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TNIX > SEC Filings for TNIX > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for TELANETIX,INC

Form 10-Q for TELANETIX,INC


30-Oct-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. Readers are also urged to carefully review and consider the various disclosures made by us that attempt to advise interested parties of the factors that affect our business, including without limitation, the disclosures referenced under "Item 1A. Risk Factors" included in Part II of this report.

Overview

Business

We are a cloud based IP voice services company. Our company is built on the belief that business telecommunication need not be expensive or complicated.
Through our AccessLine-branded Voice Services, we provide customers with a range of business phone services and applications that are easy to purchase, easy to install, easy to use and most importantly provide significant savings. Our customers have the ability to easily configure their service to meet the unique needs of their business. At the core of our cloud based, hosted service is our proprietary software, which is developed internally and runs on standard commercial grade servers. By delivering business phone service to the market in this manner, our Voice Services offer flexibility and ease of use to any sized business customer, at an affordable price point.

AccessLine offers the following cloud based, hosted Voice over IP services:
Digital Phone System (DPS), SIP Trunking Service and a la carte, individual phone services. DPS replaces a customer's existing telephone lines and phone system with a Voice over IP alternative. It is sold as a complete turn-key solution where we bundle business-class phone equipment which is manufactured by third parties, along with our reliable voice network services. This service is primarily targeted at small businesses looking for a fully integrated solution that does not require expert assistance to install or manage. SIP Trunking Service replaces high-cost telephone lines with a low cost yet high quality IP alternative. SIP Trunking is for larger businesses that already have their own on premise equipment (PBX) and is targeted at those businesses with large calling volumes looking for cost effective alternatives to traditional carrier offerings. SIP Trunking Service can support businesses with hundreds to thousands of employees.

AccessLine-branded services also offer a la carte phone services and features including conferencing calling services, find-me and follow-me services, toll-free services, and automated attendant service. Each a la carte service can be purchased individually through AccessLine's various websites. All services include easy-to-use web interfaces for simple management and customizations.

Our revenues principally consist of: monthly recurring fees, activation, and usage fees from the communication services and solutions outlined above. There are some ancillary one time equipment charges associated with our DPS solution.

Recapitalization

Our overriding objective is to grow revenue while achieving operating profitability and generating cash from operations. In 2010 we addressed this objective through the growth in our core voice businesses and a recapitalization that substantially reduced our outstanding debt, and provided additional working capital.

We experienced growth in revenue and gross profit for our AccessLine division in 2011 and through the first nine months of 2012. Our increased revenue during 2011 and the first nine months of 2012 was due, in part, to greater efficiency in our advertising and also through our success in selling our SIP Trunking Service through direct and agent channels. Our Digital Phone Service and SIP Trunking Service continues to grow month over month. We manage our gross profit percentage through our continued progress in optimizing our network configuration. Additionally, we carefully monitor our discretionary operating expenses and staffing levels.

Debenture Repurchase

On June 30, 2010, we entered into a securities purchase agreement with the holders of our outstanding debentures in the principal amount of $29.6 million. Under the terms of the agreement, we repurchased and cancelled all of our outstanding debentures in exchange for payment of $7.5 million in cash. Additionally, the holder of the debentures exchanged all outstanding warrants they held for shares of our common stock and we issued to such holders an additional number of shares of our common stock, such that the holders collectively and beneficially owned approximately 221,333 shares of our common stock immediately following the completion of the transactions contemplated by the agreement. We paid $7.5 million from the proceeds of our senior secured note private placement described below.


Table of Contents

After giving effect to the transactions contemplated by the debenture repurchase described above and the transactions contemplated by the senior secured note private placement described below, we currently have $10.5 million of senior secured notes outstanding and all our previously issued debentures, which had a principal balance of $29.6 million, were cancelled.

Senior Secured Notes Private Placement

On June 30, 2010, we entered into a securities purchase agreement, which we refer to as the "Hale Securities Purchase Agreement" in this report, with affiliates of Hale Capital Management, LP, whom we refer to collectively as "Hale" in this report, pursuant to which, in exchange for $10.5 million, we issued to Hale $10.5 million of senior secured notes, which we refer to as the "2010 Notes" in this report, and 3,833,356 unregistered shares of our common stock. For a summary of material terms of the 2010 Notes see "Commitments and Contingencies" below.

