Procera Networks Announces Second Quarter 2009 Results

LOS GATOS, CA--(Marketwire - August 12, 2009) - Procera® Networks Inc. (NYSE Amex: PKT), a developer of Evolved Deep Packet Inspection (DPI) solutions providing traffic awareness, control and protection for complex networks, announced its earnings for its second quarter ended June 30, 2009 (Q2'09).

Q2'09 Key Highlights:

-- Focus on Tier 1 service providers achieves record bookings of $7.1 million -- Announced initial $5.4M purchase order from a major Tier 1 Service Provider -- Fifth consecutive quarter of year-over-year revenue growth -- Revenue of $3.2 million; increased 24% year-over-year and 10% sequentially -- Gross margin impacted by charges; underlying gross margin rate remained strong -- Reduced operating expenses 30% year-over-year

"Our achievements in the second quarter were significant. We expect the magnitude of our Tier 1 win will be felt across all regions and verticals," said James Brear, president and CEO of Procera. "This win, along with our continued success in the Higher Education market, validates our technology leadership."

Total revenue for Q2'09 was $3.2 million, an increase of 24% from $2.6 million of revenue reported in the second quarter of 2008 (Q2'08). The GAAP net loss for Q2'09 was $4.3 million, or a loss of $(0.05) per diluted share. This compares to a GAAP net loss of $3.9 million, or a loss of $(0.05) per diluted share, in Q2'08.

Non-GAAP net loss for Q2'09 was $1.7 million, as compared to non-GAAP net loss for Q2'08 of $2.9 million.

An archive of the August 12, 2009 conference call will be available at the Investor Relations section of Procera Networks' website, www.proceranetworks.com, by no later than August 14, 2009.

Forward Looking Statements

Safe Harbor Statement: this press release contains forward-looking statements, including statements relating to the expected demand for Procera Networks' products and services and the recently announced purchase order from a Tier 1 service provider. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements, including risks related to the testing and acceptance of our products under the Tier 1 purchase order and during the trial period; our ability to raise capital; the acceptance and adoption of our products; our ability to service and upgrade our products; lengthy sales cycles and lab and field trial delays by service providers; our dependence on a limited product line; our dependence on key employees; our ability to compete in our industry with companies that are significantly larger and have greater resources; our ability to protect our intellectual property rights in a global market; our ability to manufacture product quickly enough to meet potential demand; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission. More information about these and other risks that may impact Procera Networks' business are set forth in our Forms 10-Qs filed in 2009 and our Form 10-K filed for the year ended December 31, 2008. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Use of Non-GAAP Financial Information

To supplement our financial results presented in accordance with Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables and the related earnings conference call contain certain non-GAAP financial measures that we believe are helpful in understanding our past financial performance and future results. For reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled, "GAAP to Non-GAAP Reconciliations." Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand and manage our business and forecast future periods. Our non-GAAP financial measures include adjustments based on the following items, as well as the related income tax benefits, if any:

Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from our non-GAAP net income. Amortization of intangible assets is a non-cash expense, and it is not part of our core operations. Investors should note that the use of intangible assets contributed to revenues earned during the periods presented and will contribute to future period revenues as well.

Stock-based compensation expenses: We have excluded the effect of stock-based compensation from our non-GAAP gross profit, operating expenses and net income measures. Although stock-based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. Stock-based compensation expenses will recur in future periods.

Non-cash interest expense: We have excluded the effect of a non-cash charge to interest expense for the amortization of discounts related to convertible promissory notes that were issued and converted within Q2'09.

About Procera Networks Inc.

Procera Networks Inc. delivers Evolved DPI solutions that give service providers awareness, control and protection of their applications and networks. Its core product suite, the PacketLogic line of platforms, leverages the company's advanced identification engine, DRDLT (Datastream Recognition Definition Language), to provide accurate identification of network traffic in real-time. PacketLogic is deployed at more than 400 broadband service providers, telcos, governments and higher education campuses worldwide. Founded in 2002, Procera (NYSE Amex: PKT) is based in Silicon Valley and has offices around the globe. More information is available at www.proceranetworks.com.

Procera Networks is a registered trademark, and PacketLogic and DRDL are trademarks of Procera Networks, Inc. All rights reserved. All other products or brands mentioned are trademarks and/or service marks of their respective owners.

