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 March 31, 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 ¨

 

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 April 30, 2012, there were 30,711,065 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 March 31, 2012

 

Table of Contents

 

			Page
PART I.    FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and  2011	4
		Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and  2011	5
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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	15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.		Controls and Procedures	23
PART II.    OTHER INFORMATION
Item 1.		Legal Proceedings	23
Item 1A.		Risk Factors	23
Item 4.		Mine Safety Disclosures	24
Item 6.		Exhibits	25
		Signatures	26

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED Financial Statements

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

 

		March 31, 2012				December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	3,491			$	5,453
Restricted cash			88				98
Short-term investments			1,503				2,003
Accounts receivable, (net of allowance for doubtful accounts of $207 at March 31, 2012 and  December 31, 2011)			4,221				6,375
Inventories, net			1,684				1,988
Prepaid expenses and other current assets			2,003				1,876
Total current assets			12,990				17,793
Property and equipment, net			1,245				1,355
Goodwill			5,271				5,271
Other intangible assets, net			1,383				1,461
Investments in non-publicly traded companies			336				306
Other assets			1,504				1,432
Total assets		$	22,729			$	27,618
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Credit facility		$	1,350			$	-
Accounts payable			2,503				2,272
Accrued expenses and other current liabilities			9,803				10,655
Total current liabilities			13,656				12,927
Restructuring liabilities			2,329				2,485
Total liabilities			15,985				15,412
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value: 37,500,000 shares authorized; 30,731,778 and 30,633,302 shares issued at March 31, 2012 and December 31, 2011, respectively; 30,710,984 and 30,612,508 shares outstanding at March 31, 2012 and December 31, 2011, respectively			31				31
Additional paid-in capital			411,117				410,551
Accumulated other comprehensive income – currency translation			(9	)			(64	)
Common stock held in treasury (20,794 shares), at cost			(118	)			(118	)
Accumulated deficit			(404,277	)			(398,194	)
Total stockholders’ equity			6,744				12,206
Total liabilities and stockholders’ equity		$	22,729			$	27,618

 

See accompanying notes.

 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(unaudited)

 

		Three Months Ended  March 31,
		2012				2011
Net revenues:
Product revenues		$	3,162			$	5,811
Service revenues			519				2,416
Total net revenues			3,681				8,227
Cost of revenues:
Cost of product revenues			1,119				1,780
Provision for excess and obsolete inventories			231				160
Cost of service revenues			161				1,004
Total cost of revenues			1,511				2,944
Gross profit			2,170				5,283
Operating expenses:
Research and development			4,336				4,565
Marketing and sales			1,642				1,988
General and administrative			2,132				1,859
Restructuring charges, net			-				467
Reversal of accrued royalties and other, net			(58	)			(750	)
Total operating expenses			8,052				8,129
Operating loss			(5,882	)			(2,846	)
Other (expense) income:
Other expense			(101	)			(5	)
Interest:
Interest income			23				24
Interest expense			(9	)			(125	)
Interest income (expense), net			14				(101	)
Total other expense, net			(87	)			(106	)
Loss before income taxes			(5,969	)			(2,952	)
Income taxes			114				197
Net loss		$	(6,083	)		$	(3,149	)
Basic and diluted loss per common share:
Net loss per common share		$	(0.20	)		$	(0.13	)
Weighted average common shares outstanding – basic and diluted			30,685				23,655

 

See accompanying notes.

 

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands)

(unaudited)

 

 

		Three Months Ended March 31,
		2012				2011
Net loss		$	(6,083	)		$	(3,149	)
Other comprehensive income (loss):
Foreign currency translation adjustment			55				(23	)
Comprehensive loss		$	(6,028	)		$	(3,172	)

 

See accompanying notes.

  

 

TRANSWITCH CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

		Three Months Ended March 31,
		2012				2011
Operating activities:
Net loss		$	(6,083	)		$	(3,149	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			177				533
Amortization of deferred financing fees			7				60
Provision for excess and obsolete inventories			231				160
Benefit from allowance for doubtful accounts			-				(129	)
Non-cash restructuring charges, net			-				467
Stock-based compensation expense			532				682
Accrued royalty reversals and other, net			(58	)			(750	)
Loss on retirement of property and equipment			118				-
Changes in operating assets and liabilities:
Accounts receivable			2,154				872
Inventories			73				340
Prepaid expenses and other assets			(207	)			(271	)
Accounts payable			230				206
Accrued expenses and other current liabilities			(350	)			(220	)
Restructuring liabilities			(600	)			(228	)
Net cash used by operating activities			(3,776	)			(1,427	)
Investing activities:
Capital expenditures			(95	)			(341	)
Investments in non-publicly traded companies			(30	)			(26	)
Decrease in restricted cash			10				433
Proceeds from sales and maturities of short-term investments			500				973
Net cash provided by investing activities			385				1,039
Financing activities:
Issuance of common stock under employee stock plans			100				158
Payments for stock issuance fees			(66	)			-
Principal payments on 5.45% Convertible Notes due 2011			-				(1,251	)
Net increase in credit facility			1,350				-
Net cash provided (used) by financing activities			1,384				(1,093	)
Effect of exchange rate changes on cash and cash equivalents			45				(22	)
Change in cash and cash equivalents			(1,962	)			(1,503	)
Cash and cash equivalents at beginning of period			5,453				6,280
Cash and cash equivalents at end of period		$	3,491			$	4,777

 

See accompanying notes.