We agreed to a number of provisions in the Hale Securities Purchase Agreement that protect Hale's investment, including:

Most Favored Nation. For so long as the 2010 Notes are outstanding and until Hale ceases to own ten percent of our outstanding common stock, if we (i) issue debt on terms that are more favorable than the terms of the 2010 Notes, or (ii) issue common stock, preferred stock, equivalents or any other equity security on terms more favorable than those set out in the Hale Securities Purchase Agreement, then the terms of the 2010 Notes and/or the Hale Securities Purchase Agreement shall automatically be amended such that Hale receives the benefit of the more favorable terms.

Right of First Refusal. For so long as the 2010 Notes are outstanding and until Hale ceases to own ten percent of our outstanding common stock, Hale shall have a right of first refusal on any subsequent placement that we make of common stock or common stock equivalents or any securities convertible into or exchangeable or exercisable for shares of our common stock.

Fundamental Transactions. For so long as the 2010 Notes are outstanding and thereafter for as long as any of the Hale purchasers continue to own twenty percent of the common stock that they purchased under the Hale Securities Purchase Agreement, we cannot effect a transaction in which we consolidate or merge with another entity, convey all or substantially all of our assets, permit another person or group to acquire more than fifty percent of our voting stock, or reorganize or reclassify our common stock without the majority consent of Hale. Additionally, we cannot effect such a transaction without obtaining the foregoing requisite consent if such transaction would trigger the most favored nation provision in the Hale Securities Purchase Agreement described above or if such transaction would otherwise involve the issuance of any equity securities or the incurrence of debt at a price that is less than the price paid in connection with the transaction consummated pursuant under the Hale Securities Purchase Agreement.

Post-Closing Adjustment Shares.The Company is required to make payment on certain identified contingent liabilities up to an aggregate amount of $464,831, then it will issue additional shares of common stock to Hale, such that the total percentage ownership of its fully diluted common stock immediately after the payment of such liabilities will equal the same percentage ownership that Hale would have had if the contingent payable had been paid prior to the closing under the Hale Securities Purchase Agreement. To date $214,052 of these contingent liabilities have been incurred as expenses. Accordingly, in April of 2011 we issued to Hale an additional 225,576 shares of our common stock under the terms of the Hale Securities Purchase Agreement and are currently in the process of issuing the remaining shares. During the fourth quarter 2012, we plan to issue the remaining shares in the amount of 300,004 shares of common stock will be issued to Hale as final settlement of the contingent liabilities.

Registration Rights Agreement

In connection with the Hale Securities Purchase Agreement, we entered into a registration rights agreement with Hale pursuant to which we agreed to file a registration statement with the SEC for the resale of the shares issued and issuable to Hale under the Hale Securities Purchase Agreement. We filed that registration statement on September 30, 2010. The registration rights agreement contains penalty provisions in the event that we failed to secure the effectiveness of that registration statement by November 29, 2010, fail to file other registration statements we are required to file under the terms of the registration rights agreement in a timely manner or if we fail to maintain the effectiveness of any registration statement we are required to file under the terms of the registration rights agreement until the shares issued to Hale are sold or can be sold under Rule 144 without restriction or limitation (including volume restrictions) and without the requirement that our company be in compliance with Rule 144 (c)(1). In the event of any such failure, and in addition to other remedies available to Hale, we agreed to pay Hale as liquidated damages and amount equal to 1% of the purchase price for the share to be registered in such registration statement. Such payments are due on the date we fail to comply with our obligation and every 30th day thereafter (pro-rated for periods totaling less than 30 days) until such failure is cured. The registration statement covering the resale of the shares issued to Hale has not been declared effective. Hale and the Company have agreed to amend the term "Initial Effectiveness Deadline" set forth in Section 1(o) of the Registration Rights Agreement to read in its entirety as follows: "Initial Effectiveness Deadline" means December 31, 2012.


