XNAS:TXCC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

  x   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 30, 2012

 

or

 

  ¨   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from              to             

 

Commission File Number 0-25996

 

TRANSWITCH CORPORATION

(Exact name of Registrant as Specified in its Charter)

 

Delaware   06-1236189
(State of Incorporation)   (I.R.S. Employer Identification Number)

 

3 Enterprise Drive

Shelton, Connecticut 06484

(Address of Principal Executive Offices)

 

(203) 929-8810

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    x    No    ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   x    No    ¨                    

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨      Accelerated Filer x  

 

Non-Accelerated Filer (Do not check if a smaller reporting company) ¨      Smaller Reporting Company x

 

Indicate by a check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨    No    x

 

At July 31, 2012, there were 34,317,817 shares of Common Stock, par value $.001 per share, of the Registrant outstanding.

 

 
 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2012

 

Table of Contents

 

  Page
PART I.      FINANCIAL INFORMATION  
       
Item 1.   Consolidated Financial Statements (unaudited)  
       
    Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 3
       
    Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and  2011 4
       
    Condensed Consolidated Statements of Comprehensive Loss for the six months ended June 30, 2012 and 2011 5
       
    Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 6
       
    Notes to Unaudited Condensed Consolidated Financial Statements 7
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
       
Item 3.   Quantitative and Qualitative Disclosures about Market Risk 26
       
Item 4.   Controls and Procedures 26
       
PART II.    OTHER INFORMATION  
       
Item 1.   Legal Proceedings 26
       
Item 1A.   Risk Factors 26
       
Item 4   Mine Safety Disclosures 27
       
Item 6.   Exhibits 28
       
    Signatures 29

 

2
 

 

PART I.FINANCIAL INFORMATION

 

Item 1.CONSOLIDATED Financial Statements

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

 

   June 30,
2012
   December 31,
2011
 
ASSETS          
Current assets:          
Cash and cash equivalents  $3,150   $5,453 
Restricted cash   88    98 
Short-term investments   -    2,003 
Accounts receivable, (net of allowance for doubtful accounts of $186 at June 30, 2012 and $207 at December 31, 2011)   3,144    6,375 
Inventories, net   1,396    1,988 
Prepaid expenses and other current assets   1,752    1,876 
Total current assets   9,530    17,793 
           
Property and equipment, net   1,210    1,355 
Goodwill   5,271    5,271 
Other intangible assets, net   1,306    1,461 
Investments in non-publicly traded companies   336    306 
Other assets   1,527    1,432 
           
Total assets  $19,180   $27,618 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Credit facility  $713   $- 
Accounts payable   1,810    2,272 
Accrued expenses and other current liabilities   11,182    10,655 
Total current liabilities   13,705    12,927 
           
Restructuring liabilities   1,915    2,485 
Total liabilities   15,620    15,412 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock, $.001 par value: 47,500,000 shares authorized; 32,554,880 and 30,633,302 shares issued at June 30, 2012 and December 31, 2011, respectively; 32,534,086 and 30,612,508 shares outstanding at June 30, 2012 and December 31, 2011, respectively   33    31 
Additional paid-in capital   414,220    410,551 
Accumulated other comprehensive loss – currency translation   (301)   (64)
Common stock held in treasury (20,794 shares), at cost   (118)   (118)
Accumulated deficit   (410,274)   (398,194)
Total stockholders’ equity   3,560    12,206 
Total liabilities and stockholders’ equity  $19,180   $27,618 

 

See accompanying notes.

 

3
 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(unaudited)

 

   Three Months Ended 
June 30,
   Six Months Ended 
June 30,
 
   2012   2011   2012   2011 
Net revenues:                    
Product revenues  $2,374   $4,016   $5,536   $9,827 
Service revenues   1,451    3,037    1,970    5,453 
Total net revenues   3,825    7,053    7,506    15,280 
Cost of revenues:                    
Cost of product revenues   866    1,305    1,985    3,085 
Provision for excess and obsolete inventories   220    -    451    160 
Cost of service revenues   175    1,034    336    2,038 
Total cost of revenues   1,261    2,339    2,772    5,283 
Gross profit   2,564    4,714    4,734    9,997 
Operating expenses:                    
Research and development   4,678    4,490    9,014    9,055 
Marketing and sales   1,317    2,076    2,959    4,064 
General and administrative   1,930    1,915    4,062    3,774 
Restructuring charges, net   1,001    -    1,001    467 
Reversal of accrued royalties, net   (442)   (825)   (500)   (1,575)
Total operating expenses   8,484    7,656    16,536    15,785 
Operating loss   (5,920)   (2,942)   (11,802)   (5,788)
Other income (expense):                    
Other income (expense)   57    (8)   (44)   (13)
Interest:                    
Interest income   17    68    40    92 
Interest expense   (32)   (68)   (41)   (193)
Interest expense, net   (15)   -    (1)   (101)
Total other income (expense), net   42    (8)   (45)   (114)
Loss before income taxes   (5,878)   (2,950)   (11,847)   (5,902)
Income taxes   119    49    233    246 
Net loss  $(5,997)  $(2,999)  $(12,080)  $(6,148)
                     
Basic and diluted loss per common share:                    
Net loss per common share  $(0.19)  $(0.11)  $(0.39)  $(0.24)
Weighted average common shares outstanding – basic and diluted   31,617    26,853    31,151    25,263 

 

See accompanying notes.

 

4
 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHSIVE LOSS

(In Thousands)

(unaudited)

 

   Three Months Ended 
June 30,
   Six Months Ended 
June 30,
 
   2012   2011   2012   2011 
                 
Net loss  $(5,997)  $(2,999)  $(12,080)  $(6,148)
                     
Other comprehensive loss:                    
Foreign currency translation adjustment   (292)   (29)   (237)   (52)
                     
Comprehensive loss  $(6,289)  $(3,028)  $(12,317)  $(6,200)

 

5
 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

   Six Months Ended
June 30,
 
   2012   2011 
Operating activities:          
Net loss  $(12,080)  $(6,148)
           
Adjustments to reconcile net loss to net cash used by operating activities:          
Depreciation and amortization   349    1,095 
Amortization of deferred financing fees   27    36 
Provision for excess and obsolete inventories   451    160 
Benefit from allowance for doubtful accounts   (21)   (129)
Non-cash restructuring charges, net   1,001    467 
Stock-based compensation expense   918    1,333 
Accrued royalty reversals, net   (500)   (1,575)
Loss on retirement of property and equipment   118    - 
Changes in operating assets and liabilities:          
Accounts receivable   3,252    560 
Inventories   141    516 
Prepaid expenses and other assets   1    (370)
Accounts payable   (462)   141 
Accrued expenses and other current liabilities   97    49 
Restructuring liabilities   (641)   (480)
           
Net cash used by operating activities   (7,349)   (4,345)
           
Investing activities:          
Capital expenditures   (159)   (343)
Investments in non-publicly traded companies   (30)   (26)
Decrease in restricted cash   10    444 
Purchases of short and long-term investments   -    (6,633)
Proceeds from sales and maturities of short-term investments   2,003    973 
           
Net cash provided (used) by investing activities   1,824    (5,585)
           
Financing activities:          
Issuance of common stock under employee stock plans   100    236 
Proceeds from issuance of common stock, net of fees   2,652    16,075 
Principal payments on 5.45% Convertible Notes due 2011   -    (2,502)
Net borrowings on credit facility   713    - 
           
Net cash provided by financing activities   3,465    13,809 
Effect of exchange rate changes on cash and cash equivalents   (243)   (50)
           
Change in cash and cash equivalents   (2,303)   3,829 
Cash and cash equivalents at beginning of period   5,453    6,280 
Cash and cash equivalents at end of period  $3,150   $10,109 

 

See accompanying notes.

