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TNIX > SEC Filings for TNIX > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for TELANETIX,INC


14-May-2013

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 made 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

Debenture Repurchase

On June 30, 2010, we entered into a securities purchase agreement with the holders of our then 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 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 also paid $7.5 million in cash from the proceeds of our senior secured note private placement described below.

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 had $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.


Table of Contents

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

Most Favored Nation. For so long as the 2010 Notes were outstanding and until Hale ceased to own ten percent of our outstanding common stock, if we (i) issued debt on terms that were more favorable than the terms of the 2010 Notes, or (ii) issued 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 would automatically have been amended such that Hale would have received the benefit of the more favorable terms.

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

Fundamental Transactions. For so long as the 2010 Notes remained outstanding, and thereafter for as long as any of the Hale purchasers continued to own twenty percent of the common stock that they purchased under the Hale Securities Purchase Agreement, we were notable to effect a transaction in which we consolidated or merged with another entity, conveyed all or substantially all of our assets, permitted another person or group to acquire more than fifty percent of our voting stock, or reorganized or reclassified our common stock, without the majority consent of Hale. Additionally, we could not have effected such a transaction without obtaining the foregoing requisite consent if such transaction would have triggered the most favored nation provision in the Hale Securities Purchase Agreement described above, or if such transaction would have otherwise involved the issuance of any equity securities or the incurrence of debt at a price that was less than the price paid in connection with the transaction consummated under the Hale Securities Purchase Agreement.

In December of 2012, the 2010 Notes were fully paid and discharged.

Post-Closing Adjustment Shares. If at any time prior to July 2, 2012, we had been required to make payment on certain identified contingent liabilities up to an aggregate amount of $464,831, then we would have been required to issue additional shares of common stock to Hale, such that the total percentage ownership of our fully diluted common stock immediately after the payment of such liabilities would 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 $464,831 of these contingent liabilities have been incurred as expenses. Accordingly, in April 2011 we issued to Hale an additional 225,576 shares of our common stock under the terms of the Hale Securities Purchase Agreement. As anticipated in our quarterly report on Form 10-Q for the quarter ended September 30, 2012, on November 16, 2012 we issued to Hale the remaining 300,004 shares of common stock in 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, failed to file other registration statements we were required to file under the terms of the registration rights agreement in a timely manner, or if we failed to maintain the effectiveness of any registration statement we were required to file under the terms of the registration rights agreement until the shares issued to Hale were sold or could 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 an amount equal to 1% of the purchase price for the shares to be registered in such registration statement. Such payments were due on the date we failed to comply with our obligation and every 30th day thereafter (pro-rated for periods totaling less than 30 days) until such failure should have been cured. The registration statement covering the resale of the shares issued to Hale was never declared effective. Hale and the Company had 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, 2013."

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 our Digital Phone Service products.


Table of Contents

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 shares of 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 from 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 principal 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 as 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 in the following paragraph, the Company subsequently 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 then outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through December 31, 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. On December 14, 2012 the 2010 Notes were paid in full.

Recent Developments

Our overriding objective is to grow revenue while achieving operating profitability and generating cash from operations. In 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 both 2012 and 2011. We increased revenue during 2012 through, in part, increased efficiency in our advertising and also through our success in selling our SIP Trunking Service through direct and agent channels. Our Digital Phone Service continues to grow month over month. We increased our year-to-date gross profit through our continued progress in optimizing our network configuration.

Second Amendment to Loan and Security Agreement

On April 11, 2013, Telanetix, Inc., a Delaware corporation ("Telanetix"), entered into a Second Amendment to Loan and Security Agreement (the "Second Amendment") by and among itself, its direct and indirect subsidiaries (together with Telanetix, the "Borrowers"), and East West Bank ("East West"), which amended that certain Loan and Security Agreement, dated as of December 14, 2012, by and among the Borrowers and East West, as amended by that certain Amendment to Loan and Security Agreement dated as of January 16, 2013 (the "Loan Agreement").

The Second Amendment eliminates the requirement of a Borrowing Base for the $1,000,000 line of credit established by East West to the Borrowers under the Loan Agreement (the "Line of Credit"). Prior to the Second Amendment, the aggregate amount of advances outstanding at any time under the Line of Credit could not exceed the Borrowing Base, which was the lesser of (1) $1,000,000 or
(2) 75% of the aggregate of Eligible Accounts, provided, however, prior to East West's receipt of a satisfactory collateral exam prior to January 31, 2013, the Borrowing Base was limited to the lesser of (1) $300,000 or (2) 75% of the aggregate amount of Eligible Accounts. "Eligible Accounts" was defined as the Borrowers' accounts subject to the exceptions detailed in the Loan Agreement.

In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2014, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.

The Borrowers have not borrowed under the Line of Credit as of the date of the Second Amendment.