Table of Contents

Impact of Debenture Repurchase and Senior Secured Note Private Placement

In connection with the Hale Securities Purchase Agreement we received gross proceeds of $10.5 million. We incurred expenses of $1.5 million in connection with the transaction contemplated by the Hale Securities Purchase Agreement, resulting in net proceeds of approximately $9.0 million. We used $7.5 million of these proceeds to repurchase our outstanding debentures and allotted the remaining $1.5 million for working capital purposes, including advertising and distribution programs for its Digital Phone Service products

Merriman Curhan Ford acted as our financial advisor in the transaction and we paid them a fee of $682,500 in connection with the transaction. We also issued Merriman Curhan Ford warrants to purchase 31,152 shares of our common stock. The warrants are exercisable at $2.889 per share for a period of 5 years.

Rights Offering

Under the terms of the Hale Securities Purchase Agreement, we agreed to conduct a rights offering pursuant to which we would distribute at no charge to holders of our common stock non-transferable subscription rights to purchase up to an aggregate 1,038,414 share our common stock at a subscription price of $2.889 per share. Under the terms of the 2010 Notes, we agreed to use the gross proceeds of the rights offering to redeem an aggregate of up to $3.0 million of principle amount of such notes. To the extent the gross proceeds of the rights offering were less than $3.0 million, we and Hale agreed that Hale would exchange the principle amount to be redeemed (up to $3 million) for shares of our common stock at an exchange price equal to the subscription price of the subscription rights. We paid Hale an aggregate of $60,000 in consideration for the foregoing. In addition, we agreed to pay Hale upon completion of the rights offering an amount of cash equal to the accrued and unpaid interest in respect of the principal amount of the senior secured notes redeemed or exchanged for shares of common stock in connection with the rights offering. As discussed below the Company has cancelled the rights offering and related obligations.

In August 2011, the independent directors of the Company approved, and the Company and Hale entered into a settlement agreement, pursuant to which (1) Hale released the Company from any obligation to conduct the rights offering, and
(2) the Company released Hale from its "backstop" obligation to convert up to $3.0 million of the 2010 Notes into common stock. As a result of the amendment, the original principal amount of the 2010 notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through June 30, 2012. In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of principal (plus associated "PIK Interest") through June 30, 2012 and to have any such amounts added to principal. The Company's scheduled payment obligations under the 2010 Notes, assuming that it pays all of the interest current, will average approximately $423,000 per month through September 30, 2013 and will average approximately $396,000 per month for the remaining nine months until maturity.

Recent Developments

Our overriding objective is to grow revenue while achieving operating profitability and generating cash from operations. In 2011 and the first half of 2012 we addressed this objective through the growth in our core voice businesses.

We experienced growth in revenue and gross profit for our AccessLine division in 2011 and during the first three quarts of 2012. Our increased revenue during 2011 and the first half of 2012 was due, in part, to greater efficiency in our advertising and also through our success in selling our SIP Trunking Service through direct and agent channels. Our Digital Phone Service and SIP Trunking Service continues to grow month over month. We manage our gross profit percentage through our continued progress in optimizing our network configuration. Additionally, we carefully monitor our discretionary operating expenses and staffing levels.


Table of Contents

Results of Operations

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

Revenues, Cost of Revenues and Gross Profit

                                                                             Increase/(Decrease)
                                          2012             2011            Dollars           Percent
Three Months Ended September 30:
Revenues                              $  8,010,965     $  7,254,405     $      756,560            10.4 %
Cost of revenues                         3,309,164        3,003,187            305,977            10.2 %
  Gross profit                           4,701,801        4,251,218            450,583            10.6 %
  Gross profit percentage                     58.7 %           58.6 %

Nine Months Ended September 30:
Revenues                              $ 23,692,633     $ 21,183,708     $    2,508,925            11.8 %
Cost of revenues                         9,788,598        8,865,016            923,582            10.4 %
  Gross profit                          13,904,035       12,318,692          1,585,343            12.9 %
  Gross profit percentage                     58.7 %           58.2 %

Net revenues for the three months ended September 30, 2012 were $8.0 million, an increase of $0.8 million, or 10.4% over the same period in 2011. Net revenues for the nine months ended September 30, 2012 were $23.7 million, an increase of $2.5 million, or 11.8% over the same period in 2011. Net revenues increased for the three and nine months ended September 30, 2012 as a result of increased sales in Digital Phone Service, SIP Trunking Service and High Volume SIP (HVS) Service offset by a decline in Individual Services and Legacy business.