 

6
 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.Description of Business

 

TranSwitch Corporation was incorporated in Delaware on April 26, 1988 and is headquartered in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries (collectively, “TranSwitch” or the “Company”) designs, develops and supplies innovative integrated circuit (IC) and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications.  The Company provides integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for Fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures. For the customer-premises market, the Company offers interoperable connectivity solutions that provide a bridge between HDMI and DisplayPort and enable the distribution and presentation of high-definition (HD) content for consumer electronics, and personal computer markets and also provide a family of communications processors that provide best-in-class performance for a range of applications.  

 

Liquidity

 

The Company has incurred significant operating losses and has used cash in its operating activities for the past several years. Operating losses have resulted from inadequate sales levels for the cost structure. As of June 30, 2012, the Company has negative working capital of approximately $4.2 million. In addition, the Company has outstanding indebtedness to Bridge Bank under its lending facility of $0.7 million.

 

The Company’s current forecast projects that, absent an infusion of capital, it will be unable to meet its current obligations through June 30, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

In July of 2012, the Company announced a restructuring which primarily affected the telecom product unit and is expected to save $8.0 million in annual operating costs (see Note 12 Restructuring charges). The Company also effectuated restructurings in the first and third quarters of 2011. The Company continues to assess its cost structure in relationship to its revenue levels, which may necessitate further expense reductions. 

 

As with any operating plan, there are risks associated with the Company’s ability to execute it, including the current economic environment in which it operates. Therefore, there can be no assurance that the Company will be able to satisfy its obligations, or achieve the operating improvements as contemplated by the current operating plan. If the Company is unable to execute this plan, it will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. There can be no assurance that the additional funding sources will be available to the Company at favorable rates or at all. If the Company cannot maintain compliance with its covenant requirements on its bank financing facility or cannot obtain appropriate waivers and modifications, the lenders may call the debt. If the debt is called, the Company would need to obtain new financing and there can be no assurance that the Company will be able to do so. If the Company is unable to achieve its operating plan and maintain compliance with its loan covenants and its debt is called, the Company will not be able to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current year presentation.

 

Concentrations of Credit Risk and Significant Customers

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short term investments and accounts receivable.

 

Cash and cash equivalents are held by high-quality financial institutions, thereby reducing credit risk concentrations. In addition, the Company limits the amount of credit exposure to any one financial institution.

 

Short-term investments consisted of government and corporate bonds which are all due within one year. Such investments were classified as held-to-maturity. Held-to-maturity securities are those securities which the Company has both the ability and intent to hold to maturity. Held-to-maturity securities were stated at amortized cost. Amortized cost and accrued interest approximate market value.

 

7
 

 

At June 30, 2012 and December 31, 2011, approximately 49% and 59% of accounts receivable were due from five customers. The majority of the Company’s sales are to customers in the telecommunications and data communications industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

 

Customers that accounted for more than 10% of total accounts receivable at each period end follow:

 

   June 30,
2012
   December 31, 
2011
 
         
Customer A   12%   *
Customer B   11%   10%
Customer C   *   17%
Customer D   *   15%

 

* Accounts receivable due were less than 10% of the Company’s total accounts receivable.

 

Note 2.Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of TranSwitch have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. These condensed consolidated financial statements are prepared on a consistent basis with, and should be read in conjunction with, the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2011, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2012. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments that are necessary for a fair presentation. The results of operations for any interim period are not necessarily indicative of the results that may be achieved for the full year.

 

Note 3.Short-term Investments

 

The Company had no short-term investments as of June 30, 2012. The following table summarizes the Company’s held-to-maturity investments as of December 31, 2011 (in thousands):

 

   Amortized Cost   Gross
Unrealized
Gains
   Gross 
Unrealized
Losses
   Fair Value 
                 
Corporate debt securities  $1,525   $20   $(12)  $1,533 
                     
Municipal securities   478    7    (1)   484 
                     
Total  $2,003   $27   $(13)  $2,017 

 

8
 

 

Note 4.New Accounting Standards

 

Recently Issued Standards

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amendments result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRSs”). ASU 2011-04 was effective on January 1, 2012 for the Company and the adoption did not have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. For interim periods, issuers are only required to provide a total of comprehensive income. These amendments do not change the items that must be reported in other comprehensive income. The Company adopted ASU 2011-05 effective January 1, 2012 and elected the two-statement approach.

 

The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its interim condensed consolidated financial statements.

 

Note 5.Fair Value Measurements

 

Current literature establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets and liabilities in active markets that the Company has the ability to access.

 

Level 2: Inputs to the valuation methodology include:

·Quoted prices for similar assets or liabilities in active markets;
·Quoted prices for identical or similar assets or liabilities in inactive markets;
·Inputs other than quoted prices that are observable for the asset or liability;
·Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also considers nonperformance risk in the overall assessment of fair value.

 

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

As of June 30, 2012, the Company’s financial assets were investments in non-publicly traded companies. The Company considers net realizable value for its investments in non-publicly traded companies for purposes of determining asset impairment losses.

 

The carrying amounts for cash equivalents, accounts receivable and accounts payable approximate fair value due to their immediate or short-term time to maturity. The fair value of short-term investments was zero as of June 30, 2012 and $2.0 million as of December 31, 2011. The short-term investment values are based on a Level 2 valuation technique.

 

9
 

 

Note 6.Stock-Based Compensation

 

The amount of the stock-based compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

 

Stock-based compensation expense follows (in thousands):

 

   Three Months Ended
June 30
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
Cost of Sales  $(14)  $16   $(8)  $37 
Research and Development   78    218    198    429 
Marketing and Sales   39    122    150    250 
General and Administration   283    295    578    617 
Total Stock-Based Compensation  $386   $651   $918   $1,333 

 

During the three months ended June 30, 2012, 567,955 restricted stock units ("RSUs”) were granted, 346,952 RSUs were released, and 27,658 RSUs were canceled or forfeited, or expired. During the same three months, there were no stock options granted or exercised, and 73,990 stock options were canceled or forfeited or expired.

 

During the six months ended June 30, 2012, 591,785 restricted stock units ("RSUs”) were granted, 405,998 RSUs were released, and 52,447 RSUs were canceled or forfeited, or expired. During the same six months, there were no stock options granted. 14,684 stock options were exercised, and 150,936 stock options were canceled or forfeited or expired.

 

Note 7.Loss Per Common Share

 

Basic net loss per common share and diluted net loss per common share are computed using the weighted average common shares outstanding for the respective periods. All “in-the-money” stock options and RSUs for the three and six months ended June 30, 2012 and 2011, respectively, were anti-dilutive and were excluded from the calculation of diluted net loss per share for each period presented.

 

Note 8.Restricted Cash

 

The Company’s liquidity is affected by restricted cash balances of approximately $0.1 million as of June 30, 2012 and December 31, 2011, which are included in current assets and are not available for general corporate use. The Company has pledged these restricted cash accounts as collateral for stand-by letters of credit that support customer credit requirements. 

