|
DIALOGIC INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and Notes thereto included in Part
1, Item 1 of this Quarterly Report on Form 10-Q and our Consolidated Financial
Statements and Notes thereto for the year ended December 31, 2011, in our Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
April 16, 2012. The discussion in this Quarterly Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties, including, but
not limited to, statements of our future financial operating results, future
expectations concerning cash and cash equivalents available to us, our business
strategy, including whether we can successfully develop new products and the
degree to which these gain market acceptance, revenue estimations, plans,
objectives, expectations and intentions. In some cases, you can identify
forward-looking statements by terms such as "anticipates," "believes," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"projects," "should," "will," "would" and similar expressions intended to
identify forward-looking statements. Forward-looking statements reflect our
current views with respect to future events are based on assumptions and are
subject to risks, uncertainties and other important factors. Our actual results
could differ materially from those discussed here. See "Risk Factors" in Item 1A
of Part II for factors that could cause future results to differ materially from
any results expressed or implied by these forward-looking statements. Given
these risks, uncertainties and other important factors, you should not place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future.
Overview
We are a leading provider of telecommunications platforms and technology that
enable developers and service providers to build and deploy innovative
applications without concern for the complexities of the telecommunications
medium or network. We specialize in providing products and solutions that
enhance the mobile telecommunications experience. Our technology impacts over
two billion mobile subscribers and our network solutions carry more than 15
billion minutes of traffic per month.
Wireless and wireline service providers use our products to transport, convert
and manage data and voice traffic while enabling VoIP and other multimedia
services. These service providers also utilize our underlying technology to
provide innovative revenue-generating value-added services such as messaging,
Short Message Service, voice mail and conferencing which are also increasingly
becoming video-enabled. Enterprises rely on our innovative products to enable
the integration of IP and wireless technologies and endpoints into existing
telecommunications networks, and to enable applications that serve businesses,
including unified telecommunications applications, contact center and
Interactive Voice Response/Interactive Voice Video Response.
We sell our products to both enterprise and service provider customers and sell
both directly and indirectly through distribution partners such as Technology
Equipment Manufacturers, Value Added Resellers and other channel partners. Our
customers build their enterprise telecommunications solutions, their networks,
or their value-added services on our products.
We were incorporated in Delaware on October 18, 2001 as Softswitch Enterprises,
Inc., and subsequently changed our name to NexVerse Networks, Inc. in 2001,
Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010.
Industry Background
The telecommunications industry has traditionally been highly regulated.
However, in recent years regulatory barriers to entry have been removed and
service providers with telephone, cable, and wireless networks have expanded
their offerings to voice, data, and video services over a single broadband
platform, increasing competition in the industry.
This increase in competition has also led to steep price reductions, which have
in turn caused the revenues of incumbent telecom operators to decline. At the
same time, the demand for IP-based technologies increased due to the need to
reduce costs and the need to diversify revenue streams. In developed countries,
services are increasingly bundled; for example, Internet access is often bundled
with voice telephony and television channels. Service providers and enterprises
either maintain their legacy networks or steadily plan on migrating telecom
systems from PSTN to a single IP network to deliver video calls, text messaging,
and location-based services and other high-demand services.
Our products allow service providers to deploy services smoothly over disparate
networks. We offer a softswitch that allows new services to be implemented
securely and dynamically throughout the entire network along with routing,
billing, and number portability for operational savings. Our media servers
enable creation of value-added telecommunications services. Our media gateways
interconnect multimedia streams and include bandwidth and codec optimization. We
also offer optimization of wireless telecommunication streams in the backhaul
network. Our video gateway converts pictures and video streams from different
compression formats seamlessly enabling the delivery of video between different
network generations and multiple types and sizes of devices and screens. We also
offer a session border controller with a secure proxy architecture that is
transparent to the end-to-end flow of signaling messages, enabling a reduction
in the time and cost of deploying new services.
23--------------------------------------------------------------------------------
Table of Contents
Our products meet specific customer requirements and certain industry standards,
and are subject to various laws, restrictions and regulations, including, but
not limited to, environmental protection, import-export controls, and political
and economic boundaries, which are more fully discussed in "Item 1A. Risk
Factors."
Our Products
Our products include both Next-Generation products that serve the growing mobile
and IP networks and also connect these disparate networks together, as well as
Legacy products that serve the TDM networks.
Our Next-Generation products and solutions are offered in four main categories:
Service Provider Infrastructure: These products serve in the core or edge of a
service provider network and make the fundamental connections that allow
networks to function. Our service provider product portfolio includes a Class 4
softswitch, network signaling products such as Sigtran for SS7 over IP networks,
and media gateways that connect IP and PSTN networks. Dialogic has also invested
in expanding our SBC product line and we now have SBCs that reside at the edge
of a network for peering or access from one type of IP network to another.
Our Next-Generation switching solution consists of the Dialogic® ControlSwitch™
System, a Class 4 IP softswitch and service delivery platform comprised of
numerous IMS-compatible software modules. This product suite allows our
customers to customize and tailor solutions. Our gateways enable
telecommunication from one type of network to another and convert from one type
of media stream format to another and/or one type of signaling format to
another. Our Dialogic ® Bordernet™ 2020 product is a combined gateway and SBC
that supports IP-to-IP transcoding for network peering applications and
mediation, thereby eliminating the need for separate SBCs in an environment
where only the mediation function is required. Our Dialogic ® BorderNet™ 3000
Session Border Controller is a compact, highly reliable security and session
management platform for access to mobile and fixed VoIP networks. In 2012, we
also introduced a high performance Dialogic ® BorderNet™ 4000 SBC that will
enable peering for both wireless and wireline IP-based service provider
networks.
Bandwidth Optimization:These products serve in the core or edge of a service
provider network and address the capacity challenges of networks by optimizing
the media traffic on these networks. Our bandwidth optimization products consist
of our Dialogic ® I-Gate® 4000 family of media gateways and enable service
providers to gain more bandwidth out of their existing infrastructure. The
I-Gate 4000 SBO Mobile Backhaul solution can deliver high quality data and voice
optimization for both 3G and 2G networks and can deliver up to 50% additional
bandwidth over existing infrastructure. The I-Gate 4000 SBO Core and Core-X
optimize VoIP traffic in 3G mobile and next generation switching networks in the
core of the network.