Cost of revenues for the three months ended September 30, 2012 were $3.3 million, an increase of $0.3 million, or 10.2%, over the same period in 2011. Cost of revenues for the nine months ended September 30, 2012 were $9.8 million, an increase of $0.9 million, or 10.4% over the same period in 2011. Cost of revenues increased proportionately to our growth in revenues.

Gross profit for the three months ended September 30, 2012 was $4.7 million, an increase of $0.5 million, or 10.6%, over the same period in 2011. Gross profit for the nine months ended September 30, 2012 was $13.9 million, an increase $1.6 million, or 12.9% over the same period in 2011. Gross profit percentage was 58.7% for the nine months ended September 30, 2012 as compared to 58.2% in the same period in 2011.

Selling and Marketing Expenses

Selling and marketing expenses for the three months ended September 30, 2012 were $1.7 million, an decrease of $0.1 million or 2.2%, over the same period in 2011. Selling and marketing expenses for the nine months ended September 30, 2012 were $5.1 million, a decrease of $0.2 million or 3.1%, over the same period in2011. We anticipate that selling and marketing expenses for fiscal year 2012 will be higher than those incurred in fiscal year 2011 as we look to increase our advertising expense in our effort to increase market share and to promote our Digital Phone Service, SIP Trunking Service, and Individualized Services product lines.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2012 were $1.9 million, a decrease of less than $0.1 million or 7.0%, over the same period in 2011. General and administrative expenses for the nine months ended September 30, 2012 were $5.7 million, a decrease of $0.1 million or 2.3%, over the same period in 2011.


Table of Contents

Research, Development and Engineering Expenses

Research, development and engineering expenses for the three months ended September 30, 2012 were $0.4 million, a decrease of less than $0.1 million or 14.1%, over the same period in 2011. Research, development and engineering expenses for the both the nine months ended September 30, 2012 and September 30, 2011 were $1.4 million.

Depreciation Expense

Depreciation expense for the three months ended September 30, 2012 and September 30, 2011 was $0.2 million. Depreciation for the nine months ended September 30, 2012 and September 30, 2011 was $0.5 million.

Amortization of Purchased Intangibles

We recorded $1.6 million of amortization expense in both the nine months ended September 30, 2012 and 2011, related to the amortization of intangible assets acquired in the AccessLine acquisition.

Interest Expense

Interest expense was $0.6 and $0.7 million for the three months ended September 30, 2012 and 2011 respectively. Interest expense was $1.9 and $2.5 million for the nine months ended September 30, 2012 and 2011 respectively. Interest expense includes stated interest, amortization of note discounts, amortization of deferred financing costs, and interest on capital leases.

On June 30, 2010, we entered into a securities purchase agreement with holders of our outstanding debentures in the principal amount of $29.6 million. Under the terms of the agreement, we repurchased and cancelled all of our outstanding debentures in exchange for payment of $7.5 million in cash. Additionally, the holders of our debentures exchanged all outstanding warrants they held for shares of our common stock and we issued to such holders an additional number of shares of our common stock, such that the holders collectively beneficially owned approximately 221,333 shares of our common stock immediately following the completion of the transactions contemplated by the agreement.

Concurrently with the repurchase of our debentures, we entered into the Hale Securities Purchase Agreement, pursuant to which we issued $10.5 million in principal of 2010 Notes. Interest accrues on the 2010 Notes at a rate equal to the prime rate as published in the Wall Street Journal as of the first business day of each interest period plus 4.75% per annum and is payable at the end of each month, with the first payment due on July 31, 2010. Through June 30, 2011, we had the option to defer the monthly interest payments otherwise due and have the amount of interest deferred added to the principal balance of the 2010 Notes. The Company elected to defer interest on the 2010 Notes at all available times during 2010 and 2011. In connection with the August 2011 amendment to the 2010 Notes, through June 30, 2012, the Company has the option to defer the monthly interest payments otherwise due on $3.0 million of the 2010. Notes and have any such amount of deferred interest added to the principal balance of the 2010 Notes.