Procera Networks, Inc. Condensed Consolidated Statements of Operations Unaudited Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2009 2008 2009 2008 ----------- ----------- ----------- ----------- Sales Product sales $ 2,550,845 $ 2,205,002 $ 4,721,888 $ 3,538,766 Support sales 682,874 410,296 1,459,165 792,306 ----------- ----------- ----------- ----------- Total sales 3,233,719 2,615,298 6,181,053 4,331,072 Cost of sales Product cost of sales 2,270,580 1,304,905 3,939,328 2,393,744 Support cost of sales 85,317 155,925 204,489 298,144 ----------- ----------- ----------- ----------- Total cost of sales 2,355,897 1,460,830 4,143,817 2,691,888 ----------- ----------- ----------- ----------- Gross profit 877,822 1,154,468 2,037,236 1,639,184 ----------- ----------- ----------- ----------- 27.1% 44.1% 33.0% 37.8% Operating expenses: Research and development 683,307 1,026,411 1,319,449 1,688,533 Sales and marketing 1,653,930 2,344,136 3,338,791 4,368,477 General and administrative 1,389,595 1,971,059 2,719,040 3,496,152 ----------- ----------- ----------- ----------- Total operating expenses 3,726,832 5,341,606 7,377,280 9,553,162 ----------- ----------- ----------- ----------- Loss from operations (2,849,010) (4,187,138) (5,340,044) (7,913,978) ----------- ----------- ----------- ----------- Other income (expense) Interest and other income 12,309 14,585 25,269 25,883 Interest and other expense (1,730,657) (26,562) (1,767,453) (34,803) ----------- ----------- ----------- ----------- Total other income (expense) (1,718,348) (11,977) (1,742,184) (8,920) Loss before income taxes (4,567,358) (4,199,115) (7,082,228) (7,922,898) Income tax benefit 234,763 282,545 415,580 522,391 ----------- ----------- ----------- ----------- Net loss $(4,332,595) $(3,916,570) $(6,666,648) $(7,400,507) =========== =========== =========== =========== Net loss per share - basic and diluted $ (0.05) $ (0.05) $ (0.08) $ (0.10) =========== =========== =========== =========== Shares used in computing net loss per share-basic and diluted 86,943,149 77,119,655 85,687,768 76,618,915 Procera Networks, Inc. Condensed Consolidated Balance Sheets June 30, December 31, 2009 2008 ------------ ------------ ASSETS Unaudited Current Assets: Cash and cash equivalents $ 2,303,901 $ 1,721,225 Accounts receivable, net of allowance 5,686,469 5,454,745 Inventories, net 2,925,337 3,445,802 Prepaid expenses and other 627,457 824,340 ------------ ------------ Total current assets 11,543,164 11,446,112 Property and equipment, net 1,216,342 2,573,045 Purchased intangible assets, net 244,905 964,405 Goodwill 960,209 960,209 Other non-current assets 47,600 47,294 ------------ ------------ Total assets $ 14,012,220 $ 15,991,065 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,629,220 $ 2,457,430 Deferred revenue 1,560,735 1,313,092 Accrued liabilities 1,355,587 1,841,442 Notes payable 650,000 550,000 Capital leases payable - 11,543 ------------ ------------ Total current liabilities 5,195,542 6,173,507 Non-current liabilities Deferred rent 27,890 24,234 Deferred tax liability 176,687 695,239 Capital leases payable - 39,584 ------------ ------------ Total liabilities 5,400,119 6,932,564 Commitments and contingencies - - Stockholders' equity: Common stock 94,083 84,498 Additional paid-in capital 67,080,737 61,142,430 Accumulated other comprehensive loss (155,751) (428,107) Accumulated deficit (58,406,968) (51,740,320) ------------ ------------ Total stockholders' equity 8,612,101 9,058,501 ------------ ------------ Total liabilities and stockholders' equity $ 14,012,220 $ 15,991,065 ============ ============ Procera Networks, Inc. GAAP to Non-GAAP Reconciliation; and Supplemental Financial Information Unaudited Three Months Ended Six Months Ended ---------------------------------- ---------------------- June 30, March 31, June 30, June 30, June 30, 2009 2009 2008 2009 2008 ---------- ---------- ---------- ---------- ---------- Sales - U.S. GAAP as reported 3,233,719 2,947,334 2,615,298 6,181,053 4,331,072 Reconciliation of Gross Profit: U.S. GAAP as reported 877,822 1,159,414 1,154,468 2,037,236 1,639,184 As a percentage of sales 27% 39% 44% 33% 38% Adjustment: Amortization on intangibles (1) 381,500 381,500 381,500 763,000 763,000 Stock-based compensation (2) 16,395 18,059 6,845 34,454 13,241 ---------- ---------- ---------- ---------- ---------- As Adjusted 1,275,717 1,558,973 1,542,813 2,834,690 2,415,425 As a percentage of sales 39% 53% 59% 46% 56% Reconciliation of Operating Expense: U.S. GAAP as reported 3,726,832 3,650,448 5,341,606 7,377,280 9,553,162 Adjustment: Amortization on intangibles (1) 545,083 545,083 545,083 1,090,166 1,090,166 Stock-based compensation (2) 271,285 304,369 378,709 575,654 807,445 ---------- ---------- ---------- ---------- ---------- As Adjusted 2,910,464 2,800,996 4,417,814 5,711,460 7,655,551 Reconciliation of Net Loss: U.S. GAAP as reported (4,332,595) (2,334,053) (3,916,570) (6,666,648) (7,400,507) Adjustment: Amortization on intangibles (1) 926,583 926,583 926,583 1,853,166 1,853,166 Stock-based compensation (2) 287,680 322,428 385,554 610,108 820,686 Interest related to embedded stock option (3) 1,644,756 - - 1,644,756 - Income tax adjustment (4) (259,904) (259,904) (259,904) (519,808) (519,808) ---------- ---------- ---------- ---------- ---------- As Adjusted (1,733,480) (1,344,946) (2,864,337) (3,078,426) (5,246,462) ========== ========== ========== ========== ========== (1) The intangible assets recorded at fair value as a result of our acquisitions are amortized over the estimated useful life of the respective asset. (2) Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Statements of Financial Accounting Standards No. 123 (R). (3) Interest expense related to intrinsic value of embedded common stock option feature of converted promissory notes. (4) Income tax benefit from the amortization of intangible assets.