Value-Added Services / Cloud Enablement: These platforms enable our customers to
build advanced telecommunication applications such as messaging, IVR,
conferencing and SMS applications that may be delivered by our customers either
via a cloud delivery model or via a stand-alone solution model. The Dialogic®
PowerMedia™ software solutions act as media servers that allow our customers and
partners to build rich value-added service applications including voice mail,
IVR, contact center, facsimile, conferencing, speech recognition, unified
messaging, SMS, CRBT, and announcement systems. PowerMedia performs multimedia
processing tasks on general-purpose servers without requiring the use of
specialized hardware (available in Linux and Windows versions) and uses our
existing APIs and industry standard APIs as the programming environment to
support high density advanced multimedia features. These advanced multimedia
functions include transcoding a variety of video codecs, transrating different
screen sizes and enabling mobile video conferencing of a variety of different
mobile devices.
Mobile Video: We offer Dialogic® Vision™ gateways that can connect SIP-based
video and multimedia services to both voice-only and video/3G enabled mobile
devices. The ability of these gateways to simultaneously support video and
voice-only calls simplifies the routing and switch logic needed to support video
and voice services.
Our Legacy products and solutions serve the TDM only markets. While all networks
are moving to IP or mobile based networks, TDM networks still exist and will
continue to exist for many years. As such, there will continue to be demand,
albeit decreasing demand, for the TDM products to connect to these existing
networks. Our Legacy products are offered via an array of traditional network
and/or media processing boards that range from two-port analog interface boards
to octal span T1/E1 media and network interface boards. These products connect
to and interact with an enterprise or service provider based circuit switched
network, and support a suite of media processing features, including echo
cancellation, DTMF detection, voice play and record, conferencing, fax, modem
and speech integration. The boards are grouped into four media board families,
i.e., Dialogic® Media and Network Interface boards with various architectures,
Dialogic® Diva® Media Boards, Dialogic ® CG Series Media Boards and Dialogic®
Brooktrout® Fax Boards.
We have expanded upon our experience with voice solutions to include data and
video. We believe that the continued demand for services by mobile users will
drive increasing demand for bandwidth and, as a result, we have continued to
invest in data optimization products for our portfolio to enable mobile
operators to expand their bandwidth in the mobile backhaul access portion of the
network. We are also actively expanding products enabling video applications to
mobile devices. Our customers and partners are
24--------------------------------------------------------------------------------
Table of Contents
increasingly adding video to value-added service application and our products
support key video codecs, perform video transcoding and transrating functions
from one codec type to another, and enable video play/record and video
conferencing. We also support the new voice functionality such as high
definition voice codecs.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial position and results of
operations is based upon the consolidated financial statements, which have been
prepared in accordance with U.S. GAAP pursuant to the rules and regulations of
the Securities and Exchange Commission, or SEC. The preparation of these
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. We
base our estimates on historical experience, knowledge of current conditions and
beliefs of what could occur in the future given available information. If actual
results differ significantly from management's estimates and projections, there
could be a material effect on our financial statements. Certain
reclassifications have been made to prior periods to conform to the current
presentation.
As of September 30, 2012, our significant accounting policies and estimates,
which are detailed in our Annual Report on Form 10-K for the year ended
December 31, 2011, have not changed except for the following.
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming that we will continue as a going concern. For the nine months
ended September 30, 2012, we incurred a net loss of $33.1 million and cash used
in operating activities was $7.9 million. As of September 30, 2012, our cash and
cash equivalent balance was $2.7 million, of which $2.2 million was held by
subsidiaries outside the U.S. and could be subject to tax implications if
repatriated to the U.S. As of September 30, 2012, current bank indebtedness was
$10.7 million and debt with related parties, net of discount, was $64.2 million.
Based on our current plans and business conditions, we believe that our existing
cash and cash equivalents, expected cash generated from operations and available
credit facilities will be sufficient to satisfy our anticipated cash
requirements through 2012. We will need to either raise additional funding to
fund future operations or to implement a business plan where cash flow will
fully fund operations. However, there is no assurance that additional funding
will be available to us on acceptable terms on a timely basis, if at all, or
that we will achieve profitable operations. If we are unable to raise additional
capital to fund our operations, we will need to curtail planned activities and
to reduce costs. Doing so may affect our ability to operate effectively.
On March 22, 2012, we amended the second amended and restated credit agreement
dated October 1, 2010, or the Term Loan Agreement with Obsidian, LLC, as agent,
and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC,
and Tennenbaum Opportunities Partners V, LP, as lenders, or the Term Lenders,
which extended the maturity date to March 31, 2015, reduced the stated interest
rate to 10% from 15% and revised the financial covenants. On April 11, 2012,
$33.0 million of outstanding debt (face value) under the Term Loan Agreement and
$5.0 million of outstanding stockholder loans, or the Stockholder Loans were
cancelled in exchange for convertible promissory notes, or the Notes, which
Notes were converted into approximately 8.0 million shares of our common stock
on August 8, 2012. These actions were determined to be a troubled debt
restructuring and were taken to improve our liquidity, leverage and future
operating cash flow. We also took certain restructuring action during the nine
months ended September 30, 2012, designed to improve our future operating
performance.
We are required to meet certain financial covenants under the Term Loan
Agreement, including minimum EBITDA (as adjusted), minimum liquidity, minimum
interest coverage ratio and maximum consolidated total leverage ratio, each
beginning in the quarter ending June 30, 2013. Specifically, the EBITDA (as
adjusted) covenant requires $16.9 million of EBITDA (as adjusted) for the four
quarters ending June 30, 2013. In the event that forecasts of EBITDA (as
adjusted) are reduced from anticipated levels, the covenants may not be met and
we would be required to reclassify its long-term debt under the Term Loan
Agreement to current liabilities on the consolidated balance sheet.