Provision for Income Taxes

No provision for income taxes has been recorded because we have experienced net losses from inception through September 30, 2012. As of December 31, 2011, we had net operating loss carry forwards ("NOL's"), net of section 382 limitations, of approximately $7.3 million, some of which, if not utilized, will begin expiring in the current year. Our ability to utilize the NOL carry forwards is dependent upon generating taxable income. We have recorded a corresponding valuation allowance to offset the deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

Net Loss

Our net loss for the three months ended September 30, 2012 was $596,271, compared with a net loss of $1,499,042 for the three months ended September 30, 2011, a reduction in quarterly net loss of $902,771 over the comparable period a year ago. Our net loss for the nine months ended September 30, 2012 was $2,257,009, compared with a net loss of $4,765,921 for the nine months ended September 30, 2011, a reduction in year to date losses of $2,508,912 over the comparable period a year ago.


Table of Contents

Liquidity and Capital Resources

We had an accumulated deficit of $37.6 million as of September 30, 2012, and incurred a net loss of $2.3 million for the nine months ended September 30, 2012. At September 30, 2012, we had cash of $2.2 million, accounts receivable of $1.8 million and a working capital deficit of $5.6 million. However, current liabilities include certain items that will likely settle without future cash payments or otherwise not require significant expenditures by the Company including: deferred revenue of $1.1 million (primarily deferred up front customer activation fees and accrued vacation of $0.5 million. The aforementioned items represent $1.6 million of total current liabilities as of September 30, 2012. We do not anticipate being in a positive working capital position in the near future. However, based on our projected 2012 results and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, together with anticipated cash flows from operations, will be sufficient to finance our operations through at least October 1, 2013.

If our cash reserves prove insufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other equity or debt securities. However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all. We may need additional financing thereafter until we can achieve profitability. If we cannot, we may be forced to curtail our operations or possibly be forced to evaluate a sale or other strategic alternative. Any future financing may involve substantial dilution to existing investors.

In addition, if our cash flows from operations are not sufficient to make interest payments owed on the 2010 Notes in cash in 2012 or we are unable to make the payments due on the 2010 Notes in 2012 through maturity in 2014, we would be in default under such notes. If this were to occur, we would need to evaluate other equity financing opportunities, the proceeds of which could be used to make interest payment and/or repay the 2010 Notes. If we do not pay the 2010 Notes in accordance with their terms, the holder of such notes would be entitled to additional default interest of 4%, which will accrue on the outstanding principal balance. In addition, we may be required to redeem all or any portion of the 2010 Notes at a price equal to 125% of the sum of the principal amount that such holder requests that we redeem plus accrued but unpaid interest on such principal amount plus any accrued or unpaid late charges with respect to such principal and interest. In addition, the holder would have the right to foreclose on all of our assets pursuant to the terms of the security agreement we entered into with such holders and they would have the right to take possession of our assets and operate our business. Further, a monthly penalty calculated as one percent of the aggregate Hale shares purchase price under the Hale Securities Purchase Agreement could be imposed if the Company is unable to register the Hale shares.

We have been unable to register any portion of the Hale shares and at this time we anticipate that a significant number of the Hales shares will remain unregistered as of December 31, 2012. As such, we may need to seek a waiver from Hale or incur the aforementioned penalties. While we have successfully obtained waivers in the past we can give no assurance that additional waivers will be available.

Cash generated by continuing operations during the nine months ended September 30, 2012 was $3.5 million. This was primarily the result of cash generated from operations of $3.5 million as the net loss from continuing operations of $2.3 million was more than offset by the following non-cash charges: amortization of note discounts of $1.2 million; amortization of intangible assets of $1.6 million; depreciation expense of $1.7 million (which includes depreciation expense of $0.7 million in cost of sales); non-cash interest of $0.1 million and stock compensation expense of $0.3 million. The remaining $0.9 million of cash was provided by the changes in working capital.

Net cash used by investing activities during the nine months ended September 30, 2012 was $0.4 million, which consisted primarily of purchases of property and equipment.

Net cash used by financing activities was $2.8 million during the nine months ended September 30, 2012, $0.4 million of which was related to payments on our capital leases and $2.4 million was related to payment on the 2010 notes.

We do not currently have any unused credit arrangement or open credit facility available to us. The 2010 notes are secured by a lien on all of our assets, and the terms of those notes restrict our ability to borrow funds, pledge our assets as security for any such borrowing or raise additional capital by selling shares . . .

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