 

 

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 March 31, 2012, the Company has negative working capital of approximately $0.7 million. In addition, the Company has outstanding indebtedness to Bridge Bank under its lending facility of $1.4.

 

The Company’s current forecast projects that, absent an infusion of capital, it will be unable to meet its current obligations through March 31, 2013. These conditions raise doubt about the Company’s ability to continue as a going concern. The accompanying 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..

 

The Company previously announced restructuring actions that were implemented during the first and third quarters of 2011. The Company continues to assess its cost structure in relationship to its revenue levels and is planning to make further expense reductions.  The Company’s operating plan anticipates a further infusion of capital, further operating improvements and improving sales levels.  Of course, there can be no assurance that the anticipated sales level will be achieved, or that the Company will be successful in raising additional capital included in its operating plan.

 

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 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 consist of government and corporate bonds which are all due within one year. Such investments are 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 are stated at amortized cost. Amortized cost and accrued interest approximate market value.

 

 

At March 31, 2012 and December 31, 2011, approximately 48% 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 follows:

 

		March 31,  2012				December 31, 2011
Customer A			17	%			17	%
Customer B			*				15	%
Customer C			*				10	%

 

* 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 following tables summarize the Company’s held-to-maturity investments (in thousands):

 

March 31, 2012		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Corporate debt securities		$	1,503			$	43			$	-			$	1,546

 

December 31, 2011		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

 

 

Note 4.   New Accounting Standards

 

Recently Issued Standards

  

In June 2011, the Financial Accounting Standards Board issued an ASU that provides amendments on the presentation of comprehensive income. The amendments require 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. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. This ASU was adopted in the first quarter 2012 and the Company 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

 

The Company applies fair value standards for recurring financial assets and liabilities only. The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows:

 

Level 1 – Quoted prices in active markets are available for identical assets and liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 – Unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

As of March 31, 2012, the Company’s financial assets included short-term investments and 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 $1.5 million and $2.0 million as of March 31, 2012 and December 31, 2011, respectively. The short-term investment values are based on a Level 2 valuation technique.

  

 

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 March 31,
		2012				2011
Cost of Sales		$	6			$	21
Research and Development			120				211
Marketing and Sales			111				128
General and Administration			295				322
Total Stock-Based Compensation		$	532			$	682

 

During the three months ended March 31, 2012, 23,830 restricted stock units ("RSUs”) were granted, 59,046 RSUs were released, and 20,142 RSUs were canceled, forfeited, or expired. During the same three months, there were no stock options granted, 14,684 stock options exercised, and 76,759 stock options canceled, 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 months ended March 31, 2012 and 2011, respectively, were anti-dilutive and were excluded from the calculation of diluted net loss per share for the entire period.

 

Note 8.   Restricted Cash

 

The Company’s liquidity is affected by restricted cash balances of approximately $0.1 million as of March 31, 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)		March 31, 2012				December 31, 2011
Work-in-process and raw materials		$	187			$	488
Finished goods			1,497				1,500
Total inventories		$	1,684			$	1,988

 

During the three months ended March 31, 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.

 

 

Note 10. Other Intangible Assets, net

 

Information about other intangible assets follows:

 

		Other Intangible Assets
		Developed Technology				Customer Relationships				Total
Balances at March 31, 2012
Cost		$	1,974			$	5,158			$	7,132
Accumulated amortization			(1,623	)			(4,126	)			(5,749	)
		$	351			$	1,032			$	1,383
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 both the three months ended March 31, 2012 and 2011 was $0.1 million and $0.4 million, respectively. Future estimated aggregate amortization expense for such assets as of March 31, 2012 follows: 2012 (remaining nine months) - $0.2 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:

 

 

		March 31,				December 31,
(in thousands)		2012				2011
Accrued and other current liabilities		$	2,559			$	3,162
Accrued royalties			2,394				2,536
Accrued compensation and benefits			3,132				2,813
Restructuring liabilities			1,551				1,995
Deferred revenue			167				149
Total accrued expenses and other current liabilities		$	9,803			$	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 March 31, 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

 

The Company did not record any restructuring charges during the three months ended March 31, 2012.