If future covenant or other defaults occur under the Term Loan Agreement or
under the Revolving Credit Agreement with Wells Fargo Foothill Canada ULC, or
the Revolving Credit Lender, we do not anticipate having sufficient cash and
cash equivalents to repay the debt under these agreements should it be
accelerated and would be forced to restructure these agreements and/or seek
alternative sources of financing. There can be no assurances that restructuring
of the debt or alternative financing will be available on acceptable terms or at
all. In the event of an acceleration of our obligations under the Revolving
Credit Agreement or Term Loan Agreement and our failure to pay the amounts that
would then become due, the Revolving Credit Lender and Term Loan Lenders could
seek to foreclose on our assets, as a result of which we would likely need to
seek protection under the provisions of the U.S. Bankruptcy Code and/or its
affiliates might be required to seek protection under the provisions of
applicable bankruptcy codes. In that event, we could seek to reorganize its
business or the Company or a trustee appointed by the court could be required to
liquidate its assets. In either of these events, whether the stockholders
receive any value for their shares is highly uncertain. If we needed to
liquidate its assets, we might realize significantly less from them than the
value that could be obtained in a transaction outside of a bankruptcy
proceeding. The funds resulting from the liquidation of its assets would be used
first to pay off the debt owed to secured creditors, including the Term Lenders
and the Revolving Credit Lender, followed by any unsecured creditors such as the
convertible promissory notes, before any funds would be available to pay its
stockholders. If the Company is required to liquidate under the federal
bankruptcy laws, it is unlikely that stockholders would receive any value for
their shares.
In order for us to meet the debt repayment requirements under the Term Loan
Agreement and the Revolving Credit Agreement, we will need to raise additional
capital by refinancing its debt, raising equity capital or selling assets.
Uncertainty in future credit markets may negatively impact our ability to access
debt financing or to refinance existing indebtedness in the future on favorable
25
--------------------------------------------------------------------------------
Table of Contents
terms, or at all. If additional capital is raised through the issuance of debt
securities or other debt financing, the terms of such debt may include different
financial covenants, restrictions and financial ratios other than what we
currently operate under. Any equity financing transaction could result in
additional dilution to our existing stockholders.
Results of Operations (amounts in 000's)
Comparison of Three Months Ended September 30, 2012 and September 30, 2011
Revenue
Three Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
(USD and $000's) Amount Revenue Amount Revenue Amount Percentage
Revenue:
Products $ 32,140 76 % $ 36,604 77 % $ (4,464 ) (12 )%
Services 10,251 24 10,817 23 (566 ) (5 )
Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )%
Legacy vs. Next-Gen
Legacy $ 13,527 32 % $ 17,239 36 % $ (3,712 ) (22 )%
Next-Gen 28,864 68 30,182 64 (1,318 ) (4 )
Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )%
Revenue by geography:
Americas $ 17,867 42 % $ 20,445 43 % $ (2,578 ) (13 )%
Europe, Middle East and Africa 13,350 31 16,381 35 (3,031 ) (19 )
Asia Pacific 11,174 27 10,595 22 579 5
Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )%
Revenue
Total revenue of $42.4 million for the three months ended September 30, 2012
decreased by $5.0 million, or 11%, from $47.4 million for the three months ended
September 30, 2011.
Our product revenue was 76% of total revenue at $32.1 million for the three
months ended September 30, 2012, compared to 77% of total revenue, or $36.6
million for the three months ended September 30, 2011, a decrease of $4.5
million, or 12%. The decrease in product revenue is primarily attributable to
project timing and associated revenue recognition of Next-Gen products, as well
as a slower than expected sales of Legacy products, compared to the
corresponding 2011 period.
Our services revenue was 24% of total revenue at $10.3 million for the three
months ended September 30, 2012, compared to 23% of total revenue, or $10.8
million for the three months ended September 30, 2011, a decrease of $0.6
million, or 5%. The decrease in services revenue was the result of
decommissioning of our Legacy products in customer networks, partially offset by
customer expansions and upgrades of our Next-Gen products.
26--------------------------------------------------------------------------------
Table of Contents
Cost of Revenue and Gross Profit
Three Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
Related Related
(USD and $000's) Amount Revenue Amount Revenue Amount Percentage
Cost of Revenues:
Products $ 11,070 34 % $ 13,700 38 % $ (2,630 ) (19 )%
Services 5,118 50 5,358 50 (240 ) (4 )
Total cost of revenues $ 16,188 38 % $ 19,058 40 % $ (2,870 ) (15 )%
Gross Profit:
Products $ 21,070 66 % $ 22,904 62 % $ (1,834 ) (8 )%
Services 5,133 50 5,459 50 (326 ) (6 )
Total gross profit $ 26,203 62 % $ 28,363 60 % $ (2,160 ) (8 )%
Cost of Revenue
Total cost of revenue of $16.2 million for the three months ended September 30,
2012 decreased by 15% or $2.9 million from $19.1 million for the three months
ended September 30, 2011.
Cost of product revenue of $11.1 million for the three months ended
September 30, 2012 decreased by 19% or $2.6 million from $13.7 million for the
three months ended September 30, 2011. The change is primarily attributable to
lower standard product costs, as a result of the decline in volume and a
reduction in salaries and benefits due to the decrease in headcount.
Cost of services revenues of $5.1 million for the three months ended
September 30, 2012 decreased by 4% or $0.2 million from $5.4 million for the
three months ended September 30, 2011, as a result of the decrease in headcount
compared to the corresponding 2011 period. Cost of services includes the direct
costs of customer support and consists primarily of payroll, related benefits
and travel for our support personnel.
Gross Profit
Gross profit of $26.2 million for the three months ended September 30, 2012
decreased by $2.2 million, or 8%, from $28.4 million for the three months ended
September 30, 2011. Gross profit margin increased to 62% of total revenue for
the three months ended September 30, 2012 from 60% of total revenue for the
three months ended September 30, 2011.
For the three months ended September 30, 2012, product gross profit decreased by
8%, or $1.8 million, from $22.9 million for the three months ended September 30,
2011 to $21.1 million for the three months ended September 30, 2012. Gross
profit margin increased from 62% of total product revenue for the three months
ended September 30, 2011 to 66% of total product revenue for the three months
ended September 30, 2012. The decrease in gross profit on product revenue is
primarily a result of an overall decline in product revenue.
For the three months ended September 30, 2012, services gross profit decreased
by 6%, or $0.3 million from $5.5 million for the three months ended
September 30, 2011 to $5.1 million for the three months ended September 30,
2012, due to revenue recognized on a contract for which there were no associated
costs incurred during the period. In the normal course of business, we may
experience fluctuations in our gross profit margin as revenue is recognized on
significant contracts. Gross profit margin remained consistent at 50% for the
three months ended September 30, 2012 and the three months ended September 30,
2011.