 

Note 9.Inventories

 

The components of inventories follow:

 

(in thousands)  June 30,   
2012
   December 31,
2011
 
         
Work-in-process and raw materials  $172   $488 
           
Finished goods   1,224    1,500 
           
Total inventories  $1,396   $1,988 

 

During the three months ended June 30, 2012 and 2011, gross profit was affected favorably in the amount of less than $0.1 million and $0.1 million, respectively, from the sales of products that had previously been written down. During the six months ended June 30, 2012 and 2011, gross profit was affected favorably in the amount of less than $0.1 million and $0.1 million, respectively, from the sales of products that had previously been written down.

 

10
 

 

Note 10.  Other Intangible Assets, net

 

Information about other intangible assets follows:

 

   Other Intangible Assets 
   Developed
Technology
   Customer
Relationships
   Total 
             
Balances at June 30, 2012               
Cost  $1,974   $5,158   $7,132 
Accumulated amortization   (1,661)   (4,165)   (5,826)
   $313   $993   $1,306 
                
Balances at December 31, 2011               
Cost  $1,974   $5,158   $7,132 
Accumulated amortization   (1,585)   (4,086)   (5,671)
   $389   $1,072   $1,461 

 

Amortization expense related to “other intangible assets” for the three months ended June 30, 2012 and 2011 was $0.1 million and $0.4 million, respectively. Amortization expense for the six months ended June 30, 2012 and 2011 was $0.2 million and $0.8 million, respectively. Future estimated aggregate amortization expense for such assets as of June 30, 2012 follows: 2012 (remaining six months) - $0.1 million; 2013 - $0.3 million; 2014 - $0.2 million; 2015 - $0.2 million; 2016 - $0.2 million; 2017 - $0.2 million; and thereafter - $0.1 million.

 

Note 11.  Accrued Expenses and Other Current Liabilities

 

The components of accrued expenses and other current liabilities follow:

 

   June 30,   December 31, 
(in thousands)  2012   2011 
Accrued expenses and other current liabilities  $2,967   $3,162 
Accrued royalties   1,946    2,536 
Accrued compensation and benefits   3,255    2,813 
Restructuring liabilities   2,925    1,995 
Deferred revenue   89    149 
           
Total accrued expenses and other current liabilities  $11,182   $10,655 

 

The Company periodically evaluates any contingent liabilities in connection with any payments to be made for any potential intellectual property infringement asserted or unasserted claims. The Company’s accrued royalties as of June 30, 2012 and December 31, 2011 represent the contingent payments for asserted or unasserted claims that are probable of assertion as of the respective balance sheet dates based on the applicable patent law.

 

Note 12.  Restructuring Charges

 

During the six months ended June 30, 2012, the Company recorded a net restructuring charge of approximately $1.0 million. The Company implemented a restructuring plan in the second quarter of 2012 that included a workforce reduction of approximately 64 positions primarily in the Company’s Bangalore, India, New Delhi, India, Fremont, California, Shelton, Connecticut, and European locations. The Company recorded restructuring charges of approximately $1.1 million related to employee termination benefits and approximately $0.2 million related to facilities costs. These new restructuring charges were partially offset by approximately $0.3 million of a restructuring benefit that was an adjustment to a prior restructuring charge for a facility lease obligation in Shelton, Connecticut.

 

11
 

 

A summary of the restructuring liabilities and activity for the six months ended June 30, 2012 follows (in thousands):

 

   Restructuring
Liabilities
December 31,
2011
   Restructuring
Charges
   Cash Payments, net
of Receipts on
Sublease Activity
  

Non-cash

Items

   Adjustments
and Changes
in Estimates
   Restructuring
Liabilities
June 30,
2012
 
                         
Employee termination benefits  $753   $1,144   $(314)  $   $   $1,583 
                               
Facility lease costs   3,727    183    (327)       (326)   3,257 
                               
Totals  $4,480   $1,327   $(641)  $   $(326)  $4,840 

 

During the six months ended June 30, 2011, the Company recorded a net restructuring charge of approximately $0.5 million. The Company implemented a restructuring plan in the first quarter of 2011 that included a workforce reduction of approximately 26 positions primarily in the Company’s Fremont, California, New Delhi, India and Bangalore, India locations. The restructuring charges are primarily for employee termination benefits.

 

Note 13.  Investments in Non-Publicly Traded Companies

 

The Company owns a 3% limited partnership interest in Neurone II, a venture capital fund organized as a limited partnership and a 0.42% limited partnership interest in Munich Venture Partners Fund.  The Company accounts for these investments at cost.  The financial condition of these partnerships is subject to significant changes resulting from their operating performance and their ability to obtain financing.  The Company continually evaluates its investments in these companies for impairment. In making this judgment, the Company considers the investee’s cash position, projected cash flows (both short-term and long-term), financing needs, most recent valuation data, the current investing environment, management/ownership changes, and competition. This evaluation process is based on information that the Company requests from these privately held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary.

 

For the three and six months ended June 30, 2012 and 2011, there were no impairment charges related to the Company’s investments in non-publicly traded companies. Also, the Company made additional investments of less than $0.1 million during the six months ended June 30, 2012 and 2011. 

 

Note 14.  Credit Facility

 

On April 4, 2011, the Company entered into an Amended and Restated Business Financing Agreement (the “Amended Financing Agreement”) with Bridge Bank N.A. (“Bridge Bank”) which amended and restated its existing credit facility. The Amended Financing Agreement provides a credit facility to the Company of up to $5.0 million which bears interest at the higher of (i) the prime rate plus 2.0% or (ii) 5.25% percent, plus the payment of certain fees and expenses (the “Facility”). The Facility is secured by substantially all the personal property of the Company, including its accounts receivable and intellectual property. Subject to the terms of the Amended Financing Agreement, availability under the Facility is based on a formula pursuant to which Bridge Bank would advance an amount equal to the lower of $5.0 million or 80% of the Company’s eligible accounts receivable, with account eligibility and advance rates determined by Bridge Bank in its sole discretion. The term of the Facility is two years and at the expiration of such term, all loan advances under the Facility will become immediately due and payable. Under this facility, the Company had outstanding borrowings of $0.7 million at June 30, 2012 and zero at December 31, 2011.

 

12
 

 

Note 15.  Supplemental Cash Flow Information

 

Supplemental cash flow information follows:

 

(in thousands)  Six Months Ended
June 30,
 
   2012   2011 
         
Cash paid for interest  $27   $101 
           
Cash paid for income taxes  $186   $125 

 

Note 16.  Issuance of Common Stock

 

Registered Direct Offering:

 

On May 8, 2012, the Company entered into a Securities Purchase Agreement dated May 8, 2012 (the “Investor Purchase Agreement”) with certain purchasers to sell 1,315,000 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for gross proceeds of $2,445,900 (the “Investor Offering”). The purchase price for each share of Common Stock was $1.86.

 

On May 8, 2012, the Company also entered into a Securities Purchase Agreement dated May 8, 2012 (the “Director and Officer Purchase Agreement”) with certain of the Company’s directors and officers to sell up to 161,150 shares of the Company’s Common Stock, for gross proceeds of $333,580 (the “Director and Officer Offering” and together with the Investor Offering, the “Registered Direct Offering”). The purchase price for each share of Common Stock in the Director and Officer Offering was $2.07.

 

The shares sold in the Registered Direct Offering were registered pursuant to a prospectus supplement dated May 8, 2012 and an accompanying prospectus dated October 21, 2009, pursuant to the Company’s effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “Commission”) on October 21, 2009 and declared effective by the Commission on October 28, 2009.