 

During the three ended March 31, 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.

 

 

A summary of the restructuring liabilities and activity follows:

 

(in thousands)		Activity for the Three Months Ended March 31, 2012
		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 March 31, 2012
Employee termination benefits		$	753			$	—			$	(241	)		$	—			$	—			$	512
Facility lease costs			3,727				—				(359	)			—				—				3,368
Totals		$	4,480			$	—			$	(600	)		$	—			$	—			$	3,880

 

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 months ended March 31, 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 three months ended March 31, 2012 and 2011. 

 

Note 14.    Credit Facility

 

  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 $1.4 million at March 31, 2012 and zero at December 31, 2011.

 

 

Note 15.     Supplemental Cash Flow Information

 

Supplemental cash flow information follows:

 

(in thousands)		Three Months Ended March 31,
		2012				2011
Cash paid for interest		$	2			$	65
Cash paid for income taxes		$	113			$	83

 

Note 16.   Issuance of Common Stock

 

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 may 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 are 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 may 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. With the Company’s prior written approval, MLV may also sell the common stock by any other method permitted by law, including in privately negotiated transactions. The Company or MLV may suspend or terminate the offering of common stock upon notice and subject to other conditions. Unless otherwise terminated pursuant to the terms of the Agreement, the Agreement automatically terminates upon the earlier to occur of the three-year anniversary of the date hereof, or the issuance and sale of all of the Shares. MLV will act as sales agent on a commercially reasonable best efforts basis consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of NASDAQ.

 

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 months ended March 31, 2012, no shares were issued under the Agreement.

 

Note 17.   Income Taxes

 

The provision for income taxes for the three months ended March 31, 2012 and 2011 was $0.1 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 and state income taxes and increases in the valuation allowance for deferred income tax assets offset by non-deductible interest expense.

 

During the three months ended March 31, 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

 

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 1,315,006 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for gross proceeds of $2,445,911 (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 the greater of $2.07, which was equal to or greater than the consolidated closing bid price immediately preceding the time the Company entered into the Director and Officer Purchase Agreement, or the price that will be the consolidated closing bid price on May 10, 2012.

 

The shares to be sold in the Registered Direct Offering are 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 estimated offering expenses, are expected to be approximately $2,729,491. The Registered Direct Offering is expected to close on or about May 11, 2012, subject to the satisfaction of customary closing conditions.

 

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

 

 

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.

 

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.

 

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 and personal computers.

 

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.

 

  

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.

 

 

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.

 

 

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 quarter ended March 31, 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 March 31,
		2012				2011
Net revenues:
Product revenues			86	%			71	%
Service revenues			14	%			29	%
Total net revenues			100	%			100	%
Cost of revenues:
Product cost of revenues			31	%			22	%
Provision for excess and obsolete inventories			6	%			2	%
Service cost of revenues			4	%			12	%
Total cost of revenues			41	%			36	%
Gross profit			59	%			64	%
Operating expenses:
Research and development			118	%			55	%
Marketing and sales			45	%			24	%
General and administrative			58	%			23	%
Restructuring charges, net			—				6	%
Reversal of accrued royalties			(2	)%			(9	)%
Total operating expenses			219	%			99	%
Operating loss			(160	)%			(35	)%

 

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.

 

 

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

 

(in thousands)
		Three Months Ended March 31, 2012								Three Months Ended March 31, 2011
		Net Revenues				Percent of Total Net Revenues				Net Revenues				Percent of Total Net Revenues				Percentage  Decrease in Revenues
Network Infrastructure		$	2,942				80	%		$	5,471				67	%			(46	)%
Customer Premises Equipment			739				20	%			2,756				33	%			(73	)%
Total net revenues		$	3,681				100	%		$	8,227				100	%			(55	)%

 

Total net revenues for the three months ended March 31, 2012 were $3.7 million as compared to $8.2 million for the three months ended March 31, 2011, a decrease of $4.5 million or 55%. Our Network Infrastructure revenues decrease of approximately 46% was a result of lower sales of Carrier Ethernet and Optical Transport products due to reduced telecom infrastructure capital expenditures and reduced service related revenues for Network Infrastructure. Our CPE revenues decrease of approximately 73% 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 84% of net revenues for the three months ended March 31, 2012 as compared to 72% for the three months ended March 31, 2011.

 

Gross Profit

 

Total gross profit for the three months ended March 31, 2012 decreased by approximately $3.1 million or 59% as compared to the three months ended March 31, 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 59% and 64% for three months ended March 31, 2012 and 2011, respectively. The decrease in gross margin percentage is mostly attributable to lower overhead absorption and to changes in product mix. 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.

 

During the three months ended March 31, 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. Also during the three months ended March 31, 2012 and 2011, we recorded provisions for excess and obsolete inventories in the amount of $0.2 million for each period.