27
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Three Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
Amount Revenue Amount Revenue Amount Percentage
Research and development, net $ 9,266 21 % $ 13,540 29 % $ (4,274 ) (32 )%
Sales and marketing 9,261 21 12,664 27 (3,403 ) (27 )
General and administrative 7,375 17 9,391 20 (2,016 ) (21 )
Restructuring charges 457 1 1,674 4 (1,217 ) (73 )
Total operating expenses $ 26,359 61 % $ 37,269 79 % $ (10,910 ) (29 )%
Research and Development Expenses
Research and development expenses of $9.3 million, or 21% of total revenue, for
the three months ended September 30, 2012 decreased by $4.3 million, or 32%,
from $13.5 million, or 29%, of total revenue for the three months ended
September 30, 2011. The change was primarily the result of a decrease in
salaries and benefits of $2.9 million associated with a decrease in departmental
headcount, as the result of our restructuring efforts.
Sales and Marketing
Sales and marketing expenses of $9.3 million, or 21% of total revenue, for the
three months ended September 30, 2012 decreased by $3.4 million, or 27%, from
$12.7 million, or 27% of total revenue for the three months ended September 30,
2011. The change in sales and marketing expenses is primarily attributable to
decreases in salaries and employee benefits of $1.6 million, sales commissions
of $0.1 million, travel and entertainment of $0.2 million and marketing expense
of $0.2 million.
General and Administrative
General and administrative expenses of $7.4 million, or 17% of total revenue,
for the three months ended September 30, 2012 decreased by $2.0 million, or 21%,
from $9.4 million, or 20% of total revenue for the three months ended
September 30, 2011. The change is primarily attributable to decreased expenses
related to consulting fees of $1.5 million and salaries and employee benefits of
$0.3 million.
Restructuring Charges
During 2012 and 2011, we have implemented various cost reduction initiatives to
reduce our overall cost structure including exiting certain facilities and
transitioning work to other locations. Costs incurred in connection with these
actions include employee separation costs, including severance, benefits and
outplacement, lease and facility exit costs, and other expenses in connection
with exit activities.
For the three months ended September 30, 2012, we recorded employee separation
costs and other costs related to employee termination benefits in the amount of
$0.2 million. Substantially, all of these costs are expected to be cash
expenditures. For the three months ended September 30, 2011, the Company
recorded employee separation costs and other costs related to employee
termination benefits in the amount of $1.7 million. As of September 30, 2012 and
December 31, 2011, $1.4 million and $1.4 million, respectively, remained accrued
and unpaid for termination benefits, which are reflected as a component of
accrued liabilities in the accompanying unaudited condensed consolidated balance
sheets.
In an effort to reduce overall operating expenses, we decided it was beneficial
to close or consolidate office space at certain locations. For the three months
ended September 30, 2012, we incurred expense of $0.3 million in lease and
facility exit costs related to our Eatontown, New Jersey location. For the three
months ended September 30, 2011, the Company did not incur expenses related to
lease and facility exits costs. As of September 30, 2012 and December 31, 2011,
we had a liability in the amount of $3.0 million and $2.9 million, respectively,
which was accrued for lease and facility exit costs. As of September 30, 2012,
$0.8 million was reflected as a component of accrued liabilities and $2.2
million was reflected as a component of other non-current liabilities in the
accompanying unaudited condensed consolidated balance sheets. As of December 31,
2011, $0.5 million was reflected as a component of accrued liabilities and $2.4
million was reflected as a component of other non-current liabilities in the
accompanying unaudited condensed consolidated balance sheets.
28--------------------------------------------------------------------------------
Table of Contents
Interest Expense
Interest expense decreased by $2.9 million, or 62%, from $4.7 million for the
three months ended September 30, 2011 to $1.8 million for the three months ended
September 30, 2012. The decrease is primarily attributable to lower interest
rates for the three months ended September 30, 2012 on our Term Loan Agreement,
which decreased from a stated interest rate of 15% to 10%. In addition, the
interest rate on the Revolving Credit Agreement decreased from 5.75% for the
three months ended September 30, 2011 to 4.75% for the three months ended
September 30, 2012.
Change in Fair Value of Warrants
The change in fair value of warrants represented a gain of $1.8 million for the
three months ended September 30, 2012, as a result of a decline in our stock
price from June 30, 2012 to September 30, 2012. There was no such activity in
the corresponding period of 2011, as no warrants were outstanding.
Foreign Exchange Loss net
Foreign exchange loss was $0.3 million for the three months ended September 30,
2012, compared to a loss of $0.1million for the three months ended September 30,
2011.
Income Tax Provision
We recorded an income tax provision of $0.1 million and an income tax benefit of
($0.6) million for the three months ended September 30, 2012 and September 30,
2011, respectively. The tax provision for the three months ended September 30,
2012 was primarily due to current tax expense in our profitable foreign entities
with no corresponding tax attributes. The tax benefit during the three months
ended September 30, 2011 was primarily attributable to a decrease in a reserve
for uncertain tax positions. There was no deferred provision recorded in the
three month periods ended September 30, 2012 or September 30, 2011.
Comparison of Nine Months Ended September 30, 2012 and September 30, 2011
Revenue
Nine Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
(USD and $000's) Amount Revenue Amount Revenue Amount Percentage
Revenue:
Products $ 92,249 76 % $ 118,428 80 % $ (26,179 ) (22 )%
Services 29,808 24 29,644 20 164 1
Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )%
Legacy vs. Next-Gen
Legacy $ 42,830 35 % $ 52,319 35 % $ (9,489 ) (18 )%
Next-Gen 79,227 65 95,753 65 (16,526 ) (17 )
Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )%
Revenue by geography:
Americas $ 55,775 46 % $ 66,310 45 % $ (10,535 ) (16 )%
Europe, Middle East and Africa 39,128 32 50,113 34 (10,985 ) (22 )
Asia Pacific 27,154 22 31,649 21 (4,495 ) (14 )
Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )%
Revenue
Total revenue of $122.1 million for the nine months ended September 30, 2012
decreased by $26.0 million, or 18%, from $148.1 million for the nine months
ended September 30, 2011.
Our product revenue was 76% of total revenues at $92.2 million for the nine
months ended September 30, 2012, compared to 80% of total revenue, or $118.4
million for the nine months ended September 30, 2011, a decrease of $26.2
million, or 22%. The decrease in product revenue is primarily attributable to
project timing and associated revenue recognition of Next-Gen products, as well
as a slower than expected sales of Legacy products, compared to the
corresponding 2011 period.