 

The net proceeds to the Company from the Registered Direct Offering, after deducting the Company’s offering expenses, were $2.7 million.

 

At Market Offering:

 

On February 10, 2012, the Company entered into an At Market Issuance Sales Agreement (the “Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which the Company could issue and sell shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 (the “Shares”) from time to time through MLV (the “Offering”). Also on February 10, 2012, the Company filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering (the “Prospectus Supplement”). The shares of common stock to be sold under the Agreement were registered pursuant to an effective shelf Registration Statement on Form S-3 (Registration No. 333-162609) and the Prospectus Supplement.

 

Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, MLV could sell the common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on The NASDAQ Capital Market, on any other existing trading market for the common stock or to or through a market maker.

 

The Company agreed to pay MLV a commission equal to 3.0% of the gross sales price per share sold and provide indemnification and contribution to MLV against certain civil liabilities, including liabilities under the Securities Act.

 

During the three and six months ended June 30, 2012, no shares were issued under the Agreement. Between July 1, 2012 and July 13, 2012, the Company issued and sold 363,343 shares under this agreement for net proceeds of $0.4 million.

 

On July 13, 2012, the Company delivered to MLV notice of termination of the Agreement, which termination became effective July 23, 2012.

 

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Note 17.  Income Taxes

 

The provision for income taxes for the three months ended June 30, 2012 and 2011 was $0.1 million and $0.1 million, respectively. The provision for income taxes for the six months ended June 30, 2012 and 2011 was $0.2 million and $0.2 million, respectively. The provision for income taxes relates to certain of TranSwitch’s subsidiaries located in foreign jurisdictions. The effective income tax rate differs from the U.S. federal statutory rate for the periods presented primarily due to foreign income taxes, increases in the valuation allowance for domestic deferred income tax assets, and additional reserves for uncertain tax positions recorded during the quarter.

 

During the three and six months ended June 30, 2012 and 2011, we evaluated our deferred income tax assets as to whether it is “more likely than not” that the deferred income tax assets will be realized. In our evaluation of the realizability of deferred income tax assets, we consider projections of future taxable income, the reversal of temporary differences and tax planning strategies. We have evaluated the realizability of the deferred income tax assets and have determined that it is “more likely than not” that all of the deferred income tax assets will not be realized. Accordingly, a valuation allowance was recorded for all of our domestic net deferred income tax assets. In future periods, we will not recognize a deferred tax benefit and will maintain a deferred tax valuation allowance until we achieve sustained U.S. taxable income. Additionally, in the future, we expect our current income tax expense to be related to taxable income generated by our foreign subsidiaries.

 

The Company is required to make a determination of any of its tax positions (federal and state) for which the sustainability of the position, based upon the technical merits, is uncertain. The Company regularly evaluates all tax positions taken and the likelihood of those positions being sustained. If management is highly confident that the position will be allowed and there is a greater than 50% likelihood that the full amount of the tax position will be ultimately realized, the company recognizes the full benefit associated with the tax position. Additionally, interest and penalties related to uncertain tax positions are included as a component of income tax expense.

 

Note 18.  Evaluation of Subsequent Events

 

Common Stock Purchase Agreement with Aspire Capital:

 

On July 16, 2012, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire”) to purchase up to an aggregate of $11.0 million of shares of the Company’s common stock over the two-year term of the Purchase Agreement. Under the Purchase Agreement, Aspire made an initial purchase of 990,099 shares for the purchase price of $1,000,000.  During the term of the Purchase Agreement, the Company can direct Aspire to purchase up to 50,000 shares per business day at a price equal to the lower of (i) the lowest sale price for the Company’s common stock on the date of sale or (ii) the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the 12 consecutive business days ending on the business day immediately preceding the date of sale.

 

In addition, on any business date that the Company directs Aspire to purchase 50,000 shares, the Company also has the right to direct Aspire to purchase an amount of the Company’s common stock equal to a percentage (not to exceed 15%, which limitation may be increased to 30% by mutual agreement) of the aggregate shares of common stock traded on the next business day, subject to a maximum number of shares determined by the Company. Subject to certain limitations, the purchase price for these shares shall be the lower of (i) the closing sale price on the date of sale or (ii) ninety-five percent (95%) of the next business day’s volume weighted average price.  The Company has the right to determine a maximum number of shares and set a minimum market price threshold for each purchase.

 

In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Aspire dated July 16, 2012.  The Registration Rights Agreement provides, among other things, that the Company will register the sale of the shares sold to Aspire.  In accordance with the Registration Rights Agreement, the sale of the shares to Aspire is being made pursuant to a prospectus supplement dated July 17, 2012 and an accompanying prospectus dated October 21, 2009, under the Company’s Registration Statement on Form S-3 (File No. 333-162609), filed with the Securities and Exchange Commission on October 21, 2009, as amended and supplemented from time to time (the “Registration Statement”).  The Company further agreed to keep the Registration Statement effective and to indemnify Aspire for certain liabilities in connection with the sale of the shares under the terms of the Registration Rights Agreement.

 

In addition to the initial purchase of 990,099 shares, Aspire has purchased 100,000 shares under the Purchase Agreement for net proceeds to the Company of $0.1 million.

 

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Termination of at Market Issuance Sales Agreement with MLV & Co. LLC

 

On July 13, 2012, the Company delivered to MLV & Co. LLC (“MLV”) notice of termination of the At Market Issuance Sales Agreement between the Company and MLV, which termination became effective July 23, 2012. Between July 1, 2012 and July 13, 2012, the Company issued and sold 363,343 shares under this agreement for net proceeds to the Company of $0.4 million.

 

Subsequent events have been evaluated through the date the accompanying condensed consolidated financial statements were issued.

 

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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis in conjunction with our unaudited interim condensed consolidated financial statements and the related notes thereto contained in Part 1, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2011 and Quarterly Reports on Form 10-Q filed subsequently thereto. 

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains, and any documents incorporated herein by reference may contain, forward-looking statements that involve risks and uncertainties. When used in this document, the words, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “expect” and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements as a result of risk factors including those set forth in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011 and our other Quarterly Reports on Form 10-Q filed subsequently thereto.

 

COMPANY OVERVIEW

 

TranSwitch designs, develops and supplies innovative integrated circuit (IC) and intellectual property (IP) solutions that provide core functionality for voice, data and video communications equipment for network, enterprise and customer premises applications.  We provide integrated multi-core network processor System-on-a-Chip (SoC) solutions and software solutions for Fixed, 3G and 4G Mobile, VoIP and Multimedia Infrastructures. For the customer-premises market, we offer interoperable connectivity solutions that provide a bridge between HDMI and DisplayPort and enable the distribution and presentation of high-definition (HD) content for consumer electronics, and personal computer markets and also provide a family of communications processors that provide best-in-class performance for a range of applications.  Overall, we have over 100 active customers, including the leading global telecom equipment providers, semiconductor and consumer product companies.

 

TranSwitch Corporation is a Delaware corporation incorporated on April 26, 1988. Our principal executive offices are located at 3 Enterprise Drive, Shelton CT 06484, and our telephone number at that location is (203) 929-8810. Our Internet address is www.transwitch.com. Our common stock trades on the Nasdaq Capital Market under the symbol “TXCC.”

