				151,499
Treasury stock			(26,049	)			(26,049	)
Accumulated deficit			(99,004	)			(90,063	)
Total stockholders' equity			26,953				35,387
Total liabilities and stockholders' equity		$	40,776			$	49,081

ENTORIAN TECHNOLOGIES INC.
RECONCILIATION OF ADDITIONAL GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands; unaudited)
		Three Months Ended
		September 30,				June 30,				September 30,
			2011				2011				2010
Gross profit (loss)		$	(5,651	)		$	1,675			$	2,662
Non-GAAP adjustments:
Amortization of acquisition intangibles			391				651				837
Stock-based compensation			9				9				7
Non-GAAP gross profit (loss)		$	(5,251	)		$	2,335			$	3,506
Total revenue		$	14,856			$	17,009			$	16,927
Non-GAAP gross margin percentage			(35.3	)%			13.7	%			20.7	%
Operating expenses		$	2,225			$	2,614			$	3,591
Non-GAAP adjustments:
Stock-based compensation			133				169				226
Non-GAAP operating expenses		$	2,092			$	2,445			$	3,365
Selling, general and administrative expense		$	1,147			$	1,127			$	1,614
Non-GAAP adjustments:
Stock-based compensation			116				131				169
Non-GAAP selling, general and administrative expense		$	1,031			$	996			$	1,445
Non-GAAP SG&A as a percentage of total revenue			6.9	%			5.9	%			8.5	%
Research and development expense		$	1,078			$	1,487			$	1,926
Non-GAAP adjustments:
Stock-based compensation			17				38				57
Non-GAAP research and development expense		$	1,061			$	1,449			$	1,869
Non-GAAP R&D as a percentage of total revenue			7.1	%			8.5	%			11.0	%