29
--------------------------------------------------------------------------------
Table of Contents
Our services revenue was 24% of total revenue at $29.8 million for the nine
months ended September 30, 2012, compared to 20% of total revenue, or $29.6
million for the three months ended September 30, 2011, an increase of $0.2
million, or 1%. The increase in services revenue was the result of customer
expansions and upgrades of our Next-Gen products, partially offset by a
decommissioning of our Legacy products in customer networks.
Cost of Revenue and Gross Profit
Nine Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
Related Related
(USD and $000's) Amount Revenue Amount Revenue Amount Percentage
Cost of Revenues:
Products $ 38,038 41 % $ 45,237 38 % $ (7,199 ) (16 )%
Services 15,267 51 16,215 55 (948 ) (6 )
Total cost of revenues $ 53,305 43 % $ 61,452 42 % $ (8,147 ) (13 )%
Gross Profit:
Products $ 54,211 59 % $ 73,191 62 % $ (18,980 ) (26 )%
Services 14,541 49 13,429 45 1,112 8
Total gross profit $ 68,752 57 % $ 86,620 58 % $ (17,868 ) (21 )%
Cost of Revenue
Total cost of revenue of $53.3 million for the nine months ended September 30,
2012 decreased by 13% or $8.2 million from $61.5 million for the nine months
ended September 30, 2011.
Cost of product revenue of $38.0 million for the nine months ended September 30,
2012 decreased by 16% or $7.2 million from $45.2 million for the nine months
ended September 30, 2011. The change is primarily attributable to lower standard
product costs, as a result of the decline in volume and a reduction in salaries
and benefits due to the decrease in headcount, partially offset by a $4.8
million charge during the nine months ended September 30, 2012, of which $4.2
million related to excess and obsolete inventory provision and $0.6 million
related to capitalized overhead.
Cost of services revenues of $15.3 million for the nine months ended
September 30, 2012 decreased by 6% or $0.9 million from $16.2 million for the
nine months ended September 30, 2011. The change is primarily attributable to
the decrease in headcount compared to the corresponding 2011 period. Cost of
services includes the direct costs of customer support and consists primarily of
payroll, related benefits and travel for our support personnel.
Gross Profit
Gross profit of $68.7 million for the nine months ended September 30, 2012
decreased by $17.9 million, or 21%, from $86.6 million for the nine months ended
September 30, 2011. Gross profit margin decreased from 58% of total revenue for
the nine months ended September 30, 2011 to 57% of total revenue for the nine
months ended September 30, 2012.
For the nine months ended September 30, 2012, product gross profit decreased by
26%, or $19.0 million, from $73.2 million for the nine months ended
September 30, 2011 to $54.2 million for the nine months ended September 30,
2012. Gross profit margin decreased from 62% of total product revenue for the
nine months ended September 30, 2011 to 59% of total product revenue for the
nine months ended September 30, 2012. The decrease in gross profit on product
revenue is primarily a result of an overall decline in product revenue, as well
as the charge of $4.8 million related to excess and obsolete inventory and
capitalized overhead, as discussed above.
For the nine months ended September 30, 2012, services gross profit increased by
8%, or $1.1 million from $13.4 million for the nine months ended September 30,
2011 to $14.5 million for the nine months ended September 30, 2012, due to
revenue recognized on a contract for which there were no associated costs
incurred during the period, as well as improved efficiencies gained from our
integration efforts. In the normal course of business, we may experience
fluctuations in our gross margin as revenue is recognized on significant
contracts. Gross profit margin increased from 45% for the nine months ended
September 30, 2011 to 49% for the nine months ended September 30, 2012.
30--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Nine Months Ended September 30,
2012 2011 Period-to-Period Change
% of Total % of Total
Amount Revenue Amount Revenue Amount Percentage
Research and development, net $ 33,459 27 % $ 42,262 29 % $ (8,803 ) (21 )%
Sales and marketing 31,935 26 41,829 28 (9,894 ) (24 )
General and administrative 23,766 19 27,552 19 (3,786 ) (14 )
Restructuring charges 4,760 4 6,421 4 (1,661 ) (26 )
Total operating expenses $ 93,920 76 % $ 118,064 80 % $ (24,144 ) (20 )%
Research and Development Expenses
Research and development expenses of $33.5 million, or 27% of total revenue, for
the nine months ended September 30, 2012 decreased by $8.8 million, or 21%, from
$42.3 million, or 29% of total revenue for the nine months ended September 30,
2011. The decrease was primarily the result of a $6.8 million decrease in
salaries and benefits associated with a decrease in departmental headcount, as
the result of our integration and restructuring efforts.
We expect that research and development expenses on an absolute basis and as a
percentage of total revenue will continue to decrease in 2012, as we continue to
integrate our research and development operations.
Sales and Marketing
Sales and marketing expenses of $31.9 million, or 26% of total revenue, for the
nine months ended September 30, 2012 decreased by $9.9 million, or 24%, from
$41.8 million, or 28% of total revenue for the nine months ended September 30,
2011. The change in sales and marketing expenses is primarily attributable to
decreases in salaries and employee benefits of $4.2 million, sales commissions
of $1.1 million, and travel and entertainment of $1.2 million.
We expect that sales and marketing expenses, on an absolute basis and as a
percentage of total revenue will continue to decrease in 2012, as we continue to
integrate our sales and marketing operations during the year.
General and Administrative
General and administrative expenses of $23.8 million, or 19% of total revenue,
for the nine months ended September 30, 2012 decreased by $3.8 million, or 14%,
from $27.6 million, or 19% of total revenue for the nine months ended
September 30, 2011. The change is primarily attributable to decreased expenses
for consulting fees of $1.9 million and salaries and employee benefits of $1.4
million.
We expect that general and administrative expenses, on an absolute dollar basis
and as a percentage of total revenue, will decrease in 2012 as we continue to
integrate our general and administrative operations during the year and gain
efficiencies in lower overhead and employee costs.
