Is Sliding Encryption Vendor NeoScale Ripe For EMC Buy?

One former NeoScale employee, who preferred to remain anonymous, confirmed that customers cannot buy maintenance contracts for now, which hurt sales. "One account was begging to buy the appliances, but the company wouldn't sell the maintenance contract," the former employee said. "What does that mean for other customers who just purchased their appliances?"

For USI, the answer is sell more encryption appliances from Decru, which was acquired by Network Appliance in June of 2005.

"Fortunately we're also a NetApp partner," Tuggle said. "We're converting customers to Decru."

The company's encryption appliance business started unraveling in mid-October when MTI Technology, a Tustin, Calif.-based storage solution provider, declared Chapter 11 bankruptcy.

The former NeoScale employee said that MTI owed NeoScale about $800,000 as a result of the MTI bankruptcy, a figure not denied by an executive still working at NeoScale.

A second former NeoScale employee, who preferred to remain anonymous, said MTI should have been recognized earlier as a problem. "We should have been a little more diligent in our dealings with them," the employee said.

The other problem at NeoScale, according to a couple of former employees, is that the company's Board of Directors and its investors looked at the encryption market and saw that it is difficult for a stand-alone appliance vendor to succeed in a market where several other vendors, including tape manufacturers, are implementing encryption in different ways, including native tape encryption.

A third former NeoScale employee, who preferred to remain anonymous, said employees started hearing rumors on Oct. 16 about a possible closing of the encryption business about a week after being told not to pay any invoices.

The former employee said that NeoScale CEO Barbara Nelson told employees on a company-wide call on Oct. 17 that the company was insolvent.

Shortly thereafter, most of the employees, except for a few who were mainly working on SFS technology, were let go without severance pay, bonuses, and even travel reimbursement. Some employees were owed several thousands of dollars in travel reimbursement, with one being owed over $30,000, the former executive said.

Reimbursements and current commissions are in the process of being paid, the current NeoScale executive said.

"The worst part is that many people who were let go were there since the inception of the company," the former employee said. "They just walked us out the door."

Former employees and solution providers said that NeoScale left the market early, and that there were many opportunities out there. A couple of former employees said the company had six open requisitions for sales people.

"How do you go from six open reqs to insolvency so fast?" asked the second former employee. "They left a lot of customers standing in the winds with purchase orders and no place to go with the orders."