 

Our telecom products are sold to original equipment manufacturers (OEMs) for use in a variety of communications network equipment, including:

 

1.Network Infrastructure Processing – Multi-media processing engines to address multiple carrier segments such as wireline and wireless gateways, session border controllers (SBC), media resource functions (MRF), multi-service access nodes (MSAN), passive optical network multi-dwelling units (PON MDUs) and translation gateways.  Enterprise applications include VoIP private branch exchanges.

 

2.Communication Network Premises Equipment – IP Multimedia Subsystem (IMS) and Voice over LTE (VoLTE) capable 4G/LTE fixed wireless gateways, Residential gateway routers, Small office – home office (SOHO) routers and secure VoIP private branch exchanges (PBXs).

 

Our interoperable connectivity solutions are sold to OEMs for use in consumer electronics.

 

Next Generation Network Infrastructure (Converged Network Infrastructure):

 

Data and video services are the main drivers for future network infrastructure investments. Carrier Ethernet is the industry’s accepted standard technology for next-generation networks, however, a large percentage of optical network infrastructure currently in place is based on SONET/SDH technology designed and optimized for voice traffic. Our products enable a mix of voice and data traffic to be efficiently transported over existing SONET/SDH networks using a number of techniques for mapping Ethernet data into the SONET or SDH format (EoS) in accordance with recently introduced industry standards. Our products are incorporated in Optical Transport equipment, and enable the fiber optic network to transport information with improved efficiency, thus increasing the overall network capacity. We also supply products designed for use in Ethernet equipment such as carrier-grade Ethernet routers and switches. Such products enable carriers to provide robust and differentiated services using Ethernet technology in their wide-area networks.

 

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Within this new infrastructure, voice traffic is also carried over Ethernet, and we provide market leading solutions for use in equipment such as Media Gateways, Soft Switches and Multi-Service Access Nodes used in both wire-line and cellular carrier networks as well in corporate network applications. Currently, most telephony service providers maintain two separate networks - one for legacy voice traffic and a second for data traffic. VoIP technology compresses voice signals into discrete packets of data, thereby enabling the voice signals to be transmitted over lower-cost networks originally designed for data-only transmission. VoIP technology is used in numerous new types of communications equipment, such as next generation carrier- and enterprise-class gateways, soft switches, digital loop carriers, IP DSL access multiplexers, media terminal adapters, and home gateways for use by consumers and small businesses. These VoIP technology-based devices enable more efficient and cost-effective voice transmissions than their legacy circuit-switched equipment counterparts. In addition to significant cost savings, VoIP also enables advanced services that traditional telephony could not support. VoIP technology enables and enhances features such as unified messaging and managed services that provide additional value to consumers and businesses and allow service providers to enhance revenue opportunities. Our customers in this market include Alcatel-Lucent, Tellabs, Fiberhome, Ericsson, NEC and other OEMs.

 

The Broadband Access portion of the market includes equipment that provides “last mile” connectivity between the end customer and the network for broadband services. It includes systems for connectivity over copper wires based on DSL, technology, fiber connectivity using Passive Optical Network (PON) technology or wireless connectivity using cellular, WiMAX or other technologies. Our products are incorporated into Broadband Access equipment, enabling telecommunications service providers to deliver next generation services such as voice, data and video over the broadband connection. Fiber-based broadband access, generally referred to as FTTx, is deployed in a variety of alternative architectures such as Fiber-to-the-home (FTTH), Fiber-to-the-building (FTTB) or Fiber-to-the-node (FTTN). In the case of FTTH, fiber extends all the way to each individual subscriber location, while in the case of FTTB and FTTN, fiber extends to multiplexing equipment located at a building with multiple end-users or in a neighborhood “node”, and each subscriber location (residence or office) is connected to the multiplexing equipment with copper wire using DSL or Ethernet technology.

 

FTTH provides the highest bandwidth per subscriber, while FTTB and FTTN provide a more economical alternative. The underlying technology for most FTTx deployments is Passive Optical Networking (PON) because it eliminates the need for active electronics in the fiber portion of the network. There are dominant variants of this technology, namely Ethernet-based PON (EPON) which has been adopted extensively in Japan and to a lesser extent in other Asian countries, and Gigabit PON (GPON) which is currently being deployed primarily in North America and is expected to be deployed in several other regions worldwide. EPON supports data rates up to 1 Gigabit per second (Gbps) while GPON supports data rates up to 2.5 Gbps. FTTx technology provides higher speeds than DSL technology for both residential and business end users and enables service providers to offer a wider range of next generation bundled services to potentially enhance their revenue streams.

 

Our Broadband Access product offerings include a variety of solutions for both EPON as well as GPON standards. We also supply products that support the hybrid fiber-copper architectures such as FTTB and FTTN using DSL or Ethernet as well as Voice-over-IP (VoIP) processors to extract, encode and manage voice services at the node equipment in the case of FTTB and FTTN architectures. Our customers in this market include Alcatel-Lucent, Sumitomo, Nokia Siemens Networks and other OEMs.

 

Broadband Customer Premises Equipment (Broadband CPE):

 

The increasing role of Broadband CPE in the delivery of modern communications services is driven directly by the deployment of broadband access networks discussed above. A single broadband connection is capable of delivering multiple services (voice, video and data) to the subscriber location in the form of a high speed packetized data stream. Broadband CPE must then process this high speed packet data stream and deliver the various services to appliances within the home or office in the appropriate manner. For instance, telephone (voice) service needs to be converted from packetized data using VoIP technology into its native electrical form and distributed over the internal telephone wiring or using a wireless technology such as digital enhanced cordless telecommunications to cordless phones. Similarly, internet data traffic must be routed over Ethernet connections or WiFi to computers within the customer premises and video traffic must be routed to set-top devices or TV sets as appropriate. Increasing availability of High Definition video content is driving the need for high speed connectivity within the home. The Consumer Electronics industry standard known as High Definition Multimedia Interface (HDMI) and the related DisplayPort standard adopted by the Computer industry are the de-facto interfaces of choice. Broadband CPE equipment also provides the necessary security features such as firewall and data encryption as well as a host of other management and control functions required for interworking with the service provider’s network.

 

We provide high speed interface technology conforming to HDMI, DisplayPort and Ethernet standards in the form of IP cores. Our customers for this technology are other semiconductor companies who supply complementary markets such as Consumer Electronics (TV, DVR and Video Camera) and computer equipment manufacturers.

 

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We also provide a family of communications processors designed specifically for Broadband CPE applications, combining VoIP, data routing and security functions in a single highly-integrated device that meets the stringent cost-performance and low power consumption demands of this market segment.

 

Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of our Internet website (http://www.transwitch.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at Three Enterprise Drive, Shelton, CT 06484.

 

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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

Our unaudited interim condensed consolidated financial statements and related disclosures, which are prepared to conform with accounting principles generally accepted in the United States of America (U.S. GAAP), require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the period reported. We are also required to disclose amounts of contingent assets and liabilities at the date of the consolidated financial statements. Our actual results in future periods could differ from those estimates and assumptions. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

 

During the six months ended June 30, 2012, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2011.

 

RESULTS OF OPERATIONS

 

The results of operations that follow should be read in conjunction with our critical accounting policies and use of estimates summarized above as well as our accompanying unaudited interim condensed consolidated financial statements and notes thereto contained in Item 1 of this report. The following table sets forth certain unaudited interim condensed consolidated statements of operations data as a percentage of net revenues for the periods indicated.