Restructuring Charges
For the nine months ended September 30, 2012, we recorded employee separation
costs and other costs related to employee termination benefits in the amount of
$3.6 million. Substantially, all of these costs are expected to be cash
expenditures. For the nine months ended September 30, 2011, the Company recorded
employee separation costs and other costs related to employee termination
benefits in the amount of $2.8 million. As of September 30, 2012 and
December 31, 2011, $1.4 million and $1.4 million, respectively, remained accrued
and unpaid for termination benefits, which are reflected as a component of
accrued liabilities in the accompanying unaudited condensed consolidated balance
sheets.
In an effort to reduce overall operating expenses, we decided it was beneficial
to close or consolidate office space at certain locations. For the nine months
ended September 30, 2012, we incurred expense of $1.2 million in lease and
facility exit costs related to our Eatontown, New Jersey, Getzville, New York
and Renningen, Germany locations. For the nine months ended September 30, 2011,
the Company incurred expense of $3.6 million related to lease and facility exits
costs for the Company's Salem, New Hampshire and Parsippany, New Jersey
facilities. As of September 30, 2012 and December 31, 2011, we had a liability
in the amount of $3.0 million and $2.9 million, respectively, which was accrued
for lease and facility exit costs. As of September 30, 2012, $0.8 million was
reflected as a component of accrued liabilities and $2.2 million was reflected
as a component of other non-current liabilities in the accompanying unaudited
condensed consolidated balance sheets. As of December 31, 2011, $0.5 million was
reflected as a component of accrued liabilities and $2.4 million was reflected
as a component of other non-current liabilities in the accompanying unaudited
condensed consolidated balance sheets.
31--------------------------------------------------------------------------------
Table of Contents
Interest Expense
Interest expense decreased by $4.4 million or 33%, from $13.2 million for the
nine months ended September 30, 2011 to $8.8 million for the nine months ended
September 30, 2012. The decrease is primarily attributable to lower interest
rates for the nine months ended September 30, 2012 on our Term Loan Agreement,
which decreased from a stated interest rate of 15% to 10%. In addition, the
average interest rate on the Revolving Credit Agreement decreased from 5.75% for
the nine months ended September 30, 2011 to 5.05% for the nine months ended
September 30, 2012.
Change in Fair Value of Warrants
The change in fair value of warrants represented a gain of $2.2 million for the
nine months ended September 30, 2012, as a result of a decline in our stock
price from grant date to September 30, 2012. There was no such activity in the
corresponding period of 2011, as no warrants were outstanding.
Foreign Exchange Loss, net
Foreign exchange loss was $1.0 million for the nine months ended September 30,
2012, compared to a loss of $0.4 million for the nine months ended September 30,
2011.
Income Tax Provision
For the nine months ended September 30, 2012 and September 30, 2011, we recorded
a provision for income taxes of $0.3 million and $0.6 million, respectively. The
tax provision during the nine months ended September 30, 2012 was primarily
attributable to our profitable foreign operations. The tax provision during the
nine months ended September 30, 2011 was primarily attributable to our
profitable foreign operation which was partly offset by a decrease in a reserve
for uncertain tax positions. There was no deferred provision recorded in the
nine month periods ended September 30, 2012 or September 30, 2011.
Financial Position
Liquidity and Capital Resources
As of September 30, 2012, we had cash and cash equivalents of $2.7 million,
compared to $10.4 million of cash and cash equivalents as of December 31, 2011.
Our primary anticipated sources of liquidity are funds generated from
operations, and as required, funds borrowed under the Revolving Credit Agreement
and Term Loan Agreement. As of September 30, 2012, we had borrowed $10.7 million
under our Revolving Credit Agreement. Under the Revolving Credit Agreement, the
unused line of credit totaled $14.3 million, of which $5.1 million was available
to us. Since December 31, 2011, our borrowings decreased by $1.8 million under
the Revolving Credit Agreement and we used net cash in operating activities of
$7.9 million. As of September 30, 2012, availability under the Revolving Credit
Agreement was $5.1 million, compared to $2.4 million as of December 31, 2011. In
addition, during the nine months ended September 30, 2012, we borrowed $4.0
million under the Term Loan Agreement.
During the nine months ended September 30, 2012, we paid $5.3 million to service
the interest payments on the Term Loan and Revolving Credit Agreements.
We monitor and manage liquidity by preparing and updating annual budgets, as
well as monitor compliance with terms of our financing agreements.
We believe that we will continue as a going concern. For the nine months ended
September 30, 2012, we incurred a net loss of $33.1 million and used cash in
operating activities of $7.9 million. As of September 30, 2012, our cash and
cash equivalents was $2.7 million, our bank indebtedness was $10.7 million and
our long-term debt with related parties was $64.2 million, net of discount.
On March 22, 2012, we amended the second amended and restated credit agreement
dated October 1, 2010, or the Term Loan Agreement with Obsidian, LLC, as agent,
and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC,
and Tennenbaum Opportunities Partners V, LP, as lenders, or the Term Lenders,
which extended the maturity date to March 31, 2015, reduced the stated interest
rate to 10% from 15% and revised the financial covenants. On April 11, 2012
$33.0 million of outstanding debt (face value) under the Term Loan Agreement and
$5.0 million of outstanding stockholder loans, or the Stockholder Loans were
cancelled in exchange for convertible promissory notes, or the Notes, which
Notes were converted into 8.0 million shares of our common stock on August 8,
2012. These actions were determined to be a troubled debt restructuring and were
taken to improve our liquidity, leverage and future operating cash flow. We also
took certain restructuring action during the nine months ended September 30,
2012, designed to improve our future operating performance.
32--------------------------------------------------------------------------------
Table of Contents
We are required to meet certain financial covenants under the Term Loan
Agreement, including minimum EBITDA (as adjusted), minimum liquidity, minimum
interest coverage ratio and maximum consolidated total leverage ratio, each
beginning in the quarter ending June 30, 2013. Specifically, the EBITDA covenant
(as adjusted) requires $16.9 million of EBITDA (as adjusted) for the four
quarters ending June 30, 2013. In the event that forecasts of EBITDA (as
adjusted) are reduced from anticipated levels, the covenants may not be met and
we would be required to reclassify its long-term debt under the Term Loan
Agreement to current liabilities on the consolidated balance sheet.