 

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 March 31, 2012, research and development expenses decreased $0.2 million, or 5% over the comparable period of 2011. These decreases were a result of decreased labor and subcontracting costs during the three months end March 31, 2012 as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011. These decreases were partially offset by increased 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 March 31, 2012 decreased by $0.3 million or 17% as compared to the three months ended March 31, 2011. This decrease was 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 March 31, 2012 increased by $0.3 million or 15% as compared to the comparable period in 2011.  This increase was a result of increased professional and legal fees.

 

Restructuring Charges, net

 

During the three months ended March 31, 2012 and 2011, we recorded net restructuring charges of zero 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 income, net was less than $0.1 for the three months ended March 31, 2012 as compared to interest expense, net of $0.1 million for the three months ended March 31, 2011. Interest income was essentially flat. Interest income may fluctuate in the future as it is affected by our cash and investment balances and the related interest rates. At March 31, 2012 and 2011, the effective interest rate on our interest-bearing securities was approximately 2.9% and 4.4%, respectively. Interest expense decreased approximately $0.1 million due to the maturity and pay off of our Convertible Notes due September 30, 2011 (“2011 Notes”). The 2011 Notes have been fully paid as of September 30, 2011 and as such, there were no interest payments related to the 2011 Notes during the three months ended March 31, 2012.

 

Income Tax Expense

 

Income tax expense was approximately $0.1 million and $0.2 million for the three months ended March 31, 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 months ended March 31, 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.

 

 

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 the cost structure. As of March 31, 2012, we have negative working capital of approximately $0.7 million. In addition, we have outstanding indebtedness to Bridge Bank under our lending facility of $1.4 million.

 

Our current forecast projects that, absent an infusion of capital, we will be unable to meet our current obligations through March 31, 2013. These conditions raise doubt about our ability to continue as a going concern. The accompanying 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.

 

We previously announced restructuring actions that were implemented during the first and third quarters of 2011. We continue to assess our cost structure in relationship to our revenue levels and are planning to make further expense reductions.  Our operating plan anticipates a further infusion of capital, further operating improvements and improving sales levels.  Of course, there can be no assurance that the anticipated sales level will be achieved, or that we will be successful in raising additional capital included in our operating plan.

 

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 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 March 31, 2012 and December 31, 2011, we had total cash, cash equivalents, restricted cash and investment balances of approximately $5.1 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 and Credit Agreements

 

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

 

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 March 31, 2012, we had $1.4 million in outstanding borrowings under this facility.

 

On February 10, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”), pursuant to which we may issue and sell shares of our common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 from time to time through MLV (the “Offering”). Also on February 10, 2012, we filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering. During the three months ended March 31, 2012, we did not issue or sell any shares under this agreement.

 

 

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

 

(in thousands)		March 31,  2012				December 31, 2011				Change				March 31,   2011				December 31, 2010				Change
Cash and cash equivalents		$	3,491			$	5,453			$	(1,962	)		$	4,777			$	6,280			$	(1,503	)
Restricted cash			88				98				(10	)			149				582				(433	)
Short-term investments			1,503				2,003				(500	)			-				973				(973	)
Total cash and investments		$	5,082			$	7,554			$	(2,472	)		$	4,926			$	7,835			$	(2,909	)

 

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

 

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 $16.1 million, payable over the next six 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 March 31, 2012, we have sublease agreements totaling approximately $11.3 million to rent portions of our excess facilities over the next six 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 March 31, 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.

 

 

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 three months ended March 31, 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, 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 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 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 March 31, 2012, we have negative working capital of approximately $0.7 million. In addition, we have outstanding indebtedness to Bridge Bank under our lending facility of $1.4 million.

 

Our current forecast projects that, absent an infusion of capital, we will be unable to meet our current obligations through March 31, 2013. These conditions raise doubt about our ability to continue as a going concern.

 

We previously announced restructuring actions that were implemented during the first and third quarters of 2011. We continue to assess our cost structure in relationship to our revenue levels and are planning to make further expense reductions.  Our operating plan anticipates a further infusion of capital, further operating improvements and improving sales levels.  Of course, there can be no assurance that the anticipated sales level will be achieved.

 

 

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 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

 

 

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 21, 2010 and incorporated herein by reference).
Exhibit 3.3	Certificate of Designations 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 (as 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 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).

 

 

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

 

 

May 10, 2012		/s/ Dr. M. Ali Khatibzadeh
Date		Dr. M. Ali Khatibzadeh
		Chief Executive Officer and President
		(Chief Executive Officer)
May 10, 2012		/s/ Robert A. Bosi
Date		Robert A. Bosi
		Vice President and Chief
		Financial Officer
		(Chief Financial Officer)