 

   Three Months Ended
June 30
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
Net revenues:                    
Product revenues   62%   57%   74%   64%
Service revenues   38%   43%   26%   36%
Total net revenues   100%   100%   100%   100%
Cost of revenues:                    
Product cost of revenues   22%   18%   27%   20%
Provision for excess and obsolete inventories   6%   0%   6%   1%
Service cost of revenues   5%   15%   4%   14%
Total cost of revenues   33%   33%   37%   35%
Gross profit   67%   67%   63%   65%
Operating expenses:                    
Research and development   123%   64%   121%   59%
Marketing and sales   34%   29%   39%   26%
General and administrative   51%   27%   54%   25%
Restructuring charges, net   26%   -    13%   3%
Reversal of accrued royalties   (12)%   (11)%   (7)%   (10)%
Total operating expenses   222%   109%   220%   103%
Operating loss   (155)%   (42)%   (157)%   (38)%

 

Net Revenues

 

We have two product line categories: Network Infrastructure and Customer Premises Equipment (CPE). Our Network Infrastructure product lines include our Optical Transport, Carrier Ethernet, Media Gateway/VoIP and Broadband Access product lines. The Optical Transport products are incorporated into OEM systems that improve the efficiency of fiber optic networks for packetized data traffic, thereby increasing the overall network capacity. Our Media Gateway/VoIP products provide Voice-over-IP and other packet processing functionality in a variety of equipment types deployed in wireless and wire-line carrier networks as well as in enterprise networks.  These equipment types include large capacity media gateways in the core of the network, small-medium capacity access gateways in the ‘last-mile’ section of the network and customer premise equipment for business and residential subscribers. The Broadband Access product line is incorporated into equipment that provides high speed connections to subscribers using fiber (FTTx) or DSL technology, enabling telecommunications service providers to support next generation voice, data and video services. The Carrier Ethernet product line facilitates the transition of existing networks-based legacy voice oriented technologies to Ethernet technology which is more suitable and efficient for supporting next generation converged video, data and voice services. Our CPE product line category includes HDMI, DisplayPort and Ethernet IP Cores which have been incorporated into a number of consumer electronics and PC appliances and Multi-Service Communications Processors used in broadband modems or to be added as part of a small office, home office, or SOHO network. Our Network Infrastructure and Multi-Service Communications Processor product lines continue to show a decline year over year. As such this may affect our impairment analysis of goodwill in the future.

 

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The following table summarizes our net revenue mix by product line category:

 

(in thousands)  Three Months Ended
June 30, 2012
   Three Months Ended
June 30, 2011
     
  

Net

Revenues

  

Percent of

Total Net

Revenues

  

 Net

Revenues

  

Percent of

Total Net

Revenues

  

Percentage

 Decrease in

Revenues

 
Network Infrastructure  $3,067    80%  $4,073    58%   (25)%
Customer Premises Equipment   758    20%   2,980    42%   (75)%
Total net revenues  $3,825    100%  $7,053    100%   (46)%

 

 

(in thousands)  Six Months Ended
June 30, 2012
   Six Months Ended
June 30, 2011
     
  

Net 

Revenues

  

Percent of

Total Net

Revenues

  

 Net

Revenues

  

Percent of

Total Net

Revenues

  

Percentage

 Decrease in

Revenues

 
Network Infrastructure  $6,009    80%  $9,544    63%   (37)%
Customer Premises Equipment   1,497    20%   5,736    37%   (74)%
Total net revenues  $7,506    100%  $15,280    100%   (51)%

  

Total net revenues for the three months ended June 30, 2012 were $3.8 million as compared to $7.0 million for the three months ended June 30, 2011, a decrease of $3.2 million or 46%. Our Network Infrastructure revenues decrease of approximately 25% was a result of lower sales of Carrier Ethernet and VoIP products due to reduced telecom infrastructure capital expenditures. Our CPE revenues decrease of approximately 75% was attributable to decreased service revenues for IP licensing of our high speed interface technology and reduced sales of CPE ASIC products.

 

Total net revenues for the six months ended June 30, 2012 were $7.5 million as compared to $15.3 million for the six months ended June 30, 2011, a decrease of $7.8 million or 51%. Our Network Infrastructure revenues decrease of approximately 37% was a result of lower sales of Carrier Ethernet and VoIP products due to reduced telecom infrastructure capital expenditures and reduced service related revenues for Network Infrastructure. Our CPE revenues decrease of approximately 74% was attributable to decreased service revenues for IP licensing of our high speed interface technology and reduced sales of CPE ASIC products.

 

International net revenues represented approximately 71% of net revenues for the three months ended June 30, 2012 as compared to 76% for the three months ended June 30, 2011. Also, international net revenues represented approximately 77% of net revenues for the six months ended June 30, 2012 as compared to 74% for the six months ended June 30, 2011.

 

Gross Profit

 

Total gross profit for the three months ended June 30, 2012 decreased by approximately $2.2 million or 46% as compared to the three months ended June 30, 2011. The decrease in gross profit was primarily the result of a decrease in total net revenues. The total gross profit as a percentage of revenue was 67% for three months ended June 30, 2012 and 2011. Also during the three months ended June 30, 2012 and 2011, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million and zero, respectively.

 

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Total gross profit for the six months ended June 30, 2012 decreased by approximately $5.3 million or 53% as compared to the six months ended June 30, 2011. The decrease in gross profit was primarily the result of a decrease in total net revenues. The total gross profit as a percentage of revenue was 63% and 65% for six months ended June 30, 2012 and 2011, respectively. Also during the six months ended June 30, 2012 and 2011, we recorded provisions for excess and obsolete inventories in the amount of $0.5 million and $0.2 million, respectively.

 

We anticipate that gross profit will continue to be impacted by fluctuations in the volume and mix of our product shipments as well as material costs, yield and the fixed cost absorption of our product operations.

 

 Research and Development

 

Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses. During the three months ended June 30, 2012, research and development expenses increased $0.2 million, or 4% over the comparable period of 2011. This increase was a result of increased subcontracting and other costs for our high-speed interface product line partially offset by decreased labor and other cost savings as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011. The workforce reductions principally affected our Network Infrastructure product line. During the six months ended June 30, 2012, research and development expenses decreased less than 1% over the comparable period of 2011. This decrease was a result of decreased labor and other cost savings as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011 offset by increased subcontracting and other costs for our high-speed interface product line.

 

We will continue to closely monitor both our costs and our revenue expectations in future periods. We will continue to concentrate our spending in this area to meet our customer requirements and respond to market conditions.

 

Marketing and Sales

 

 Marketing and sales expenses consist primarily of personnel-related expenses, trade show expenses, travel expenses and facilities expenses. Marketing and sales expenses for the three months ended June 30, 2012 decreased by $0.8 million or 37% as compared to the three months ended June 30, 2011. Marketing and sales expenses for the six months ended June 30, 2012 decreased by $1.1 million or 27% as compared to the six months ended June 30, 2011. These decreases were a result of decreased salaries as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011 and reduced expense for amortization of intangible assets as a result of lower intangible asset balances due to intangible asset impairment charges that were recorded in the fourth quarter of 2011.

 

 General and Administrative

 

General and administrative expenses consist primarily of personnel-related expenses, professional and legal fees, insurance and facilities expenses.  General and administrative expenses for the three months ended June 30, 2012 increased by less than $0.1 million or 1% as compared to the comparable period in 2011.  General and administrative expenses for the six months ended June 30, 2012 increased by $0.3 million or 8% as compared to the comparable period in 2011. These increases were a result of increased professional and legal fees.