If we should default on any of the covenants contained in the Term Loan and
Revolving Credit Agreements, we do not anticipate having sufficient cash and
cash equivalents to repay the debt should the revolving credit lender and
related party term loan lenders accelerate the maturity dates and we would be
forced to restructure these agreements and/or seek alternative sources of
financing. There can be no assurances that restructuring of the debt or
alternative financing will be available on acceptable terms or at all. This
could harm us by:
• increasing our vulnerability to adverse economic conditions in our
industry or the economy in general;
• requiring substantial amounts of cash to be used for debt servicing,
rather than other purposes, including operations;
• limiting our ability to plan for, or react to, changes in our business and
industry; and
• influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire
customers.
Unfavorable economic and market conditions in the United States and the rest of
world could impact our business in a number of ways, including:
• deferment of purchases and orders by customers;
• negative impact from increased financial pressures on distributors and
resellers of our product; and
• negative impact from increased financial pressures on key suppliers.
In order for us to meet the debt repayment requirements, we will need to raise
additional capital by refinancing our debt, raising equity capital or selling
assets. Uncertainty in future credit markets may negatively impact our ability
to access debt financing or to refinance existing indebtedness in the future on
favorable terms, or at all. If additional capital is raised through the issuance
of debt securities or other debt financing, the terms of such debt may include
different financial covenants, restrictions and financial ratios other than what
we currently operate under. Any equity financing transaction could result in
additional dilution to our existing stockholders.
In the event of an acceleration of the our obligations under the Revolving
Credit Agreement or Term Loan Agreement and our failure to pay the amounts that
would then become due, the Revolving Credit Lender and Term Loan Lenders could
seek to foreclose on our assets, as a result of which we would likely need to
seek protection under the provisions of the U.S. Bankruptcy Code and/or our
affiliates might be required to seek protection under the provisions of
applicable bankruptcy codes. In that event, we could seek to reorganize our
business, or we or a trustee appointed by the court could be required to
liquidate our assets. In either of these events, whether the stockholders
receive any value for their shares is highly uncertain. If we needed to
liquidate our assets, we might realize significantly less from them than the
value that could be obtained in a transaction outside of a bankruptcy
proceeding. The funds resulting from the liquidation of its assets would be used
first to pay off the debt owed to secured creditors, including the Term Lenders,
Revolving Credit Lender followed by any unsecured creditors before any funds
would be available to pay our stockholders. If we are required to liquidate
under the federal bankruptcy laws, it is unlikely that stockholders would
receive any value for their shares.
Based on our current plans and business conditions, we believe that our existing
cash and cash equivalents, expected cash generated from operations and available
credit facilities will be sufficient to satisfy our anticipated cash
requirements during 2012. We will need to either raise additional funding to
fund future operations or to implement a business plan where cash flow will
fully fund operations. However, there is no assurance that additional funding
will be available to us on acceptable terms on a timely basis, if at all, or
that we will achieve profitable operations. If we are unable to raise additional
capital to fund our operations, we will need to curtail planned activities and
to reduce costs. Doing so may affect our ability to operate effectively.
Operating Activities
Net cash used in operating activities of $7.9 million for the nine months ended
September 30, 2012 was primarily attributable to our net loss of $33.1 million,
partially offset by adjustments for non-cash items aggregating to $13.1 million.
Operating assets decreased by $18.4 million and operating liabilities decreased
by $6.4 million. The decrease in operating assets relates to inventory of $9.7
million, accounts receivable of $7.0 million and other current assets of $1.7
million. The decrease in operating liabilities is primarily attributable to
decreases of $5.0 million in accounts payable and accrued liabilities, deferred
revenue of $1.6 million, income taxes payable of $0.7 million and interest
payable of $0.4 million, partially offset by an increase in other long-term
liabilities of $1.4 million.
33
--------------------------------------------------------------------------------
Table of Contents
Net cash used in operating activities of $11.1 million for the nine months ended
September 30, 2011 was primarily attributable to our net loss of $45.6 million,
partially offset by adjustments for non-cash items aggregating to $19.5 million.
Operating assets decreased by $22.9 million and operating liabilities decreased
by $7.8 million. The decrease in operating assets relates to accounts receivable
of $11.8 million, other current assets of $5.1 million and inventory of $5.9
million. The decrease in operating liabilities is primarily attributable to
decreases of $3.0 million in deferred revenue, accounts payable and accrued
liabilities of $4.9 million, and income taxes payable of $0.2 million, partially
offset by an increase in interest payable, related parties of $0.3 million.
Investing Activities
Net cash used in investing activities of $0.5 million for the nine months ended
September 30, 2012 consisted primarily of an increase of $0.5 million related to
restricted cash, offset by $1.0 million related to the purchase of property and
equipment and $0.1 million of intangible asset purchases.
Net cash used in investing activities of $3.5 million for the nine months ended
September 30, 2011 consisted primarily of a decrease of $1.0 million related to
restricted cash, $2.3 million for the purchase of property and equipment, $0.1
million for the purchase of intangible assets and an increase in other assets of
$0.1 million.
Financing Activities
Net cash provided by financing activities of $0.7 million for the nine months
ended September 30, 2012 included $4.0 million in proceeds from our long-term
debt, partially offset by net payments to our Revolving Credit Agreement of $1.8
million and debt issuance costs of $1.5 million.
Net cash used in financing activities of $1.0 million in the nine months ended
September 30, 2011 included $1.2 million in payments on our Revolving Credit
Agreement facility, partially offset by $0.2 million in proceeds from the
exercise of stock options.
Restructuring of Debt Obligations
A troubled debt restructuring is generally the modification of debt in which a
creditor grants a concession it would not otherwise consider to a debtor that is
experiencing financial difficulties. These modifications may include a reduction
of the stated interest rate, an extension of the maturity dates, a reduction of
the face amount or maturity amount of the debt, or a reduction of accrued
interest.
On April 11, 2012, we entered into a Purchase Agreement with accredited
Investors including certain related parties, pursuant to which we issued and
sold $39.5 million aggregate principal amount of the Notes and one share of
Series D-1 Preferred Share, to the Investors in a Private Placement in exchange
for $38.0 million of Term Loans and Stockholder Loans. This exchange of debt was
treated as a "Troubled Debt Restructuring" in accordance FASB ASC 470-60,
"Troubled Debt Restructurings by Debtors," as we had been experiencing financial
difficulty and the lenders granted a concession to us. We assessed the total
future cash flows of the restructured debt as compared to the carrying amount of
the original debt and determined the total future cash flows to be greater than
the carrying amount at the date of the restructuring. Further, the effective
interest rate for both the Term Loans and Stockholders Loans was higher before
the restructuring than subsequent to the restructuring. As such, the carrying
amount was not adjusted and no gain was recorded, consistent with troubled debt
restructuring accounting.