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Agreement and Plan of Merger

On January 18, 2013, Intermedia Holdings, Inc., a Delaware corporation ("Parent"), Sierra Merger Sub Co., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and Telanetix, Inc., a Delaware corporation (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the "Merger").

The aggregate consideration to be paid by Parent and Merger Sub in the Merger for all of the outstanding equity interests of the Company, including securities convertible into shares of the Company's common stock, par value $0.0001 per share (the "Company Common Stock"), is approximately $41.5 million, minus the sum of (i) the amount (if any) by which the Transaction Expenses (as defined in the Merger Agreement) exceed $2,525,000, (ii) the amount (if any) by which the Regulatory Expenses (as defined in the Merger Agreement) exceed $200,000 (as so adjusted, the "Merger Consideration"), and certain other potential adjustments described below. The Merger Consideration will also be increased by the proceeds of certain warrant and option exercises, if any, occurring between the date of the Merger Agreement and the closing of the Merger.

At the effective time of the Merger, each share of Company Common Stock issued and outstanding immediately prior to the effective time of the Merger, other than (i) shares held in the treasury of the Company and shares owned by Parent, Merger Sub, or any subsidiary of Parent or the Company (which shares will be cancelled) and (ii) shares that are, as of immediately prior to the effective time of the Merger, owned by stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal pursuant to Section 262 of the Delaware General Corporation Law with respect to such shares, will be converted into the right to receive an amount in cash equal to the Per Share Merger Consideration. The Merger Agreement defines "Per Share Merger Consideration" as the Merger Consideration divided by the Fully Diluted Share Number (as defined in the Merger Agreement). We originally estimated the Per Share Merger Consideration to be approximately $7.40, however, due to increases in certain Transaction Expenses and Regulatory Expenses, primarily due to regulatory issues and complexities of the transaction, we currently estimate the Per Share Merger Consideration to be in the range of $7.33 to $7.27. Please note that this estimate of the Per Share Merger Consideration reflects currently available information and does not include additional Transaction Expenses or Regulatory Expenses that may be incurred in connection with regulatory reviews and stockholder matters. If expenses beyond what is currently estimated are required, there are likely to be further downward adjustments to the Per share Merger Consideration, which expenses and adjustments are more fully described in the Merger Agreement. The Merger Consideration is subject to decrease in certain circumstances described above, and also may be decreased for amounts, if any, placed in escrow to cover certain matters that arise, if any, prior to the Merger closing, up to a maximum aggregate amount of $5,000,000, or for Merger Consideration held back under certain circumstances. The Company's senior and subordinated debt will be paid in full in connection with the closing of the Merger, which payments will not affect the amount of Merger Consideration.

Each (i) outstanding option to purchase shares of Company Common Stock (a "Company Stock Option") and granted under any stock option plan to which the Company or any of its subsidiaries is a party, whether or not then exercisable and (ii) outstanding warrant to purchase shares of Company Common Stock (a "Company Warrant") shall, as of the effective time of the Merger, be cancelled, and the holder thereof shall be entitled to the right to receive, without any interest thereon, an amount in cash payable immediately following the cancellation of such Company Stock Option or Company Warrant, as the case may be, equal to (i) the number of shares of Company Common Stock subject to the Company Stock Option or Company Warrant, as the case may be, in each case, as of immediately prior to the effective time of the Merger and (ii) the difference (if any) between (x) the Per Share Merger Consideration and (y) the per share exercise price with respect to such Company Stock Option or Company Warrant, as the case may be.

The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, the approval of the Merger by the Federal Communications Commission and applicable state public service or public utility commissions or other similar state regulatory bodies, and the adoption and approval of the Merger Agreement by the Company's stockholders, which was effected on January 19, 2013 by the written consent of the holders of 4,358,942 shares of Company Common Stock, or approximately 85.1% of the outstanding shares entitled to cast a vote with respect to the adoption and approval of the Merger Agreement. Parent's and Merger Sub's obligations to consummate the Merger are not subject to a financing condition; provided, that Parent's and Merger Sub's obligations to close the Merger are subject to certain caps on liability set forth in the Merger Agreement.

The Merger Agreement contains customary termination provisions, including, without limitation, that the Merger Agreement may be terminated by either the Company or Parent if the Merger has not been consummated by the close of business on August 16, 2013 (which date may be extended to October 15, 2013 in certain limited circumstances), other than due to the failure of the terminating party to fulfill its obligations under the Merger Agreement. The Merger Agreement requires the Company to pay a $2,000,000 termination fee to Parent under certain limited circumstances. In addition, the Merger Agreement requires Parent to pay a $5,250,000 termination fee to the Company under certain limited circumstances.