 

Restructuring Charges, net

 

During the three months ended June 30, 2012 and 2011, we recorded net restructuring charges of $1.0 million and zero, respectively. During the six months ended June 30, 2012 and 2011, we recorded net restructuring charges of $1.0 million and $0.5 million, respectively. Information on restructuring charges is located in Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Interest Income (Expense), net

 

Interest expense, net was less than $0.1 million for both the three months ended June 30, 2012 and 2011. Interest expense, net was less than $0.1 million and $0.1 million for the six months ended June 30, 2012 and 2011, respectively. Interest income decreased less than $0.1 million for both the three and six month periods ended June 30, 2012 as compared to 2011 due to lower cash and investment balances. Interest income may fluctuate in the future as it is affected by our cash and investment balances and the related interest rates. At June 30, 2012 and 2011, the effective interest rate on our interest-bearing securities was approximately 2.4% and 1.5%, respectively. Interest expense decreased approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively as compared to the comparable 2011 periods due to the maturity and pay off of our Convertible Notes due September 30, 2011 (“2011 Notes”). The 2011 Notes were fully paid as of September 30, 2011 and as such, there were no interest payments related to the 2011 Notes during the six months ended June 30, 2012.

 

21
 

  

Income Tax Expense

 

Income tax expense was approximately $0.1 million for each of the three month periods ended June 30, 2012 and 2011. Income tax expense was approximately $0.2 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries, principally India.

  

During the three and six months ended June 30, 2012 and 2011, we evaluated our deferred income tax assets as to whether it is “more likely than not” that the deferred income tax assets will be realized. In our evaluation of the realizability of deferred income tax assets, we consider projections of future taxable income, the reversal of temporary differences and tax planning strategies. We have evaluated the realizability of the deferred income tax assets, and have determined that it is “more likely than not” that all of the deferred income tax assets will not be realized. Accordingly, a valuation allowance was recorded for all of our domestic net deferred income tax assets. In future periods, we will not recognize a deferred tax benefit and will maintain a deferred tax valuation allowance until we achieve sustained U.S. taxable income. Additionally, in the future, we expect our current income tax expense to be related to taxable income generated by our foreign subsidiaries.

 

 

22
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have incurred significant operating losses and have used cash in our operating activities for the past several years. Operating losses have resulted from inadequate sales levels for our cost structure. As of June 30, 2012, we have negative working capital of approximately $4.2 million. In addition, we have outstanding indebtedness to Bridge Bank under our lending facility of $0.7 million.

 

Our current forecast projects that, absent an infusion of capital, we will be unable to meet our current obligations through June 30, 2013. These conditions raise substantial doubt about our ability to continue as a going concern.

 

In July of 2012, we announced a restructuring which primarily affected the telecom product unit and is expected to save $8.0 million in annual operating costs. We also effectuated restructurings in the first and third quarters of 2011. We continue to assess our cost structure in relationship to our revenue levels, which may necessitate further expense reductions. 

 

As with any operating plan, there are risks associated with our ability to execute it, including the current economic environment in which we operate. Therefore, there can be no assurance that we will be able to satisfy our obligations, or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. There can be no assurance that the additional funding sources will be available to us at favorable rates or at all. If we cannot maintain compliance with our covenant requirements on our bank financing facility or cannot obtain appropriate waivers and modifications, the lenders may call the debt. If the debt is called, we would need to obtain new financing and there can be no assurance that we will be able to do so. If we are unable to achieve our operating plan and maintain compliance with our loan covenants and our debt is called, we will not be able to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

As of June 30, 2012 and December 31, 2011, we had total cash, cash equivalents, restricted cash and investment balances of approximately $3.2 million and $7.6 million, respectively. This is our primary source of liquidity, as we are not currently generating any significant positive cash flow from our operations. A summary of our cash, cash equivalents, restricted cash, investments, credit agreements and future commitments are detailed as follows:

 

Cash, Cash Equivalents, Restricted Cash, Investments, Credit Agreements and Issuance of Common Stock

 

Our primary source of liquidity is cash, cash equivalents, restricted cash, short-term investment balances, a credit facility agreement and issuances of our common stock.

 

Credit Facility:

 

On March 12, 2010 we entered into a credit facility agreement with Bridge Bank N.A., a subsidiary of Bridge Capital Holdings. The facility allows for borrowings up to the lower of $5.0 million or 80% of our outstanding eligible accounts receivable as determined by Bridge Bank N.A. This agreement was amended and restated on April 4, 2011 and the current facility matures on April 4, 2013. The agreement bears interest at the higher of (i) the lender’s prime rate plus 2.0 percent or (ii) 5.25 percent, plus the payment of certain fees and expenses. At June 30, 2012, we had $0.7 million in outstanding borrowings under this facility.

 

At Market Issuance Sales Agreement with MLV & Co. LLC:

 

On February 10, 2012, the Company entered into an At Market Issuance Sales Agreement (the “Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which the Company could issue and sell shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 (the “Shares”) from time to time through MLV (the “Offering”). Also on February 10, 2012, the Company filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering (the “Prospectus Supplement”). The shares of common stock to be sold under the Agreement were registered pursuant to an effective shelf Registration Statement on Form S-3 (Registration No. 333-162609) and the Prospectus Supplement.

 

23
 

 

Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, MLV could sell the common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on The NASDAQ Capital Market, on any other existing trading market for the common stock or to or through a market maker. The Company agreed to pay MLV a commission equal to 3.0% of the gross sales price per share sold and provide indemnification and contribution to MLV against certain civil liabilities, including liabilities under the Securities Act.

 

During the three and six months ended June 30, 2012, no shares were issued under the Agreement. Between July 1, 2012 and July 13, 2012, the Company issued and sold 363,343 shares under the Agreement for net proceeds to the Company of $0.4 million.

 

On July 13, 2012, the Company delivered to MLV & Co. LLC (“MLV”) notice of termination of the Agreement, which termination became effective July 23, 2012.

 

Common Stock Purchase Agreement with Aspire Capital:

 

On July 16, 2012, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire”) to purchase up to an aggregate of $11.0 million of shares of the Company’s common stock over the two-year term of the Purchase Agreement. Under the Purchase Agreement, Aspire made an initial purchase of 990,099 shares for the purchase price of $1,000,000.  During the term of the Purchase Agreement, the Company can direct Aspire to purchase up to 50,000 shares per business day at a price equal to the lower of (i) the lowest sale price for the Company’s common stock on the date of sale or (ii) the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the 12 consecutive business days ending on the business day immediately preceding the date of sale.

 

In addition, on any business date that the Company directs Aspire to purchase 50,000 shares, the Company also has the right to direct Aspire to purchase an amount of the Company’s common stock equal to a percentage (not to exceed 15%, which limitation may be increased to 30% by mutual agreement) of the aggregate shares of common stock traded on the next business day, subject to a maximum number of shares determined by the Company. Subject to certain limitations, the purchase price for these shares shall be the lower of (i) the closing sale price on the date of sale or (ii) ninety-five percent (95%) of the next business day’s volume weighted average price.  The Company has the right to determine a maximum number of shares and set a minimum market price threshold for each purchase.