The following table sets forth the carrying amounts of long-term debt prior to
the restructuring on April 11, 2012, and carrying amounts of the long-term debt
upon effecting the modifications described above.
Prior to Subsequent to
Restructuring Restructuring
Term Loan, principal $ 94,093 $ 61,135
Term Loan Debt Discount (7,657 ) (2,530 )
86,436 58,605
Convertible Notes, carrying value - 32,905
- 32,905
Shareholder Loans 5,074 -
Total long-term 91,510 91,510 Accrued interest payable-term loan 260 260
$ 91,770 $ 91,770
34
--------------------------------------------------------------------------------
Table of Contents
The conversion feature embedded in the Notes was not required to be bifurcated
on the restructuring closing date and separately measured as a derivative
liability, as we have sufficient authorized and unissued common shares to
satisfy conversion of the Notes among other criteria that were met. Further,
stockholders owning greater than 50% of our common stock agreed to the
conversion, and as a result, on August 8, 2012, the Notes were converted into
equity.
The Notes
The Investors in the Private Placement include the Term Lenders and the Related
Party Lenders. The Term Lenders purchased $34.5 million aggregate principal
amount of Notes in exchange for the cancellation of (i) $33.0 million in
outstanding principal under the Term Loan Agreement, $3.0 million of which
represents accrued but unpaid interest that was capitalized under the Term Loan
Agreement on March 22, 2012, and (ii) a prepayment premium of $1.5 million
triggered by the cancellation of the outstanding debt described above. The
remaining $5.0 million aggregate principal amount of Notes was purchased by the
holders of the Related Party Lenders in exchange for the cancellation of
outstanding debt.
The Notes had an interest at the rate of 1% per annum, compounded annually, and
were convertible into shares of our common stock, par value $0.001 per share.
The conversion price of the Notes was generally $5.00 per share, except that the
Notes issued to the Term Lenders in exchange for the cancellation of the
Interest Amount had a conversion price of $4.35 per share, in each case as
adjusted for any stock split, reverse stock split, stock dividend,
recapitalization, reclassification, combination or other similar transaction.
Under the terms of the Notes, the principal and all accrued but unpaid interest
automatically converted into shares of Common Stock upon stockholder approval of
the Private Placement, which approval was obtained at the Company's 2012 Annual
Meeting of Stockholders on August 8, 2012.
The Purchase Agreement contains customary representations, warranties, covenants
and closing conditions by, among and for the benefit of the parties thereto. The
Purchase Agreement also provides for indemnification of the Investors in the
event that any Investor incurs losses, liabilities, costs and expenses related
to a breach of the representations and warranties by the Company under the
Purchase Agreement or the other transaction documents or any action instituted
against an Investor or its affiliates due to the transactions contemplated by
the Purchase Agreement or other transaction documents, subject to certain
limitations.
Series D-1 Preferred Stock
On April 11, 2012, we filed a certificate of designation, or Certificate, for
our Series D-1 Preferred Share with the Secretary of State of the State of
Delaware. The Series D-1 Preferred Share was issued and sold to Tennenbaum, or
Holder, in exchange for cancellation of $100 dollars in outstanding principal
under the Term Loan Agreement.
The Certificate authorizes one share of Series D-1 Preferred Share, which is
non-voting and is not convertible into other shares of our capital stock, or
Common Stock. However, following stockholder approval of the Private Placement,
if it occurs, the holder of the Series D-1 Preferred Share has the right to
designate certain members of the Board as follows:
• four directors to the Board (each director to the Board designated and
elected pursuant by the Holder, a "Series D-1 Director", and all such
directors, or the Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least
45% of the then issued and outstanding shares of Common Stock (assuming
(x) the exercise in full of all warrants then exercisable by the Holder
and any affiliates thereof and (z) conversion or exercise, as applicable,
of any other securities of the Company that by their terms are convertible
or exercisable into shares of Common Stock that are held by the Holder,
collectively, or the Fully Diluted Common Stock;
• three Series D-1 Directors at any time while the Holder (together with its
affiliates) beneficially owns in the aggregate at least 30% and less than
45% of the Fully Diluted Common Stock;
• two Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 10% and less than
30% of the Fully Diluted Common Stock; or
• one Series D-1 Director at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least three percent and
less than 10% of the Fully Diluted Common Stock.
The Certificate further provides that we must obtain the Holder's consent to,
among other things, (i) take any action that alters or changes the rights,
preferences or privileges of the Series D-1 Preferred; (ii) convert us into any
other organizational form; (iii) change the size of the Board; (iii) appoint or
remove the chairman of the Board; or (iv) establish, remove or change the
authority of any committee of the Board or appoint or remove members thereof.
The Holder is not entitled to any dividends from us. However, upon any
liquidation, dissolution or winding up excluding the sale of all or
substantially all of the assets or capital stock of us and the merger or
consolidation into or with any other entity or the merger or consolidation of
any other entity into or with us, or a Liquidation Event, the Holder is entitled
to a liquidation preference, prior to any distribution of our assets to the
holders of Common Stock, in an amount equal to $100 payable in cash. After
payment to the Holder of the full preferential amount, the Holder will have no
further right or claim to our remaining assets.
35--------------------------------------------------------------------------------
Table of Contents
The Series D-1 Preferred Share is redeemable for $100 (i) at the written
election of the Holder, or (ii) at the election of us at any time after the
earlier to occur of the following: (x) the Holder (together with its affiliates)
beneficially owns in the aggregate less than three percent (3%) of the Fully
Diluted Common Stock at any time following the stockholder approval of the
Private Placement, if it occurs, or (y) a Liquidation Event.
Off-Balance Sheet Arrangements
At September 30, 2012, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance, special purpose or variable interest entities, which would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. We do not have
any off-balance sheet arrangements that are currently material or reasonably
likely to be material to our consolidated financial position or results of
operations.
Recent Accounting Pronouncements
See Note 2(w) in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on April 16, 2012 for a full description of the recent
accounting pronouncements including the date of adoption and effect on results
of operations and financial condition.
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