Table of Contents

The Merger Agreement contains customary representations and warranties made by the Company, Parent and Merger Sub. In addition, the Company has agreed to various covenants in the Merger Agreement, including, among other things, covenants to continue to conduct its business in the ordinary course and in accordance with past practices and not to take certain actions prior to the closing of the Merger without the prior consent of Parent.

The foregoing description of the terms of the Merger Agreement are not complete and are qualified in their entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to this Current Report on Form 8-K and incorporated herein by reference. The Merger Agreement has been attached to provide investors with information regarding its terms. It is not intended to provide any other factual information about the Company or Parent. In particular, the assertions embodied in the representations and warranties contained in the Merger Agreement are qualified by information in a confidential Disclosure Schedule provided by the Company to Parent in connection with the signing of the Merger Agreement. The confidential Disclosure Schedule contains information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were used for the purpose of allocating risk between the Company and Parent rather than establishing matters as facts. Accordingly, you should not rely on the representations and warranties in the Merger Agreement as characterizations of the actual state of facts about the Company or Parent.

Loan Agreement

On December 14, 2012, Telanetix, Inc., a Delaware corporation ("Telanetix"), entered into a Loan and Security Agreement (the "Loan Agreement") by and among itself, its direct and indirect subsidiaries (together with Telanetix, the "Borrowers"), and East West Bank ("East West").

The Loan Agreement provided the Borrowers a term loan in the principal amount of $7,500,000 with principal and interest payable on a monthly basis over four years subject to the terms of a Promissory Note by the Borrowers in favor of East West (the "East West Note"). The unpaid balance of the East West Note accrues interest at a rate per annum equal to the daily Wall Street Journal Prime Rate, as quoted in the "Money Rates" column of The Wall Street Journal (Western Edition), rounded to two decimal places, as determined by East West, plus a margin of 1.750 percentage points (the "Applicable Interest Rate"). Payments on the East West Note are as follows: (i) consecutive monthly principal payments of $125,000, beginning January 2, 2013, (ii) consecutive monthly interest payments, beginning January 2, 2013, and (iii) one principal and interest payment on December 13, 2016 of all principal and accrued interest not yet paid. Commencing the fiscal year ending December 31, 2013 and for each fiscal year thereafter, the Borrowers are obligated to make additional annual payments in respect of the East West Note equal to 25% of excess cash flow, which is defined as the Borrowers' EBITDA minus (a) cash taxes, (b) cash interest expense, (c) scheduled principal payments on the East West Note, (d) capital lease payments, (e) unfinanced capital expenditures, and (f) plus or minus changes in working capital. Upon prepayment of the East West Note, the Borrowers are required to pay a premium equal to 1% of the original amount of the East West Note amount so prepaid if such prepayment occurs during the first year of the term of the East West Note. After the first year anniversary of the East West Note, there is no prepayment penalty. The indebtedness under the East West Note is secured by a security interest and lien on substantially all of the Borrowers' assets. The Loan Agreement contains customary affirmative and negative covenants. Among the affirmative covenants is a covenant that the Borrowers will maintain the following financial ratios: (1) a quarterly Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of not less than 1.25 to 1.00 through June 30, 2013, and 1.50 to 1.00 thereafter, (2) a quarterly EBITDA (as defined in the Loan Agreement) of $625,000 for Q4 2012, $725,000 for Q1 2013, and $875,000 thereafter, and (3) a maximum Senior Debt (as defined in the Loan Agreement) divided by trailing 12 months EBITDA of 2.50 to 1.00 through December 31, 2013, and 2.00 to 1.00 thereafter. "

Refinancing of Note Obligations

On December 14, 2012, using proceeds of the term loan evidenced by the Loan Agreement and East West Note, Senior Secured Notes of Telanetix (and guaranteed by the other Borrowers) respectively in favor of HCP-TELA, LLC ("HCP"), EREF-TELA, LLC ("EREF"), and CBG-TELA, LLC ("CBG") (collectively, the "Lenders") in the original aggregate principal amount of $10,500,000 (collectively, the "2010 Notes") purchased by the Lenders pursuant to that certain Securities Purchase Agreement, dated as of June 30, 2010, by and among Telanetix and the Lenders, were paid in full. In connection with the payment in full of the 2010 Notes, which contractually were not prepayable, an Event of Default Redemption Price (as defined in each 2010 Note) was required to be paid. Accordingly, on December 14, 2012, the Borrowers executed and delivered Subordinated Promissory Notes to the Lenders in the aggregate original principal amount of $1,726,659.72 (collectively, the "Subordinated Notes"). The unpaid balance of the Subordinated Notes accrues interest at the Applicable Interest Rate. The principal and all accrued and unpaid interest under the Subordinated Notes are to be paid on the earliest of (a) June 14, 2017, (b) the date of the acceleration of the Subordinated Notes in accordance with the terms of the Subordinated Notes, and (c) the date of the payment in full of all obligations . . .

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