 

In connection with the Purchase Agreement, the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Aspire dated July 16, 2012.  The Registration Rights Agreement provides, among other things, that the Company will register the sale of the shares sold to Aspire.  In accordance with the Registration Rights Agreement, the sale of the shares to Aspire is being made pursuant to a prospectus supplement dated July 17, 2012 and an accompanying prospectus dated October 21, 2009, under the Company’s Registration Statement on Form S-3 (File No. 333-162609), filed with the Securities and Exchange Commission on October 21, 2009, as amended and supplemented from time to time (the “Registration Statement”).  The Company further agreed to keep the Registration Statement effective and to indemnify Aspire for certain liabilities in connection with the sale of the shares under the terms of the Registration Rights Agreement.

 

In addition to the initial purchase of 990,099 shares, Aspire has purchased 100,000 shares under the Purchase Agreement for net proceeds to the Company of $0.1 million.

  

A summary of the net change in total cash and investments follows:

  

(in thousands) 

June 30,  

2012

  

December 31,

2011

   Change  

June 30,  

2011

  

December 31,

2010

   Change 
Cash and cash equivalents  $3,150   $5,453   $(2,303)  $10,109   $6,280   $3,829 
Restricted cash   88    98    (10)   138    582    (444)
Short-term investments   -    2,003    (2,003)   6,147    973    5,174 
Long-term investments   -    -    -    486    -    486 
Total cash and investments  $3,238   $7,554   $(4,316)  $16,880   $7,835   $9,045 

 

Effect of Exchange Rates and Inflation: Exchange rates and inflation have not had a significant impact on our operations or cash flows.

 

24
 

 

Commitments and Significant Contractual Obligations

 

There have been no material changes to our contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on March 13, 2012. Additional comments related to our contractual obligations are presented below.

 

We have outstanding operating lease commitments of approximately $14.7 million, payable over the next five years. Some of these commitments are for space that is not being utilized and for which we recorded restructuring charges in prior periods. As of June 30, 2012, we have sublease agreements totaling approximately $10.5 million to rent portions of our excess facilities over the next five years. We currently believe that we can fund these lease commitments in the future; however, there can be no assurances that we will not be required to seek additional capital or provide additional guarantees or collateral on these obligations.

 

We also have pledged approximately $0.1 million as of June 30, 2012 and December 31, 2011 as collateral for stand-by letters of credit to support customer credit requirements. These amounts were in our bank accounts and are included in our restricted cash balances.

 

25
 

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, our management, including our President and Chief Executive Officer, and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). These officers have concluded that our disclosure controls and procedures are effective. As such, we believe that all material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic filings with the SEC (i) is recorded, processed, summarized and reported within the required time period, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

During the six months ended June 30, 2012, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Limitations Inherent in all Controls

 

Our management, including the President and Chief Executive Officer, and Chief Financial Officer, recognize that our disclosure controls and our internal controls (discussed above) cannot prevent all errors or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.

  

PART II.    OTHER INFORMATION

  

ITEM 1.    LEGAL PROCEEDINGS  

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

 

ITEM 1A.    RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2011, and in Part II, Item 1A, Risk Factors, of any Quarterly Report on Form 10-Q filed subsequently thereto, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K and any Quarterly Report on form 10-Q filed subsequently thereto are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

The risk factor set forth below is in addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

There is substantial doubt about our ability to continue as a going concern.

 

We have incurred significant operating losses and have used cash in our operating activities for the past several years. Operating losses have resulted from inadequate sales levels for the cost structure. As of June 30, 2012, we have negative working capital of approximately $4.2 million. In addition, we had outstanding indebtedness to Bridge Bank under our lending facility of $0.7 million.

 

Our current forecast projects that, absent an infusion of capital, we will be unable to meet our current obligations through June 30, 2013. These conditions raise substantial doubt about our ability to continue as a going concern.

 

26
 

 

In July of 2012, we announced a restructuring which primarily affected the telecom product unit and is expected to save $8.0 million in annual operating costs. We also effectuated restructurings in the first and third quarters of 2011. We continue to assess our cost structure in relationship to our revenue levels, which may necessitate further expense reductions. 

 

As with any operating plan, there are risks associated with our ability to execute it, including the current economic environment in which we operate. Therefore, there can be no assurance that we will be able to satisfy our obligations, or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. There can be no assurance that the additional funding sources will be available to us at favorable rates or at all. If we cannot maintain compliance with our covenant requirements on our bank financing facility or cannot obtain appropriate waivers and modifications, the lenders may call the debt. If the debt is called, we would need to obtain new financing and there can be no assurance that we will be able to do so. If we are unable to achieve our operating plan and maintain compliance with our loan covenants and our debt is called, we will not be able to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not applicable

 

27
 

 

ITEM 6.     EXHIBITS

 

Exhibit 3.1 Amended and Restated Certificate of Incorporation, as amended to date (previously filed as Exhibit 3.1 to TranSwitch’s quarterly report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).
   
Exhibit 3.2 Amendment to the Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed on May 22, 2012 and incorporated herein by reference).
   
Exhibit 3.3 Certificate of Designation of Series B Junior Participating Preferred Stock, dated October 3, 2011 (previously filed as Exhibit 3.1(b) to TranSwitch’s current report on Form 8-K as filed on October 3, 2011 and incorporated herein by reference).
   
Exhibit 3.4 Second Amended and Restated By-Laws (previously filed as Exhibit 3.1 to TranSwitch’s current report on Form 8-K as filed on October 17, 2007 and incorporated herein by reference).
   
Exhibit 4.1 2008 Equity Incentive Plan, as amended (previously filed as Exhibit 4.1 to TranSwitch’s current report on Form 8-K as filed on May 22, 2012 and incorporated herein by reference).
   
Exhibit 4.2 Registration Rights Agreement dated as of July 16, 2012 by and between TranSwitch and Aspire Capital Fund, LLC (previously filed as Exhibit 4.1 to TranSwitch’s current report on Form 8-K as filed on July 17, 2012 and incorporated herein by reference).
   
Exhibit 10.1 Common Stock Purchase Agreement dated as of July 16, 2012 by and between TranSwitch and Aspire Capital Fund, LLC (previously filed as Exhibit 10.1 to TranSwitch’s current report on Form 8-K as filed on July 17, 2012 and incorporated herein by reference).
   
Exhibit 10.2 Form of Employment Agreement for each of Mr. Bar-Niv and Mr. Chung (previously filed as Exhibit 10.1 to TranSwitch’s current report on Form 8-K as filed on May 22, 2012 and incorporated herein by reference).
   
Exhibit 10.3 Amendment to Employment Agreement dated June 27, 2012 between Dr. M. Ali Khatibzadeh and TranSwitch (previously filed as Exhibit 10.1 to TranSwitch’s current report on Form 8-K as filed on July 2, 2012 and incorporated herein by reference).
   
Exhibit 31.1 CEO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
Exhibit 31.2 CFO Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
Exhibit 32.1 CEO and CFO Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

28
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

    TRANSWITCH CORPORATION 
     
August 9, 2012   /s/ Dr. M. Ali Khatibzadeh
Date   Dr. M. Ali Khatibzadeh
    Chief Executive Officer and President
     (Chief Executive Officer)
     
August 9, 2012   /s/ Robert A. Bosi
Date   Robert A. Bosi
    Vice President and Chief
    Financial Officer
     (Chief Financial Officer)

 

29

 

XNAS:TXCC Quarterly Report 10-Q Filling

XNAS:TXCC Stock - Get Quarterly Report SEC Filing of XNAS:TXCC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XNAS:TXCC Quarterly Report 10-Q Filing - 6/30/2012
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